WHAT IS A BRIDGE LOAN?
A bridge loan is a short-term loan designed for property buyers and developers. Think of it as either a temporary loan or even a short-term mortgage.
Bridging can be used in a variety of circumstances to provide finance until a more permanent form of finance can be arranged, such as a mortgage. The term ‘bridge’ is often used, as that’s exactly what a bridging loan is designed to do. Finance to get you from A to B. You may need to ‘bridge the gap’ due to monetary issues or time constraints (or both).
Funds are provided very fast in comparison to mortgages and can therefore make a great alternative. A word of caution, bridging loans usually come with high-interest rates and fees and for this reason, are generally used as a last resort. Nonetheless, they can make financial sense when used correctly.
HOW DOES BRIDGE LOAN WORK?
Here’s how a bridge loan would work:
You want to purchase a property, but it isn’t possible to get a mortgage due to its condition
The property is valued at £200,000 and you have a £50,000 deposit
You then get a bridge for £150,000 so you can buy the property outright
You can then sell the property to repay the loan plus the interest or get a mortgage once you’re able
Bridge loans is often repaid within one year, as interest rates are a lot higher when compared to mortgage rates.
How much your buy-to-let mortgage will cost you will depend on several factors. The main ones are:
Size of your deposit: The bigger deposit you can put down, the smaller the mortgage you’ll need to borrow. Lenders will usually ask for 25% of the property’s value, although it can be higher
Interest rate: You’ll only pay back the interest each month, not the full capital amount
Loan term: You’ll pay back the full cost of the mortgage at the end of the loan term
With a buy-to-let mortgage, you’ll only usually pay the interest each month, not the full capital amount. But while this might mean your monthly repayments are cheaper than a standard residential mortgage, you’ll need to consider how you’ll repay the full cost of your mortgage debt at the end of the loan term.
To get an idea of your buy-to-let mortgage eligibility and affordability, we can work out what your repayments will cost you each month. This will be based on how much you’re borrowing, the interest rate and fees of your mortgage deal, and how long you’ll have to pay it off (the term).
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