Bridging loans can be an important part of your plans, especially if you need access to cash for a short-term transition or buying a property on a time limit. Getting cheap bridging loans is definitely the key to doing this successfully.
However, not all bridging loans were created equally, and some of the providers out there offer a good rate, so finding the right bridging loan for you involves understanding the different criteria.
Bridging Loan Limits
Technically speaking, there is no limit on the amount of money that you can borrow through a bridging loan. However, most lenders set a cap of £150,000 for bridging loans, as anything else would be too much of a risk for a short-term basis.
Calculating Bridging Loans
The limits of a bridging loan are calculated based on your ability to make payments. Unlike a lot of regular mortgages and other types of loans, your lender won’t really care about your financial situation so much as whether or not you can pay. They’re not interested in conducting a thorough examination of your finances and background, but they will want to know what your exit strategy for the loan is.
The costs for a bridging loan will depend on the lender that you are working with, how much you want to borrow, and how secure the loan is. The amount of interest that you will pay is going to be higher than a typical mortgage because you’re only paying it back for a fraction of the time.
As the repayment period is so small, the majority of lenders will quote you an interest rate on a monthly basis. This can fluctuate between roughly 0.5% and 2% each month. However, it is important to understand that something that might sound good isn’t necessarily as advantageous as it may first seem, as you would need to compare it to a typical mortgage.
So, to give an example, if you took out a bridging loan and the monthly interest was 1.5%, this would be the equivalent of paying 18% interest on a typical long-term loan. This is the main contributing factor for what makes different deals viable.
Your typical lender will calculate interest in three main ways.
If monthly interest is paid off via direct debit, then the balance falls payable on the end of the term. Alternatively, there is deferred interest, in which interest rates are added into the total of the loan, and then, at the end, you pay back the loan, plus all the accumulated interest at once. Finally, you have retained interest, which means that you borrow the value that you owe as an interest payment, and the amount that you have to pay back is calculated based on the length of your loan.
The typical deposit for an interest loan will be based on the loan to value ratio that comes out for the bridging loan. This can be as high as 75% in some cases, but more normally falls between 50 and 60%. The absolute worst you might be expected to pay is 40% of the loan as a deposit.
Things to Consider
They’re definitely a few things to consider with bridging loans which make it difficult for people to navigate the many options that are available:
- First of all, it’s important to understand that there are a lot of different providers out there. Each one has a different rate, so sorting through them becomes a large task.
- Each provider will assess based on your exit strategy, but they will also look at things like your credit rating, how much you are trying to borrow, and what kind of security you can offer.
- These types of loans can sometimes be more expensive than a long-term loan because interest rates often counterbalance any potential savings you might have made from borrowing on a short term basis.
Despite all of this, there are a lot of situations where a bridging loan is a good choice, especially if you are looking for an easy way to get access to money quickly. They are definitely worth considering.