Bridging Loan

[Irishlad74]

Can anybody explain to me how a bridging loan works?

Thank you,

Brendan

[Oneeyedvic]

Very basically:

You own a property A. You want to sell Property A and Buy Property B. Lets say Property A is owned by you outright (no mortgage) and is worth �200,000.

Property B is worth �250,000 and you have a arranged a �100,000 mortgage on it. You obviously need to have a further �150,000 to buy property B which will come from the proceeds of the sale of Property A.

Unfrotunately, your don't have a purchaser for Property A and you are in danger of losing Property B unless you complete quickly.

A bridging loan will bridge the gap between the two, so the finance company lends you the �150,000 and takes security of Property A. It charges you interest monthly and 'rolls up' the interest - ie it adds the interest to the loan so you don't have a monthly commitment.

Once Property A is sold, the original loan (�150,000) plus all the interest (depending on how long it takes to sell) is repaid to the finance company and you receive the balance.

That is the most basic type of bridging.

The example used is called 'Open Bridging' since it assumes that you don't have a purchase. Some companies will only so 'closed bridging' which is where Property A has already sold but will not complete the sale for some time.

Typically there will be an initial set up fee (around 1.5% of the loan - �2250 in the example) and then interest is charged monthly again about 1.5% per month. This means that is you had the loan for 4 months in would cost over �9000 in interest / fees.

It is an expensive way of borrowing but it does have its uses.

Obviously, open bridging can be dangerous as if you don't sell quickly it can cost you a lot of money.

Give me a shout if you need any more questions answering.