When buying your first property, you may have assumed that you have to apply for a mortgage to finance the purchase. There are some situations, though, when a mortgage just isn’t suitable. In these instances, bridging finance is a viable alternative to fund the purchase of your first home or investment property.
What is a bridging loan for first-time buyers?
A bridging loan is a type of short-term finance that allows you to proceed with your purchase while your mortgage or other longer-term finance is being finalised. There are various reasons why you may need a bridging loan as a first-time buyer:
- You’ve found a bargain property at an auction.
- The property you want to buy is unmortgageable.
- You want to buy and then refurbish a property to sell for profit.
- You don’t want to be tied to a mortgage.
The application process for a bridging loan is very quick and the funds are transferred to you in a short space of time. This is ideal if you’re on a tight deadline, such as buying your first property at auction. Unlike the application process for a mortgage, in which affordability and credit checks are carried out, bridging loan lenders focus more on the security you can provide for the loan and your exit strategy. The security can be residential or commercial property or even a plot of land. The exit strategy is how you intend to repay the loan.
Your exit strategy
As an example, the property you want to buy in Bexleyheath may need a lot of work and is unmortgageable in its current state. You can use the bridging loan to buy it and carry out the necessary work to reach a habitable condition. At that point, you can refinance to a mortgage, which is your exit strategy. Alternatively, you may have found a fixer-upper property in Pimlico. Using the bridging loan to fund the purchase and refurbishment work, you can then sell the property. The proceeds from the sale will repay the bridging loan and provide you with some profit.
Types of bridging loans
As a first-time buyer, you can use a bridging loan to buy residential, commercial or semi-commercial property. For example, you can buy your first home, a buy-to-let investment or business premises with a bridging loan.
Regulated and unregulated bridging loans
If the property that you’re buying as your first home is to be used as security for your loan, you’ll have a regulated bridging loan. This means that it’s regulated by the Financial Conduct Authority (FCA) and you’ll benefit from consumer protection. Lenders have to meet particular standards for regulated bridging loans so the checks they carry out tend to be more stringent.
If the loan is secured against a commercial or investment property, however, you’ll be offered an unregulated bridging loan. You won’t be provided with FCA protection but unregulated bridging loans offer more flexibility. For example, the maximum term for a regulated bridging loan is usually 12 months while an unregulated bridging loan can have a longer term, such as up to 36 months.
Open and closed bridging loans
An open bridging loan means that you don’t have a definite date planned to repay it. For example, your exit strategy is to sell your property to repay the loan but, at this stage, you don’t have a buyer lined up. A closed bridging loan, on the other hand, means that you know exactly when you can repay it. You might have an investment that’s about to mature, for example. Closed bridging loans provide more security for lenders so you’ll benefit from a lower interest rate with this option.
How much can you borrow for a bridging loan?
Bridging loans generally start at £25,000 with no set limitations. The amount you can borrow depends on various factors, including the value of the property or land used as security. Lenders tend to offer a loan-to-value (LTV) ratio of up to 75% or 80%. Some lenders offer higher LTVs depending on your circumstances. However, you’ll pay higher bridging loan interest rates to benefit from this. Your exit strategy also determines how much you can borrow. If you plan to refinance to repay your bridging loan, your affordability for this arrangement will be taken into account.
Get expert help as a first-time buyer from our bridging loan brokers
If you’re ready to buy your first property and want to use a bridging loan to do this, give us a call on 01322 907 000. Our bridging loan brokers in London, Kent and Edinburgh are ready to give you expert advice and provide a fast application process. They’ll determine the type of bridging loan you need to apply for and ascertain how much you can borrow. They’ll also ensure that you’re fully aware of the terms and cost of your bridging loan, including the interest rate payable. You can rest assured you’ll benefit from the best bridging loan options available to meet your needs as a first-time buyer.