Money can be one of the reasons for delays in property purchase. You cannot sell the existing property, but you got an attractive deal on a new property. This is where bridge loans can play a critical role.
These loans can literally help you plug the funding gap. You can get access to cash to meet the down payment. You might have to drop the idea of a new property purchase in Ireland, blaming the ongoing cash shortage problem.
Table of Contents
What is a bridging loan?
Understanding the bridging loan definition in Ireland is crucial, as they are slightly different. They are also a typical personal loan that can be obtained for a shorter term. You can get them to bridge the cash gap between two transactions.
Some of the unique things to know about these loans are:
- They are ideally meant to provide speedy, but temporary financing
- Do not take longer to get processed like a mortgage
- Loan offers personalized to suit your budget
How much can I borrow with a bridging loan?
Bridging loan maximum amount will depend on a few aspects.
- Get a Loan-to-value ratio 70% to 80% of the property value
- Amount of equity you have in the property
- An executable and practical exit plan
- LTV will be from 50% to 60% in the case of second-charge loans
- Reason why you are getting loans
- Creditworthiness also might matter, but not much
What collateral is usually required for a bridging loan?
For these loans, either the residential or commercial property can be pledged as collateral. It could be a property you already own or something that you are anticipating to buy. It should be able to provide adequate equity and should be marketable.
Why do individuals and businesses use bridge loans?
Both individuals and businesses can rely on these loans to fetch short-term funding. There are scenarios where timing is critical, and when you cannot reach out for typical long-term financing options. When you cannot arrange a mortgage quickly, these loans can come in handy.
What are the common situations where a bridge loan is useful?
| Use case |
Explanation |
| Purchasing a new home before selling the old one |
Prevent you from letting go of the desired property when the previous is still on the market |
| Renovating the existing home |
Use loans to renovate the property to increase its resale worth |
| Rule out property chain delays |
Prevent chain collapse because of funding delays |
| Property auctions |
Raise funds quickly to participate in property auctions |
| Business cash flow |
Helps fill up cash gaps or invest in properties |
What are the different types of bridge loans available in the UK?
The different types of bridging loans are first-charge, second-charge, closed, open, residential, and commercial bridging loans. The last two options are typically meant for either individuals or businesses interested in buying or refinancing properties.
What are first-charge and second-charge bridges?
First charge bridging loans are ideal for borrowers lacking a fixed exit plan.
- Repayment is flexible
- High interest because of high risk
- Looking for a new home without listing the old one for sale
- The term can extend up to 12 months
Second-charge bridging loans are ideal for individuals already working with a mortgage on the property.
- Always comes as a second priority
- Criteria can be stricter
- Need to get permission from the first lender
- Require short-term help despite having the baggage of a mortgage
What is the difference between open and closed bridge loans?
A closed bridging loan comes with a fixed repayment date. No fixed repayment date for open bridging loans. Risk is lower in the first option because of a predictable exit than in the second option.
Quite naturally, the first one will be less costly than the second option. For this reason, the first one is a popular option amongst lenders. A closed bridging loan comes with an already agreed exit strategy, which will be lacking in an open bridging loan.
Are there alternatives available to bridge loans?
You can consider exploring
alternatives to bridging loans if they are not the right fit for you.
- Refinancing a traditional mortgage (if possible)
- Getting any other personal loan
- Taking out a loan from within the family or friends
- Business overdraft to manage cash shortfalls
Who is eligible, and how does a bridge loan work?
You need to understand whether or not you have qualified before proceeding to apply for these loans.
What are the eligibility criteria for these loans?
The eligibility criteria for bridging loans show that anyone who is a homeowner, a property investor, a business, or a property developer can apply. You should have a well-defined exit strategy. Whether or not poor credit will be accepted can be confirmed by the lender with whom you might be applying for these loans.
What documents and information will the lender require?
At the time of applying for these loans, you must produce your proof of ID, address, income, bank statements, property valuation report, and mortgage statements. Provide valid details in the loan application.
What is the application process?
Find out how bridging loans work in Ireland right here. This basically defines the way you will have to apply for these loans.
- Get the online form to add details
- Re-check the form before final submission
- Provide all the relevant documents
- Wait for some time to get a response
- Sign the agreement if you are ready to give consent
- Get funds in your checking account
How does the exit strategy affect approval and costs?
This is the repayment plan you will be working with while managing these loans. Thus, depending on whether it’s strong or weak, you will have to face high or low costs. Besides, it can influence the likelihood of loan approval.
- A strong plan reduces risk and lets the lender offer a low rate
- The sale timeline is clear when they can repay loans
- It comes with a plan B to support repayment if plan A fails
How is repayment structured for bridge loans?
The typical duration for repayment will vary from 12 to 24 months. Repayment of these loans should happen after the sale of the property. You can even consider refinancing into a long-term mortgage.
In the case of business, you can sell the asset to arrange funds for repayment of loans. The following structures of repayment are available.
- Rolled-up interest – Pay in full at the end even, when interest keeps compounding.
- Only paying interest – Monthly interest payments and clearing up the principal at the end.
- Retained interest- The amount of interest remains with the lender upfront, while you get less.
Why bridging loans are usually more expensive than traditional loans?
What are the costs and fees of bridging loans? These loans are a flexible and useful loan option, but they are expensive. They attract high rates of interest because of the inherent risk factor meant for the lender.
Contact different direct lenders and get pre-approved to see how much they are charging. This can help you compare the rates. Besides, if you delay repayment, you will have to face late charges.
Risks and considerations of Bridge loans
When you decide to get a loan, understand the risks and considerations of bridging loans. This will help you to make an informed decision.
What risks should borrowers be aware of?
- Risk of re-possession and penalties for non-payment
- Less time to overcome market downturns
- Fear of losing the asset or the property
- Exit strategy failing to fulfil loan payment conditions
How does a bridge loan differ from other short-term loans?
Find out the difference right here
| Bridge loan |
Short-term loan |
| Purpose is specified |
Any small cash requirement |
| Always backed by an asset |
Maybe secured or unsecured |
| More focus on the value of the asset than credit scores |
Your credit history is crucial |
| Rates are high |
Competitive rates are available |
The bottom line
There are important pointers to be noted about bridge loans before applying. Check them carefully.
When someone writes about UK finance, both research and experience should be visible. Ken Stokes is a prime example of this. He is a well-experienced finance writer and author and possesses years of experience. He is currently responsible for the position of Senior Loan Executive at 24loanswales. He joined the organisation 6 months ago, but he already has enough experience to guide someone on any loan product.Ken Stokes is a PhD holder in the Business Finance stream. Therefore, he has extensive knowledge of the UK finance sector.
Being part of 24loanswales, he has already written research-based blogs for the company’s website. Start reading his blogs here before applying for any loan.
