Bridging Loans for First Time Buyers
A bridging loan is a short term loan that covers the financial gap between buying a new property and selling it or arranging another type of long-term mortgage.
These loans are always secured against one or more properties, using a legal charge (like a mortgage).
The core of bridging finance is to take the timing stress out of property transactions, giving buyers the funds to complete the purchase.
If you need to move quick you can get a bridging loan to make it happen.
explore bridging loansCriteria for First Time Buyers
First time buyers (FTB) must meet several criteria for a bridging loan, including proof of ID, address and a clear exit strategy.
An ‘exit strategy’ is your detailed plan of how you will repay the lender, within the loan term.
Lenders need a clear repayment plan, usually the sale of the new property or refinance into a long term mortgage, to feel confident the borrower can repay the loan.
Most bridging loans are set up for 12-24 months and if you are buying a home to live in, the maximum is 12 months. This is known as a regulated bridging loan.
Good credit history will help you get a bridging loan.
Lenders will look at your financial stability, including proof of income, and other assets. So having a good financial background will make the application process easier and increase your chances of acceptance.
That said, lenders mostly look at the actual property and the exit strategy. These are the two most important points.
We even have lenders that lend on a non-status basis, without needing proof of income. For these you need to have a minimum cash deposit of 20%.
Related reading: How Do You Pay Back a Bridging Loan?
Types of Bridging Loans
Bridging loans come in two main types: open bridging loans and closed bridging loans.
First time buyers should understand the difference to choose the right bridging loan for you.
Open bridging loans don’t have a set repayment date and are the most common type, they are open ended. However, repayment must always take place before the end of the loan term.
Closed bridging loans have a fixed and specific repayment date, usually tied to the completion of a property sale. This type of loan is normally used by buyers who have exchanged contracts.
And there are first charge bridging loans and second charge bridging loans.
A first charge bridging loan is secured on a property with no other loans against it, and a second charge bridging loan is when there are existing loans on the property.
Again, most bridging finance is set up on a first-charge basis.
How Much Can First Time Buyers Borrow?
The amount first time buyers can borrow through a bridging loan depends on several factors, including the value of the property, the lender’s criteria and the borrower’s financial situation.
Lenders will assess the value of the property to determine the borrowing limit, so higher property values means higher loan amounts, but it will be capped by the LTV percentage.
The loan to value (LTV) ratio is key to determining the borrowing capacity. A lower deposit means higher LTV, usually up to 80%, so buyers can borrow up to 80% of the property’s value, which eases the financial gap.
The majority of lenders will go up to 75% and we have a few that go to 80% and 90%.
Bridging loans start from £150,000 with no upper limit, depending on individual circumstances and lender’s assessment.
Bridging Loan Costs
You need to understand the costs involved. Bridging loans have higher interest rates than traditional mortgages because of its short term nature. This is the trade off for the flexibility and speed they offer.
Bridging loans also have various fees, such as arrangement fees ranging from around 2% of the loan amount. These cover the cost of setting up the loan.
Other fees include valuation, legal, broker and administrative charges. You need to pay both your legal fees and the lenders legal fees.
Exit fees, charged when the loan is repaid, can be 1.25% but are not always levied. And survey fees, which depend on the value of the property, is another cost to consider.
Exit Strategies for First Time Buyers
Having an exit strategy is key when taking out a bridging loan.
Lenders need to be assured that the loan will be repaid before the term ends.
Exit strategies usually involve selling the primary property, refinancing into a long term mortgage or selling other investments.
These provide a clear repayment path and is key to lender approval. Bridging loans are perfect when buyers need to act fast, such as broken property chains or auction purchases.
A big advantage of bridging loans is the quick approval and funding process, which is key for buyers who need to act fast. This speed is important in a competitive property market, so buyers can get the property they want without delay.
Your Financial Status
You maybe surprised to learn that bridging lenders are not that bothered about the job that you do and what income you have, or how many times you use JustEat in a month!
They just need to understand how you will pay them back.
There’s no monthly payments with a bridge loan. So how much disposable income you have is not that relevant.
However.
If, your exit strategy will be via a long-term mortgage, the lender will want to see some proof that you can actually get this mortgage. Most are happy to see a positive Decision in Principle (DIP) from a mainstream lender as proof.
How They Differ from a Mortgage
On a very basic level, bridging loans are quite similar to mortgages. It is a loan secured against a specific property using a legal charge.
Mortgages can allow you to borrow up to 90-95% of a property value, bridging loans tend to be around 75-80%.
The biggest difference is that bridging finance is only ever for short periods. These lenders have no wish to give you a loan for the next 30 years.
- You borrow some money, quite easily and quickly.
- You use the money to buy a property.
- You sell the property or get a mortgage.
- You repay what you borrowed plus the interest.
Read more: Is a Bridging Loan More Expensive Than a Mortgage?
Why would a FTB need a bridging loan?
This is an important question to ask yourself.
A FTB will not have owned property before, so why use a bridging loan to buy the first one?
Most people use a bridging loan because it offers speed and convenience. It can be set up really quickly, in just a few days, and can be used to buy a residential property, buy to let, holiday let or a commercial property.
And these properties can be in any condition, loans can be arranged for unmortgageable properties. Maybe you want to buy a doer upper as your first home.
But all of this comes at a price. You will pay an arrangement fee of around 2% of the loan amount, two set of legal fees and the interest rate will be higher than a standard mortgage.
Makes sure your sums add up and make sure your exit strategy is well thought out.
Finding the Right Bridging Loan
Choosing the right bridging loan is key for first time buyers as it affects their financial future and property purchase. Compare bridging loans, competitive interest rates, good terms and fees to make sure the loan fits your financial situation.
Using a bridging loan broker will make the process easier and you will get tailored product recommendations. Brokers know the ins and outs of bridging finance and can help you find the right loan.
And searching for a bridging loan doesn’t affect your credit score so you can shop around freely.
In the end, taking the time to research and compare loans thoroughly will give you better financial outcome and a smoother property purchase journey.
