Buying a property at an auction inspires many people because of low competition and the scope of saving money, but the speed of purchase is so prompt that you need an immediate injection of cash. Normally, you will have four weeks to close the transaction. Chances are your current property is taking longer than necessary to liquidate funds, and in the interim, you may need to hinge on a bridging loan to buy an auction property.

However, the fact that they are subject to risks cannot be overlooked. Having an understanding of how they work is paramount to ensure you do not struggle to discharge the debt. In order to obtain a bridging loan, consult a business loan broker in the UK. They would guide you through the whole application process.

How bridging loans work

Bridging loans are short-term loans used to bridge the gap until your current property is sold. You must have money readily available to buy a property at an auction, but if your existing property is yet to find a buyer, you could be reliant on bridging loans. They bridge the gap between the purchase of an auction property and the sale of another property, thereby called bridging loans. These loans are normally used when funds are needed instantaneously.

Bridging loans can be used for both residential and commercial property. They are used by individuals and companies. Bridging loans are short-term loans. The repayment length of these loans is 12 months. Of course, it could be challenging to pay off the whole debt within such a short period of time. They are subject to high risks. Chances are your current property will not be sold. If so, you are yet to discharge the debt. You must have a backup plan to ensure that you do not struggle with payments.

Bridging loans typically charge higher interest rates compared to traditional loans. it is vital to carefully examine interest rates offered by lenders. Seek professional advice to get the best bridging loan for an auction property. Make sure you are applying for these loans from a reputable lender because working with them improves your chances of getting the best deal. Caution is enjoined when you are using bridging loans.

The benefits of bridging loans

One of the significant benefits of using a bridging loan is that they have a quick turnaround time. The property bought at an auction requires an upfront payment, and the rest payment is to be made within 28 days. Bridging loans provide you with money promptly. In a matter of days, your application process is approved, and money is directly paid to the auctioneer. Then, you have 12 months to settle your debt. Most of the time, bridging loans are interest-only debt, meaning you will be required to pay only interest throughout the repayment term. The principal will be paid at the end of the term. Understand the repayment structure of these loans so you do not struggle to discharge the debt on time. In addition to a quick turnaround, the following are the benefits of bridging loans:

• Flexibility

Bridging loans are preferred to fund an auction property because they come with flexible repayment terms. You do not have to take on the stress of selling your current property to buy a new property at an auction. These loans will allow you to complete the purchase without having enough money.

Though bridging loans are to be paid back in a period of 12 months, lenders will provide you with a repayment term based on the borrowing amount and your overall financial condition. Do not forget that your credit score also plays a vital role. The repayment length varies by the borrowing amount.

• They can be used to fund various properties

Another benefit of using a bridging loan is that it can be used to buy various types of properties. It could be residential, commercial or simply a piece of land. So, you will have more options when it comes to buying a property at an auction.

• A higher loan-to-value

Contrary to traditional loans, bridging loans come with a high loan-to-value ratio. You can borrow a significant portion of the property’s value through bridging loans; however, bear in mind that each lender has its own policy. The percentage varies by lender. Before applying to any lender, make sure that you have researched the maximum amount of money you could secure. Prequalifying letters are the key to getting a line on the amount you could secure when you formally apply for a bridging loan.

• Poor credit rating is not a snag

There is no doubt that you must have a good credit rating to qualify for a bridging loan at lower interest rates. Even if you manage to secure them at a competitive interest rate, the interest rate you are charged will be quite high in relation to unsecured loans.

They will be even higher if your credit report is not up to scratch. But even so, you can secure a competitive interest rate because bridging loans are secured against the property. Though bridging loans are small, they are secured. In case of a default, you will be at risk of losing your property. It is always suggested that you do not use these loans if you are not sure about the sale of your existing property. If that is the case, you must have an alternative payment plan.

Ways to find the best bridging loans

Here are the ways how you could find the best deal on bridging loans:

• Know what you need

The first step is to know how much money you need to make the purchase. Bridging loans are expensive. The lower the borrowed sum, the better it is.

• Do your research

There are various bridging loan providers. Make sure that you compare deals between them to avail yourself of the most competitive interest rates. Do not forget to consider other alternatives such as secured loans. They might cost you less interest.

Consider using a bridging loan broker to know what kinds of financial products you can access. Choose the one that helps save you money. a broker can also help you get exclusive interest rates.

• Read the fine print

At the time of signing the agreement, make sure to read the small print. You must know fees and associated charges you are paying on top of the interest.

The bottom line

A bridging loan can help you secure a profitable auction property as it provides you with immediate cash. However, these loans are quite expensive. You should consult a broker to explore your options.