What are Bridging Loans?
A Bridging loans is a short-term loan taken to ‘bridge the gap’ between the purchase or refinance of a property and repayment from the sale of a property or refinance onto a long term loan.
Are Bridging Loans expensive?
The bridging loan market is very competitive with more lenders competing for business – this has driven down costs and increased accessibility. Moreover, bridging loans can be arranged much faster than finance from a high street lender. This is particularly advantageous to property investors and developers to refinance or make purchases quickly. For example:
- Fund a renovation, refurbishment or light development project
- Finish a part-complete a development, refurbishment or light development project prior to sale or long term refinancing
- Refinance an existing development loan to avoid default rates
Trading business with property assets
- Raise capital for business investment or working capital
- Buy out a business partner
- Settle liabilities such as VAT, Corporation Tax, IHT, CGT
- Pay for unexpected business costs and expenses
- Refinance an existing commercial loan
Residential and Commercial property investors
- Finance auction properties
- Purchase or refinance a commercial or residential property/portfolio
- Purchase or refinance an unmortgageable property
- Acquire a discounted property
Individual with property assets
- Repay and discharge IVA, bankruptcy and CCJs
- Divorce settlements
- Settle inheritance and CGT
Types of assets that can used to secure a Bridging Loan
Bridging lenders prefer take a first, second or third charges over most types of freehold or long leasehold properties or land with planning consent. Some lenders accept valuable assets such as jewellery, paintings, gold and prestige cars to secure the loan.
What is the difference between an Open Bridging Loan and Closed Bridging Loan?
A Closed bridging loan will have a clearly defined or agreed term, repayment date, interest costs and with little/no chance of default on or before repayment due date. A typical example of this is following exchange of contracts pending completion or when full finance to repay is in place.
An Open bridging loan is still a short-term loan but without a defined exit date. This is higher risk to the lender and as a result, the borrower is likely to pay higher interest as well as a lengthier application process in order for the lender to understand and be comfortable with the risk.
Advantages and disadvantages of a Bridging Loan?
Advantages of Bridging Loans
- Allows borrowers to quickly release equity in their properties to fund time sensitive opportunities, such as purchasing a property at auction or purchase a property at a discount.
- Bridging loan lenders are less stringent with their lending criteria and can base their decision to lend on the strength of security and exit strategy. As a result, they have a more flexible approach to credit advances. In contrasts to traditional lenders who usually have a stricter lending criteria that requires the assessment of the income, credit history and information about the borrower.
- Bridging loans are ideal to raise finance to refurbish an uninhabitable property that a traditional lender would not normally lend against. Using the funds to bring the property back to a habitable standard and subsequently letting it out can add value to the property and satisfy the criteria of a long term lender.
Disadvantages of Bridging Loans
- The short term and higher risk of bridging finance means interest rates, fees and charges tend to be higher than long-term finance providers.
- Defaulting on a bridging loan can result in a significant increase in the overall cost of the loan and overall loan to value due to additional fees, charges and interest. Consequently, this may make the property and loan difficult to refinance.
- Default on a loan will have a negative impact on the borrower’s credit record and future ability to borrow. Furthermore, risk the lender taking possession of the asset.
How much can I borrow?
The amount varies depending on lender. The minimum loan is usually £26,000 with no maximum. Lenders usually cap their borrowing at 60-80% loan to value. Furthermore, loans above lenders criteria would require additional security to cover the extra risk.
What is the length of a Bridging Loan?
Terms are usually between 1-36 months. But generally, average term is 9-18 months. However, this depends on the nature and purpose of the loan. For example, a tenanted auction purchase requiring long term financing will have a shorter term than multi unit heavy refurbishment with a phased repayment schedule.
How long do Bridging Loans take from application to drawdown?
A bridging loan typically takes 1-3 weeks from application to completion. In some instances, it can take 48-72 hours. However, this does depend on a number of factors including:
- The speed and accuracy of information provided
- The viability and exit strategy
- Track record, experience and credit worthiness of the borrower
- Income of the borrower
- Complexity of the transaction
- The quality and speed all professional parties including broker, lender, valuer, solicitor and other parties acting for the borrower.
What are costs for Bridging Loans?
- Interest charges start from 0.49% per month
- Lender arrangement fee starts at 1%
- Valuation fee cost will be dependent on the size, scope and number of properties being valued
- Legal fees of the borrower and the Lender
- Exit fees are not usually applied to bridging loans
- Early repayment charges usually apply if a bridging loan is repaid before the minimum term of the loan
- Default fees and interest rates can apply if the borrower breaks the terms of the loan for example not repaying the debt within the term agreed.
- Brokers usually charge to organize bridging finance, although this does depend on the size and complexity of the loan.
What information is needed for a Bridging Loan?
The lender requires the following suite of information to process the application to offer stage:
- The purpose of the loan, loan amount and term
- The value and nature of the asset being offered to secure the loan
- A clear understanding of the exit strategy
- The experience and track record of the borrower
- A statement of income, assets and liabilities
- Bank statements covering minimum of three months
- Proof of identity or otherwise known as Know Your Customer (KYC).
How is a Bridging Loan repaid?
Lenders must have a clear exit strategy, which simply means how and when the loan will be repaid. The most common ways to repay bridging loans are:
- From the sales of property or properties
- Refinance onto long-term loans/commercial mortgages
- Sale of investments such as shares other assets
How is interest applied on a Bridging Loan?
Monthly interest can be paid in the following ways:
Retained Interest is when interest is deducted from the gross advance on completion and retained by the lender for the duration of the loan
Rolled up Interest is when interest is added principal debt each month and recalculated.
Serviced interest is when the borrower pays the interest when due monthly.
Combined is a combination of above
What factors determine the interest rate charged on Bridging Loans?
- A clear understanding of the credit risk and exit strategy of the transaction
- The loan to value (LTV) of the security
- Whether the type of charge is a first, second or third charge over the property
- The experience and track record of the borrower
- The borrowers credit history
- Net worth and income of the borrower
- The quality of the asset, the location and condition of the property. For example, a property in poor condition and/or in a poor location will increase the risk to the lender and may result in a higher interest rate charged.
What is the difference between regulated and unregulated Bridging Loans?
Regulated bridging loan on a property is one where the individual or their family live in or intend to live in in the future. Conversely, an unregulated bridging loan on a property is when an individual or their families do not live in or plan to live in the property being mortgaged. In essence, an unregulated loan is for a commercial borrower.
A bridging loan becomes unregulated if it is secured by a second charge over property, above £25,000 and used for commercial purposes for example to fund the investment of assets for a business.
The Bridging Loan application process?
1. The initial enquiry
We use this stage to learn as much as we can about the borrower, the project, their loan requirements, the security being offered and repayment strategy. The accuracy and quality of the information helps us to approach the right lenders offering the best terms. We also discuss how we work, costs and process to completion.
2. Approach lender
The information we gather from the fact find is used to a approach lenders for an Agreement in Principle or offer subject to valuation.
A valuation is instructed and paid for in advance to confirm the value of the property and equity.
4. Appointing solicitors
The lender and borrower appoint a solicitor to act on their behalf. It is important for the borrower to appoint a solicitor with experience in bridging loans to act for them. The borrower is responsible for both the lender and their own legal fees.
The lender will release the funds to your solicitors to complete the transaction on receipt of a satisfactory valuation, completion of the legal work,.
How should I apply for a Bridging Loan?
Complete our online enquiry form. Alternatively, you can telephone us on 020 8988 1102 to discuss your requirements.