A bridging loan is a short-term loan designed for property buyers and developers and can be used as either a temporary loan or even a short-term mortgage. Bridging loans can be used in a variety of circumstances and provide short-term finance until a more permanent form of finance can be arranged or the loan balance can be cleared.
Bridging loans can be extremely useful, as funds are provided quickly and efficiently in comparison to applying for a mortgage. The main difference between mortgages and bridging is that bridging is very ‘short-term’ in comparison. Mortgages are usually taken out on 25-35 year terms. Bridging loans are generally offered for 1 year or less. However, it must be stressed that bridging loans usually come with high-interest rates and fees and for this reason, is generally used as a last resort. Nonetheless, bridging loans can make financial sense when used correctly.
Bridging is largely assessed on the value of the property. The good news is, bridging lenders don’t make assessments on personal income whereas mortgage lenders do. The bad news is, lenders, assess property value in varied ways, but this can be a good thing as it gives you more options.
Here are some examples of where Bridging Finance is used:
Chain Break – A bridging loan can also help when there is a gap in the property chain between buying and selling properties. It may be necessary to purchase a property to avoid missing out but there is not the time available to sell your current property to raise the required funding.
Buying at Auction – Upon winning the bid at an auction you generally have to complete within 28 days, so you may not be able to raise a standard mortgage in this time frame, so a bridging loan can be used to complete on the purchase.
Uninhabitable Properties – Standard mortgages require the property to be in a habitual form – i.e. have a kitchen, bathroom, heating etc – but some properties are run down and due to their poor condition they are classed as uninhabitual and not suitable security for traditional mortgage lenders. In this situation bridging finance could be a solution.
Change of Use – This is where you plan to make extensive changes to the building, so for example change an office block into flats or convert a residential house into a HMO (House of Multiple Occupation). Due to these types of changes high street banks will not lend, whereas bridging loan lenders will consider this.
Renovation Work – You might needs funds to complete the renovation work.
Purchase Items – Such as stock machinery or IT equipment.
Previous source of funding – If previous source of funding has fallen through and you need a quick solution.
Benefits of a Bridging Loan
Flexibility – You can use this type of finance in lots of different situations as outlined above. Our panel of lenders are always open to discussing the transaction and tailoring the finance to the client’s needs.
Speed – This is an essential part of this type of finance as there are generally deadlines in place which need to be met.
Finance Size – We have bridging loan lenders that can offer loans from £50,000 to £25 Million.
Disadvantages of a Bridging Loan
Timescale – For regulated bridging finance (secured on your home) the loan can only last for 12 months and for non-regulated loans the max term is generally 18 months. You need to do your homework to make sure these timescales are feasible.
Cost – The longer the project runs for the more costly it will be, so you need to make sure you have really planned out the project and had advice from builders, planners, brokers etc.
What sort of costs are associated with Bridging Finance?
Typical costs that will be charged are:
Valuation Fees – A valuation will be needed on all properties that you are using to secure the finance. The valuation could be an automated valuation (Desktop) or a full valuation maybe required – The lender will consider which they would need.
Arrangement Fees – The lender will charge an arrangement fee for a bridging loan and this fee amount will be dependent upon the loan size. Additionally a broker fee maybe charged and the amount would depend upon the work involved for the the overall transaction and loan size.
Exit Fees – In some cases the lender may charge an exit fee, so look out for this in the terms issued by the lender.
Solicitor – You will need a solicitor to represent you and also the lender needs a solicitor to represent them. Generally you are responsible for the cost for both sets of solicitors involved in the transaction. In some cases the same solicitor firm can represent both parties.
Monthly Interest – The lender will charge you a monthly interest for lending you the money. How much this will be will depend many factors such as the loan size, the overall project, credit history and Deposit/Equity that you have.
So to end you two things you should always consider, first the total cost of a bridging loan not just the interest rate charged, take into account exit fees, management fees and see if there are any hidden costs. Make sure you ask for a breakdown of total costs before proceeding. Secondly have you a viable repayment method, consider how the bridging loan will be repaid and make sure the proposed exit is viable. If your option was to refinance after the bridging loan term finishes aim to get a agreement in principle from a lender before completion of the bridging loan.
The costs of a bridging loan include, a monthly interest rate for borrowing the money, a lender arrangement fee which is normally a percentage of the amount you are borrowing, a valuation fee payable upfront, broker fees and legal fees (you normally have to pay for your own legal fees and the lenders legal fees).
Bridging loans are mainly provided by specialist lenders that you can access through finance brokers. Using an experienced broker who will be able to advise you on your options is key as every property development project is different.
Most lenders will provide a bridging loan upto 75% of the property value although if you do have additional security to use, they may provide upto 100% finance. Every bridging loan is bespoke to your circumstances and working with an experienced broker is key.