Property purchases aren’t always straightforward; sometimes, buyers need additional help or a different way to fund when buying property.
One standard solution is a property bridging loan. This guide informs you why you should arrange a bridging loan, the benefits and challenges of bridging loans, and how to best negotiate the best terms.
What is a Property Bridging Loan?
Bridging loans provide finance for a short period (in comparison with traditional mortgages or loans) and are a common funding source for some property purchases where traditional mortgages are not available.
What types of property bridging loans are there?
There are terms and conditions for each bridging loan which help make them unique, but in general, you
Regulated bridging loan
Non Regulated bridging loan
Regulated property bridging loans are when the security used is currently or will be your home. These loans typically run for 3months to 12 months.
Non Regulated bridging loan is when the security involved has been or will be purchased purely for business purposes and no family member has lived or will live in the property. These loans typically run from 3 months to 24 months.
What are the costs associated with property bridging loans?
The costs associated with property bridging loans include:
A valuation fee
A lender arrangement fee, often running to 1-2% of the value
Monthly cost for borrowing the money
Legal fees, which can include legal costs for the lender plus stamp duty maybe payable
With property bridging loans, some fees and the monthly payments are usually rolled into the finance, so there is nothing to pay each month; the full sum is paid off at the end of the loan.
Also, be aware that the Annual Percentage Rate (APR) for a bridging loan is higher than a traditional mortgage.
Are there limits to how much money you can borrow with a bridging loan?
The amount of money you can borrow depends on many factors, and the maximum loan-to-value ratio (LTV) is commonly 75% although if you have other security to add into the overall deal you could borrow more. If you also want to raise money for the renovation of the project this is also possible, up to 100% of the development costs (paid in stages and in arrears) providing the end GDV is strong. Property bridging loans are all unique, so getting an experienced adviser involved is key.
What are the pros of property bridging loans?
There are many reasons to take out a bridging loan, and the most common reason is a traditional lender will not provide a conventional mortgage.
Obtaining funding when traditional methods don’t provide a solution
An example of this is when a house is deemed uninhabitable. A traditional lender won’t sanction funding if a property has no viable kitchen or bathroom. With a bridging loan, a buyer can purchase the property, renovate the property to a habitable level, and then decide what to do next. The owner could sell the property, pay off the bridging loan and hopefully make a profit or they could replace the bridging finance with a traditional mortgage, which is now applicable.
Another example is when the buyer wishes to change the nature of the property, and a traditional lender won’t support this move. A buyer looking to split a family home into multiple flats might struggle to arrange traditional finance. Again, a bridging loan provides the short-term support to make changes, and then the
owner has more options at their disposal.
The speed of funding
Another area where bridging loans make a difference is the speed of funding.
If a buyer purchases a property at an auction, they must place their deposit down on the day and complete the purchase in 28 days. The time associated with arranging and conducting a traditional mortgage makes that an unsuitable option. So, arranging a bridging loan allows the buyer to gain funds, pay in full on time, and then switch to a more suitable financial arrangement for their needs.
There is flexibility
A prevalent reason to take out a property bridging loan occurs when a problem arises in the property chain. If a homeowner is selling and buying simultaneously, a potential buyer for their home pulling out can be a disaster and they may not have the funds in place to complete the purchase.
However, with a property bridging loan, they can finance their purchasing activity in the short term, giving themselves more time to find another buyer and conclude that deal.
You can make money
A clear benefit, and one that is perhaps so obvious it is overlooked, is that a property bridging loan helps you make money. You could purchase an uninhabitable property, add value and then pay off the loan and achieve profit.
This is the working process, so many investors live by, and a bridging loan provides an opportunity.
What are the cons of bridging loans?
There are drawbacks to bridging loans, the most notable being that this is a more expensive funding solution than traditional borrowing.
You have to make sure you have your numbers & timings right, because if the project overruns in time or cost this may wipe out all your profit and you could face a loss.
Make sure you have a planned exit route – i.e. way to pay off the debt.
How do you develop an exit strategy?
Given the importance of an exit strategy with a bridging loan, what is it, and how do you develop one?
An exit strategy is how you plan to pay off your loan. This might be through selling property or remortgaging to a traditional mortgage after the property is upgraded. These are viable options but aren’t always suitable for every project.
If refinancing is your planned exit route make sure you speak with a broker/lenders to confirm this is plausible.
You need specialist help with property bridging loans
As bridging loans are complex, it is vital to receive expert help from specialists. Bridging loan brokers will review your circumstances, help you develop a viable exit strategy, and find the most suitable lenders for
your needs. If your credit score is low to the extent that traditional high street lenders are unlikely to lend to you, there are still specialist lenders that may be able to help – but make sure you get advice in this area and confirm that this is a possible exit strategy.
Brokers can help you understand the criteria for property bridging loans, the total costs, and how to manage the process.
Are property bridging loans worth it?
The usefulness of a bridging loan depends on the buyer’s circumstances and needs. Anyone requiring a short-term financial solution that traditional lenders are unlikely or unwilling to finance will find a bridging loan is their best option.
Key takeaways from bridging loans:
Bridging loans are viable short-term solutions when purchasing property
Bridging loans offer a range of benefits including offering a solution when traditional methods aren’t available, speed of funding, flexibility in managing projects and the chance to make money.
Bridging loans are more expensive than traditional loans and you must have an exit strategy to pay off the loan and minimise the additional risks these loans bring.
How to explore your bridging loan options with The Money Hub
If you are looking to arrange a property bridging loan and you require assistance in finding the best option, help is available.
Call The Moneyhub Limited on 0203 725 5830 and speak to one of our highly specialised and dedicated Advisors or you can complete an enquiry form which will allow you to schedule a call time.
A bridging loan used for your home (to buy or already own) can have a term of 3months to 12 months. A bridging loan used for property development (business purposes) can be 3 months to 24 months depending upon the project.