While many people are aware of bridging loans, they may not fully understand how they work. In this blog we will explain the purpose of bridging loans, how they work and the benefits of taking out a bridging loan. Hopefully at the end of this article if you are considering taking out a bridging loan you will have all the information needed to make an informed decision.
What is a Bridging Loan?
A bridging loan is a form of secured short term lending that can be used to provide you with immediate access to funding. That can be used to facilitate the purchase or the refinance of a property and land. Depending on your circumstances you will require a Regulated Bridging Loan or a Non-Regulated Bridging Loan.
• Regulated Bridging – Is required if you are borrowing money secured against your residential home. This type of borrowing is regulated by the Financial Conduct Authority (FCA). And means that consumers are protected from incorrect advice or miss-selling from lenders or brokers.
• Non-Regulated Bridging – Is not regulated by the FCA and is for businesses purposes. For example, the purchase of a BTL property at auction or refinancing a commercial property to pay tax bills.
Bridging loans are commonly found in the property market where buyers often find themselves in need of a quick injection of cash. Although a buyer could have the capital needed to go ahead with a purchase, they may not have access to liquid cash. For example, a bridging loan will help you complete the purchase of a new property while you are waiting for the sale of an existing property to go through.
Bridging loans are often used in auction purchases where you might only have 28 days in which to complete the purchase. A bridging loan will allow you to bid on your desired property even though you may not have the cash available. This could be due to your existing property not being sold, or because you don’t have time to arrange a mortgage.
Bridging loans are useful as a short-term cash injection, to bridge a financial gap whilst you arrange long term finance or dispose of assets.
Note: The use of bridging loans isn’t exclusively to purchase property. You might own a business and have short-term requirements for an injection of cash to meet the payroll; the need to purchase stock; or make payment of tax bills. Bridging finance can be secured against commercial properties including BTL properties on a first or second charge basis for short-term business finance requirements. If you don’t own commercial properties, there are occasions when lenders will consider a bridging finance facility for business purposes. With your main residential property used as security.
How Does a Bridging Loan Work?
While there are two main options when it comes to bridging loans, there is a significant difference between them.
• Closed Bridging Loan – If you choose a closed bridging loan it will have a fixed repayment date that is agreed when you take out the bridging finance. In most cases this is the completion date of a property sale. But it could also be the date that the refinance of a property is completed. Or the date that has been confirmed for the receipt of cash from an inheritance or tax refund. To obtain a closed loan you will need proof of how you will repay the loan at the end of the term, this is also known as an ‘exit strategy’.
• Open Bridging Loan – Is available if you don’t have a clear ‘exit strategy’. You will still have to repay the loan when the repayment date becomes due. It could be that you are waiting for the sale of a property but haven’t found a buyer or confirmed the date that the sale will complete. Open bridging loans tend to attract higher rates of interest than closed loans, and the lender will need to be satisfied that you have the means to repay the loan.
Both open and closed bridging loans can have terms ranging from 1 to 36 months. It is however advisable to repay the loan as soon as possible. To help determine which option best suits your particular needs. Our advice would be to consult with a specialist bridging finance broker that is authorised and regulated by the FCA.
There are different fees and costs associated with bridging loans that also need to be considered:
• Interest – Charged on the money borrowed monthly, and rates can range from 0.45% to 2.50%. The rate of interest can vary from lender to lender depending on the assets and the borrowers’ financial circumstances. Interest is normally rolled up or deferred, which means that you don’t pay interest on the loan until the end of the agreement. However, there are options to service the interest payments if affordability can be demonstrated.
• Lender Arrangement Fee – Between 1.00% to 3.00% and added to the loan.
• Lender Administration Fee – Often charged on submission of the application and can range from £145 to £1,455 depending on the lender.
• Exit Fee – This can be £0 though to a percentage of the loan amount or the equivalent of one month’s interest.
• Valuation Fee – The cost of sending a surveyor to prepare a report about the property for the lender.
• Lender Legal Fees – You will be asked to provide an undertaking to cover the cost of the lenders legal fees. This is normally a fixed cost and is normally disclosed when you make an initial enquiry with a bridging lender.
• Personal Legal Fees – These are the fees that you will have to pay to your solicitor and are separate to the lender’s legal fees.
• Default Interest – This is interest charged at a higher rate if you fail to repay the bridging finance facility by the agreed contractual date.
The bridging finance lender will place a legal charge over the property or properties being used as security. This would be a first charge if the security property is unencumbered or a second charge if there is a mortgage already secured against the property. If it’s a first charge you might be able to borrow up to 80% of the property’s value. And if a second charge is required the maximum borrowing will be around 65% of the property value. If you are purchasing a property you need to introduce the deposit and must be able to demonstrate proof of funds to a lender.
Bridging finance can be arranged quickly, sometimes within 5 days. This can only happen if the borrower is organised and has the necessary paperwork and documents available. The basic requirements are passport and driving licence; 3 months personal bank statements; 3 months business bank statements (if business borrowing); residential utility bill dated last 2 months; credit report.
What are the Benefits of a Bridging Loan?
• Speed
Completion of a bridging loan can take between 5 to 14 days and is one of the main reasons for considering bridging finance.
• Flexibility
Unlike traditional mortgage lenders, bridging lenders don’t work with strict underwriting criteria. Therefore, roadblocks in the process such as adverse credit; self-employment; lack of company financial accounts; overseas applications; proof of income. Can be addressed on a case-by-case basis and solutions found.
• No Monthly Repayments
Bridging lenders will roll up or defer interest payments until the end of the loan term. This takes pressure off cash-flow.
• Avoid Financial Loss
A bridging loan can be used to avoid financial loss and enable you to repay pressing financial commitments. Such as suppliers invoices; tax bills or even an existing finance agreement that is due to default or have Receivers appointed.
• Profit From Property
There are times when a property is un-mortgageable and refurbishment is required. The refurbishment will increase the value of the property. Bridging finance is ideal in this situation as bridging lenders will lend against such property and will also consider lending additional funds for the refurbishments.
Final Thoughts…
Hopefully the information contained in this article has helped give you greater insight into bridging loans. However, if you are still unsure, why not give us a call and one of our friendly team will be happy to answer any specific questions you may have.
