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We look at the most frequently asked questions we get from clients regarding bridging loans.
The list put together are the most common questions and will allow you to understand bridging loans and make a more informed decision.
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Bridging Loans can be a convenient short-term financial solution for many.
As the name suggests they are designed to help ‘bridge the gap’ in finance before a more long-term financial solution is secured.
Bridging Loans can be applied to many intentions. This includes:
The amount you can borrow with a bridging loan varies greatly, however, most lenders offer amounts between £5,000 and £10 million+.
How much you can borrow personally is dependent on a number of factors, including your credit rating and the collateral you can offer.
Bridging loans are well known for how quickly you can get your hands on one!
If successful, the lender will typically confirm the application was successful within 24 hours.
You might even be able to get access to the money within two days, however, usually it takes a bit longer as checks have to be completed and processed.
Assets such as land, residential property and vehicles can be employed as bridging loan collateral.
The nature of the collateral expected can vary between lender, but property is the most common asset used as collateral.
Lenders will add a ‘charge’ to whatever you are using as security once you have submitted your loan application.
This establishes how you will pay back debt, if you are unable to repay the loan.
In the circumstance that you have an existing loan secured against a property with an existing mortgage,
you will need a second charge loan. For example, these loans apply if you are doing refurbishments to a property you already own and pay the mortgage for.
First charge loans apply when the loan is the sole borrowing secured against said property.
Typically, mortgages are first charge loans. Lenders can potentially repossess or sell the assets you put forward as security if you do not repay the bridge loan.
Yes, this can be done quite easily. Bridging loans can be secured against both first and second charges.
Some lenders will incur an arrangement or facility fee.
This is to cover the cost of setting up the bridging loan and will be able 2% of the loan.
This fee is typically included in the loan, so you will not have to pay it right away.
In addition to interest, borrowers need to pay several fees., lenders will typically ask for the following:
In general, interest rates on bridging rates are expensive and tend to be between 0.4% and 2%.
Bridging loans are simply a short-term option, and because of this short-time scale interest rates are charged each month as opposed to yearly.
Nuanced differences in interest rates can alter the cost of your bridge loan greatly.
Nevertheless, there are three major ways it can be billed:
You are able to opt for either a fixed or variable interest rate on your bridging loan.
This choice is pertinent and you must consider how much risk you are willing to accept.
Fixed rate interest is established beforehand, so you will know how much interest you are paying but that added stability may equate to more expense.
On the other hand, variable rates are riskier, but you can potentially make savings when the market is in your favour.
In instances where, an exit date is confirmed, or there is an established date when repayment is expected a loan is ‘closed’.
For example, both parties would leave the arrangement on a specific date if the sale of a property is completed on that calendar day.
In the interest of getting this type of loan, you must provide a possible exit date. A favourite of both lender and borrower as they carry less risk.
Open bridging loans do not involve a guaranteed exit date.
These loans are used when the person taking out the bridging loan is unable to guarantee an exit date or say for definite how long the bridging loan be necessary.
This type of loan could be used for a house sale, when they were no definite buyers when the loan was taken out. These loans are riskier.
Following the 2008 financial crash, the majority of high street banks decided to halt offering bridging loans, and instead decided to only pay attention the financial products which were profitable to them.
Today, some of the UK’s mainstream banks offer a small selection of bridging finance options. However, these are mostly only available to their exclusive customers.
Nevertheless, as a result of the popularity of bridging loans over the last few years, many specialist lenders have emerged. These lenders offer bridging loan specific products which are often the best deals.
For those with bad credit, bridging finance is a very realistic option.
The majority of lenders will review the application submitted, even if your credit rating is poor. The main impact of bad credit is on the interest rate.
If the lender deems you high risk, you will face an inflated interest rate. Bridging loans are accessible but they will be more expensive for you.
The number of bridging loan options available can seem like too much to process.
In order to make the best decision, before you proceed with comparing different options, you should establish exactly what you want for your loan.
Currently, the bridging loan industry is not wholly regulated due to the fact the residential market is regulated whilst the commercial market it not.
What is regulated is subject to change in the law.
Regulated loans are bridging loans which are secured against a property, that is occupied by the borrower or will be.
If a loan is regulated it may be second or first charge. These loans are contingent on regulation by the FCA.
Unregulated bridging loans are also usually secured by property; however, the main difference is that the property in question is unoccupied and is being used for business or investment.
These loans are additionally obtainable as second and first charge.
You will need an unregulated loan if you need money to either purchase or refinance commercial property, residential property intended for rental and land.
Anyone can get a bridging loan with the following:
Borrowers can acquire loans at a maximum loan-to-value of 75%. The LTV is the assessment used to work out how much risk the lending arrangement carries.
The lower the value the less risk involved. In the context of bridging loans, lenders will use it to decide how much they are willing to make available for you.
100% bridging loans are sometimes available, but the carry extreme financial risk and are not generally advisable.
Both bridging finance and development finance happen to be easily comparable.
They are both financial products designed to only be utilised for a short time and can be implemented to fund property building and renovations.
Upon the completion of a project, both financial products will need to be repaid to their lender.
There are two ways to do this. Firstly, the borrower can acquire a solution more suitable for an extended period like a mortgage. Alternatively, the borrower can sell the property.
The two differ greatly because of the period of time they can be borrowed for.
Whilst development finance is available for 3 years, bridging loans are generally only available for up to a year.
Development finance is typically the superior option for building projects and restoration works because of the lower cost point as the interest rates are significantly lower and any earnings can be made available when necessary.
For some bridging loans are the singular option, due to the fact in order to gain development finance you often require a portfolio of past properties.
Asset refinancing is a technique often utilised by businesses to liberate some equity held within an asset. Oftentimes, this is an asset like a vehicle or equipment such as a machine.
This arrangement is typically organised on assets the borrower owns completely. Nevertheless, the arrangement can be made against assets which are already secured, as long as the existing facility has been paid back.
Any asset used must be able to be identified and possess a serial number or something similar.
The process of acquiring a bridging loan is largely focused on establishing a repayment strategy, due to the fact brokers and lenders really want to you to pay them back.
Sale of property or refinance are the plans usually accepted. It is an inevitability that despite every caution in the world, some loans will not be repaid before the agreed time.
Especially, as the housing market is extremely unpredictable. Typically, lenders will communicate with the borrower three months before the end of agreed terms.
Mainly to establish how likely it is repayment will be successful. Lenders may provide advice to make it more likely.
Especially useful for property developers, mezzanine finance of funding is product to help finance development projects.
Generally, whilst the majority of funds will be given by a central lender the rest will be made up by a mezzanine lender. This additional lender will take a second charge.
Bridging loan applications can be made by limited companies or partnerships.
Like normal, you will just need to prove you can pay and supply evidence of enough equity to be used as collateral.
Buy to let mortgages are a financial product that can be secured against rental property.
They are popular and usually based on residential properties. Buy to Let mortgages are commonly utilised to generate money to buy or refinance investment property.
In addition, let to buy mortgages are the name given to these mortgages when they are being used to generate income on the mortgage owners existing home.
This finance facility as seen a recent popularity, as the property market has been dull and people want to buy new property whilst generating income from their existing property.
What are Secured Loans?
A loan is called a secured loan if it is secured against an asset that the borrower owns such as their home.
They involve relatively lower interest rates, but this option comes with great risk.
Particularly if the said asset is someone’s own home. However, as a result of this level of risk, these loans can involve large sums.
Additionally, these loans are sometimes called a second mortgage.
This will also depend on the lender, and the terms of the bridging loan, in most cases yes as long as the security has sufficient equity and the the exit strategy is viable.
For further reading on bridging loans, please read our blog, which contains much information on the uses of bridging loans here