Bridging finance was once viewed as a product only to be used perhaps when a property chain had broken down. It is now a more understood and accessible option, typically used by property investors across the UK.
Short term loans can be used for residential and commercial property transactions, auction purchases, refurbishment and development projects. With many more lenders available than in recent years, increased competition has driven rates down which has now made this a viable option once considered too expensive in the past.
What is a Bridging Loan?
A bridging loan is a short-term loan secured on property or assets. It can be used by individuals and businesses for any purpose until the next financing stage, permanent funding is available or, the property is sold.
The interest rates are usually higher than other loans, reflecting the risk profile when a short-term finance solution, usually of 12 months or less, is required although in some circumstances, loans can be offered for up to five years. A bridging loan should only act as a cash injection for the buyer and should not be a replacement for a long-term solution.
There are two types of bridging loans, a Closed Bridge – when the borrower has a set date when the loan will be repaid. An Open Bridge – when the borrower sets out a proposed exit plan to repay the loan with no definitive date agreed at the outset. There will, however, be an agreement beyond which the loan cannot be extended which would usually be no more than 12 months.
What are they used for?
For residential and commercial property, collapsed chains for home buyers, refurbishment and development projects for builders, property investors, and landlords. They could solve a financial emergency or exploit a new opportunity as they can be flexible and arranged in a matter of days in some circumstances. They can be secured against property which is unhabitable and therefore not suitable for a traditional mortgage.
Why are bridging loans used?
Landlords, developers and investors most commonly use bridging loans as a way of building property portfolios quickly by taking advantage of market conditions. But bridging loans can also help fund commercial and residential purchases.
It’s important to remember that a bridging loan is not an alternative to mainstream lending and should only be considered when other lending options are not suitable. You should always seek professional advice from a specialist broker before applying for this type of finance.
Reasons for considering a bridging loan:
- Collapsed chains
- Build your own home
- Larger developments or new build
- Commercial to residential conversion
- Auction purchases
- Temporary cashflow
- Unmortgageable property
- House to flat conversions
- Conversions to HMOs
- Light, medium or heavy refurbishment
- Property purchase below market value
- To fund both the purchase and the costs of the work
How does a bridging loan work?
- Complete a Fact Find and enquiry form
- Adviser will provide terms and issue application pack
- Complete the application and provide required documentation
- A property valuation will be arranged
- Solicitors instructed
- Complete the legal process
- Funds released
What are the costs?
These will vary dependent on the lender, the loan type and how it’s structured. Interest is charged for the term of the loan, lenders usually have an arrangement fee, there may be administration, insurance, legal and disbursement, valuation, exit, and brokers fees, some will be added to the loan and some will need to be paid upfront.
As bridging finance is more expensive than other mortgage funding options, a clear repayment and exit strategy should be in place before taking out the loan. This will help you avoid paying additional charges or high penalty interest rates. It can also help to avoid the potential repossession of the property if the loan is not redeemed within the agreed timescale.
- Interest rates may be from 0.43% per month
- Lenders arrangement fees may be from 1-2%
- Administration fees may be charged from £495
- Insurance (usually title indemnity) from around £250
- Lenders legal fees from around £650
- Valuation fees from around £300
- Exit fees may be charged
- Brokers fees may be charged
Not all fees apply to all loans and will vary considerably, the list above is a rough guide only.
A summary of our bridging loan features:
- 100% lending available with additional security
- 1st, 2nd or 3rd charge loans available
- Additional lending for the cost of works
- Loans from £50,000
- Loan terms from 1 to 60 months
- No exit fees on some loans
- Free valuations on some loans
- Free legals on some loans
- Interest can be rolled up on the loan, no monthly payments
- Market leading rates
- Fast turnaround
Most Bridging Loans are not regulated by the Financial Conduct Autority (FCA)
This article (Bridging Loans) is intended to provide a general appreciation of the topic and it is not advice.