A bridge loan is a short-term finance product that is usually utilised in three scenarios: 1. To bridge the gap when the timings of a property’s purchase and sale do not coincide. 2. You must complete a property purchase in a fast timescale. 3. The property you’re purchasing isn’t eligible for a conventional mortgage due to its condition.
How much time does it take to arrange a bridging finance?
The speed of processing is crucial to the success of bridging lenders and they’re raison-detre to operate at a rapid pace. We’ve seen cases move to offer the same day, only to be completed three days later, but the average time to process a request to finalisation is 14 days. Although a bridging loan may be made much more quickly than a conventional loan and is more flexible than traditional loans, bridging finance companies have strict lending requirements. They are typically smaller and more efficient and specialise in performing the same checks banks perform, without the burden of bureaucratic bank procedures.
What is the process for bridging loans?
The amount you can borrow will depend on the amount of equity that you own in a given property. Typically, the maximum amount with interest is restricted to 80 percent LTV for residential and 65% for commercial property. This loan can be secured either on the property, or on multiple properties to raise funds and is then usually repaid after you sell the property, or by refinancing it to a standard mortgage product.
Similar to an ordinary mortgage, you’ll need to pay an initial deposit (20 percent for residential bridging, and up to 35 percent for commercial bridges) in addition to paying interest, typically as a monthly rate, rather than an annual. The lender may be charged an arrangement fee (usually 1.5% to 2% of the amount of the loan) in addition there may also be charges for valuations, solicitors and broker fees if you’re using a broker. These lenders tend to be more tolerant to homes in a poor condition – even inhabitable properties can be used to secure a bridging loan.
The terms for loans could be as short as three months, or up to 24 months. The average loan amount is approximately £50,000, but some lenders offer no limit and its not unheard of to be able to raise £5m or even £10m using this financing solution.
Who uses a bridge?
A lot of businesses and individuals that include professional landlords as well as property investors, are often required to finish purchases in a hurry or fund a property which isn’t a suitable short-term loan.
What is the reason to get a loan to bridge the gap?
The primary reasons professional property owners use fast bridging loans to raise funds quickly. Sarah from bridging broker Finbri explains “Speed is usually a prerequisite for the bridging loan succeeding or not. Many customers need a fast bridging loan facility because of the urgent circumstances they find themselves in.”
Examples of where fast bridging loans can help include:
- To purchase at auction.
- To purchase a property that could not be able to secure a mortgage in its current state with a conventional lender.
- To cover a gap in funds needed to purchase and sell an asset when the delay occurs in the sale.
- To fund a deposit buying another property.
What is the cost of a bridging loan?
Short-term financing is generally more expensive than loans with a longer term. However, it’s priced competitively as more lenders are coming into the market. The rate of interest charged will vary based on the situation; rates currently are between 0.50%-1.25 percent per month. There is the possibility of even higher rates for more complex cases but speaking with a broker will help you ascertain the best rates available in the market at any given time.
There’s a growing number of lenders available that offer a range of pricing structures such as interest paid monthly or lenders that deduct interest in advance for a time of between 3 and 24 months.
Fee for arranging with a lender
A fee for arrangement, usually at 2.0%, is usually taken out of the total loan.
Some lenders could charge a fee if the loan is due. But, the majority of lenders will not, as long as the bridging loan has been in force for a minimum of 3 months.
Valuation and legal fees
Most lenders will ask for an in-person valuation, although it’s becoming more commonplace for valuations being completed remotely, which are called desktop valuations. Some lenders might have the option of using an appraisal report from the past (for instance an appraisal by a professional was conducted and the lender rejected the request).
Like a typical mortgage, bridging financing must be handled according to the legal framework of the country governing loan transactions. The borrower will be accountable for the legal expenses of the lender.
What are the broker’s fees?
A broker can help you save money over the long term, because they will be able to find the best bridge loan that is for you. The typical broker’s fee can be circa 2% – 4% of the loan value, however this can be offset due to the expertise of the broker sourcing a better rate than you could otherwise obtain without their assistance.
The typical bridging loan requirements
Bridging financiers will evaluate the credit worthiness of the borrower but this isn’t necessarily a deal breaker as the loan is secured against an asset, and it’s the stability of the asset and the borrower’s exit strategy that is of critical importance.
What are the benefits of a Bridging loan?
The primary benefit of applying for the bridging loan is that you can access the money fast. It is also possible to apply for large amounts of money and the lending criteria may be flexible.
What are the dangers of using a Bridging loan?
It is crucial to develop a robust exit strategy that is clearly defined to ensure that the loan will be paid back (either through a sale or refinancing) to avoid having to pay high penalties for interest or worse, default which risks your security of repossession. The borrower should be aware that if you are unable to repay the loan, as with any mortgage, your property could be at risk of repossession.
The choice of lenders
There is a growing number of lenders offering short-term loans who are entering the market. Choosing one can be difficult especially since certain types of bridging finance need an FCA approved lender. For landlords and property investors, the kind of loan needed for bridging is typically not regulated, therefore it’s not required to select an FCA approved lender. A majority of reliable Bridging lenders belong to the Association of Short-Term Lenders. The self-regulating body enforces a strict code of ethics to ensure that the borrowers are treated with respect.
Bridging finance is an area of expertise, where it’s recommended to hire a professional broker or an independent financial advisor. They will spend time to get to know the borrower’s circumstances and funding needs, and will be the best placed to coordinate the most appropriate loan with the right lender.