What are bridging loans?
Bridging loans are a fast way to borrow money short term. One use is to fund the gap between buying a property and selling another. Bridging loans can be arranged quickly and are usually also paid off fast.
They tend to be secured on the property you are purchasing (this includes commercial property and land), but can also be secured on any other valuable assets, such as cars or jewelry. Bridging loans are certainly not the cheapest option, however, they can help you raise the extra cash you need, fast. Speed is especially important in bridging.
Always speak to a bridging expert at the outset to make sure you understand the process and how it relates to your circumstances and requirements. It could save you time, anguish and stop you making a costly mistake.
What can bridging loans be used for?
Well, bridging is typically used by landlords and property investors. However, they can be used by anyone that needs to borrow money fast, but keep in mind they are also paid off fast. Here are some of the few reasons why bridging finance may be needed:
- Fast property purchase. This is usually the main reason why individuals may take out a bridging loan. It is fast paced, meaning the funds will be available within a few days/weeks to make your purchase. Rather than months.
- Buying property at auction. Bridging loans are often used in this scenario, when an individual needs the money immediately to buy a property but hasn’t sold their current one.
- Property refurbishment. Bridging loans can cover the costs of a refurbishment, even if the property isn’t mortgageable, then be paid off once the property is sold.
- Building a bigger property portfolio. A bridging loan can help landlords expand by buying property quickly and cheaply. Then once refurbished or let, bridging can be replaced by a longer term mortgage.
What is the criteria for bridging loans?
Every lender is different, and therefore will have a different eligibility criteria. However, most borrowers might have to fall into the criteria below to be accepted for bridging finance:
- Be over the legal age of 18. Some lenders may even have a higher age limit.
- Borrowing over £10,000, but many bridging lenders have minimum loans of £100k to £150K
- Employed, self-employed or retired with a financial footprint in the UK.
- Offer collateral. Bridging loans are normally secured on the property that is in the UK.
Do I need a deposit for a bridging loan?
You do usually need to put down a deposit. The size of your deposit depends on many factors, such as the amount you want to borrow, the value of the property you wish to purchase and the loan to value. However, the minimum deposit should be at least 20%-25%.
There are some scenarios where you can get a bridging loan with no deposit. This can be done by offering security over another property you own. A classic example is where someone is selling a property and using bridging to purchase another; before the first property is sold. In this scenario a lender may take security over both properties and not require any cash deposit.
Are bridging loans risky?
As with all loans, borrowers must beware of the potential risks that come with bridging. Let’s talk about the main ones:
- Non-payment – just like any other loan, you must be able to keep up with the repayments or you will face serious consequences. However it is very common that bridging lenders will include all the expected fees and interest charges within the loan. This means your cash flow is unaffected. However, because the interest is deducted from the total loan it does mean the borrower will get less cash in hand.
- Breach of conditions – bridging finance is often unregulated in the UK, meaning the lenders have the right to make their own terms and conditions. You must read them carefully to understand what you are agreeing to.
- Exit strategy failure – an exit strategy is the most important part of the loan process. Sometimes things don’t go as planned and you may end up not being able to sell your old property on time or refinance as quickly as you hoped. This is why it’s important to consider all the hypothetical situations that may arise, which may involve extending the finance. Always plan ahead, strategically. Always read the small print on what happens if you don’t repay the loan within the term. Some lenders charge high penalties but many don’t
Does a bridging loan affect your credit score?
The answer is yes, it can show up on your credit history and impact your credit score negatively. However it is unlikely to have a significant impact if the interest is rolled up in to the loan and you repay it on time If your application for a bridging loan gets declined for any reason, then it will show up on your credit report. Most lenders run credit checks beforehand, so the best thing to do is to speak to a specialist first if you’re unsure.
What is the average cost of a bridging loan?
The overall cost depends on multiple factors. It depends on the amount you are looking to borrow, your lender, the duration of the loan, and interest rates. Any extra fees may, but won’t always include:
- Arrangement fees – typically 2% of the loan amount
- Valuation fees – can be anywhere from £400-£5,000 depending on the property type and loan amount. Residential bridging is cheaper. Commercial property bridging is more expensive.
- Exit fees – may be additional fees if you wished to pay off your loan earlier than agreed
- Legal fees – usually paid either at application or deducted from the loan amount upon completion. Again these vary widely depending on the property type, loan amount and any other unusual requirements
- Broker fees – normally paid upon completion, usually calculated at a % of the loan. On larger bridging loan brokers may not charge a fee as they receive a commission from the lender.
Bridging lenders charge interest in 3 ways:
- Monthly – you make monthly repayments, while the overall amount of the loan stays the same.
- Deferred Interest – the interest is not paid off monthly. Instead, it is added to the final amount which is paid off at the end of the loan’s end.
- Retained Interest – the total interest is calculated at an agreed rate at the start with the lender. It is then added to the total bridging finance figure.
What are the pros and cons of bridging loans?
- Loan completion times are very fast when compared to other types of loans, ranging realistically from 5 days from enquiry to 4 weeks.
- Monthly interest on bridging loans can be as low as 0.45% per month, or sometimes even less.
- It’s possible to borrow large sums of money secured on property which may not be mortgageable.
- You may still be accepted with a poorer credit score.
- If you can’t afford the repayments, the interest can be added to the loan if there is sufficient equity
- The repayment terms are flexible, meaning you can repay it early to save money and avoid early loan repayment fees.
- Bridging finance is a secured loan. Therefore, you’ll need to give the lender a collateral, which they can repossess if you fail to make repayments.
- Bridging loans normally come with fees that may end up adding to their expense.
- The loan must be repaid in full within a short period of time, or the monthly interest rate can escalate overtime.
Do I need proof of income for a bridging loan?
The majority of bridging lenders do not require a proof of income, however you may need proof of employment.
How hard is it to get a bridging loan?
While bridging loans are usually arranged fast, be mindful that they are short-term and secured on your property. Therefore, you must be sure you can keep up with the repayments, or your property is at risk of repossession.
Most bridging providers will often offer their most favourable rates to borrowers with
- Good security with a low LTV (loan to value ratio)
- Great credit history
- Experience in property and good portfolio
- A reliable exit strategy
Is there an alternative to bridging loans?
Bridging loans are quite risky, but there are plenty of alternatives. It’s important to know all of the other options that are available to you and discuss these with an expert.
Landlord credit facility – this is a credit facility or overdraft which can be secured on one or a number of properties. Unlike bridging, it can be used over and over again and cash can be withdrawn and paid back to the facility without penalty. Interest is only paid on the cash drawn down. This can save landlords money and allow them to buy properties quickly as the facility is already agreed and in place
Unsecured lending/personal loans/bank overdrafts – Depending on the amount you are looking to borrow, unsecured loans and arranged overdrafts can be a good alternative. However, they do usually offer smaller funds. This means you may not raise as much as you intend.
Refurbishment loans – they are designed specifically for refurbishing property. The amount you borrow can be based on the final value of the property once it’s ready to be sold.
Asset finance – it can be put into place quickly and is likely to be cheaper than bridging finance but may have high early repayment charges. Asset finance is used by businesses to make purchase payments in installments or to release cash from existing assets.
Remortgage – this method can be used in order to release equity from your current property. There may be some savings on interest rates from remortgaging, but, keep in mind that other fees may apply.
Commercial mortgages – they are a long-term product, as opposed to bridging, offering lower rates. However, commercial mortgages do sometimes come with early repayment charges and are overall slower and a lot less flexible, so do weigh up the pros and cons of this option.
Fast house buying companies – they can be an alternative to bridging and help you release equity from a property fast. When borrowing money through bridging, you retain ownership of the property, whereas quick house sale companies are buying the asset from you. It’s important to note that these companies will usually offer no more than 75% of your property’s value. This is how they make their profit. Bridging loan costs usually come to less, however, it’s still an option to consider.
How long does it take to get approved for a bridging loan?
The most realistic timescale for bridging loans is a minimum of 5 to 10 days however, in practice a valuation is often required and your local solicitor may not move as fast as you would wish. Therefore it is prudent to allow 4 weeks. If the legal ownership or scenario is complex it may take longer
Make your timescales known at the outset as there are means to get things done faster depending on the security, LTV, exit and your circumstances.
There are numerous reasons why a bridging loan application may be delayed or taking a little longer than expected. Just like most secured loans, bridging is priced according to the level of risk the lender is taking, which means they have to complete multiple checks.
To make the application process run smoothly, find a good solicitor and cooperate with your broker. To make progress quickly, all proof requested by the lender must be sent back immediately. Any delays will slow down the process of the application.
Can I secure my bridging loan against a property that already has a mortgage on it?
Providing that there is sufficient equity in the property, the bridging loan can be secured on your mortgaged property as second or even third charge. However, with a second charge loan, you may need permission from your first charge lender in order to take out a bridging loan and so on.
What if I cannot repay my bridging loan?
Sometimes, things out of our control happen, and therefore, lenders must be understanding. Most bridging lenders will keep in regular touch with the borrower to ensure things are running smoothly with your projects. If you know your circumstances have changed and you may have issues repaying your loan, you MUST let your lender know immediately.
Always be honest with your lender. They will come up with an alternative arrangement. No decent lender want to repossess your property. They just want their money back.
Every lender will have different terms which apply if your loan goes on for longer that the agreed period. penalties apply so make sure you read this part of the agreement carefully and discuss it with your broker.
Talk to a Promise Money adviser for more details
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