What are the typical terms of a bridging loan?

What are the typical terms of a bridging loan?

Bridging loans is a vital tool for quick funding needs. But, what are the typical terms of a bridging loan?. These loans serve as a temporary solution, often used in property transactions to ‘bridge’ the gap between a purchase and the sale of an existing property. Understanding the typical terms of such loans is crucial for anyone considering this financing option.

Let’s delve into what makes up the terms of a bridging loan, including interest rates, loan duration, and additional fees. This knowledge will help you make informed decisions, whether you’re buying at auction, investing in real estate, or facing any situation that requires swift financial action.

Typical Interest Rates and Charges of a bridging loan

The interest rates typical terms of bridging loan are typically higher than those on conventional property based loans. This is due to their short-term nature and the higher risk associated with them. Rates can vary greatly depending on the lender and the specifics of the loan scenario. Expressed as a monthly rate, starting from 0.59% per month (correct at the time of writing) they can range up to and beyond 1% per month.

In addition to interest rates, borrowers should be aware of various charges that can apply. These include arrangement fees, which are often about 1% to 2% of the loan amount.

You may face early repayment charges and exit fees. These varied by lender and the type of bridging product.

Standard bridging loans secured against residential property tend to have no early repayment charges or a minimum loan period of three months. Generally there is no exit fee.

However, a bridging loan which is intended for heavy refurbishment of property or development, may have an exit fee of between 1 and 1.5%.

It is your brokers job to find competitive terms which meet your circumstances and requirements. Their knowledge of the market can help to find lenders offering lower rates and lower fees.

Typical Loan Term for Bridging Loans

One of the defining features of a bridging loan is its short duration. Typically, these loans last from a few weeks up to 12 months, though some can extend longer up to 24 months. This short-term loan covers an immediate financial need until you secure a more permanent source of funding.

It’s important for borrowers to have a clear exit strategy. Plan how you will repay the loan, whether through a property sale, refinancing, or another method.

Loan-to-Value Ratios

The loan-to-value (LTV) ratio on a bridging loan is another crucial term. This ratio determines how much you can borrow against the value of the property involved. Typically, the maximum LTV for bridging loans is around 70% to 75%, but this can reach up to 85% in very specific circumstances.

A higher LTV ratio can mean higher interest rates, as it represents a greater risk to the lender. Borrowers should carefully consider their LTV ratio when planning their finances, as this will affect both the feasibility of the loan and the total cost of borrowing.

Get more information on different types of bridging loans and the LTVs available here

Repayment Options

Bridging loans offer flexible repayment options, which are tailored to the borrower’s circumstances. The most common is the ‘closed’ bridging loan, where the borrower has a fixed date for repaying the loan. When the date of incoming funds is known, such as from a property sale, this type of loan is used.

‘Open’ bridging loans, on the other hand, do not have a fixed repayment date. These offer more flexibility but can come with higher interest rates due to the increased uncertainty for the lender. Open bridging loans are used more for commercial transactions.

Retained interest, rolled up interest or serviced interest

These are the main repayment methods.
Retained interest and rolled up interest both allow you to defer the interest payments on the loan until it is settled. They simply have a slightly different calculation which is explained in the video below. The upside is that it gives you extra cash flow or provides a loan which you can’t afford to service monthly. The downside is that the amount of interest is deducted from the gross loan you will receive. This means you end up borrowing a lower amount in hand compared to servicing the loan.

Serviced interest means that you pay the interest payments on a monthly basis exactly as you would with a buy to let mortgage. It is an interest only payment meaning that the balance of the bridging loan is unlikely to increase or decrease if all the payments are made on time. This could impact negatively on your cash flow but positively on the amount of loan you will get in your hand at the outset.

Typical Regulatory Considerations of bridging loans

Bridging loans, secured against residential property, are always regulated by the Financial Conduct Authority. This regulation ensures brokers and lenders act in the best interests of their clients and adhere to fair practices. The regulatory protection is detailed in the typical terms of bridging loans illustration and offer. It broadly means customers must be treated fairly, give it information in a clear and transparent way and only offered products which are suitable both now in the future.

For loans related to investment properties, fewer regulatory protections apply, highlighting the need for borrowers to understand the terms fully and seek professional advice if necessary. This ensures all financial actions are taken with a clear understanding of the implications.

People Also Asked

Can bridging loans be used for purposes other than real estate?

Commonly used in property transactions, bridging loans can also fund business ventures, tax liabilities, or other urgent cash needs.

Are there alternatives to a bridging loan?

Alternatives include personal loans, lines of credit, or long-term mortgages, depending on the financial need and timeframe.

What happens when a bridging loan is not repaid on time?

If not repaid, the lender may charge extension fees and a penalty rate of interest. Ultimately they could recover funds through the sale of the secured property or other agreed means.

How quickly can a bridging loan be arranged?

Arranged within days to a number of weeks, depending on the lender’s requirements and the complexity of the loan.

Is it possible to extend a bridging loan?

Extensions may be possible but often come with additional costs and higher interest rates. If this is a requirement always speak to your broker about the option of a new loan with a different lender so you can compare both options.