Bridging Loans Explained

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Bridging Loans Explained

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If you’re looking for a fast, flexible and short-term property finance solution and aren’t eligible for a conventional mortgage, a bridging loan might be an excellent solution!

In short, a bridging loan provides a way to ‘bridge’ the gap between buying a new property or investing in development work and being in a position to take out a mortgage or sell the real estate.

One of the best examples of bridge finance is an auction purchase.

Typically, a property sold at auction comes at a competitive price. The downside is that you need to pay an upfront 10% deposit and the total balance within 28 days – a serious challenge if you need to go through the whole mortgage application process!

Let’s look a little closer at bridging loans, what they’re used for, and how they work.

If you think a bridge loan might be right for you and would like expert advice from the independent specialists, please contact Revolution Brokers on 0330 304 3040, or email the team at [email protected]

What is Bridging Loans?Image: Unsplash

How Do Bridge Loans Work?

There are two core types of bridging loan:

  • A closed bridging loan has a pre-agreed repayment date. This kind of loan might be perfect if you’ve agreed on a sale of your existing home and have exchanged contracts but need to get moving on your purchase to avoid losing out.
  • Open bridging loans are the opposite and don’t have a specific end date. You’ll usually have a finite term, though, so you need to pay back the borrowing, say within 12 months.

The key to securing a bridge loan is to have a strong exit strategy, showing the lender how you’re going to repay the capital.

For most borrowers, the repayment strategy is either to sell the property or take out a mortgage.

Lenders will also need to know what property you’re buying, for how much, and evidence of your exit plan. That requires supporting information such as a valuation or projected value for a development project.

What is a First and Second Charge Bridging Loan?

The next element is that your lender will place a charge on your property – that’s a legal process whereby your loan provider holds an interest in the property as security and could call on it if you failed to pay back the loan.

  • A first charge means that the bridging lender is the only charge holder or the first priority. They’ll get paid back first if anything goes wrong and the property is repossessed.
  • Second charges are standard where you’re using an existing property as security but already have a mortgage in place. That means the mortgage lender would be paid back first and the bridge lender second if you defaulted.

A first charge is more desirable from a lender risk perspective, and you can use a property owned outright as security against a new bridge loan.

How Much Do Bridging Loans Cost?

How Much Do Bridging Loans Cost?

Costs will depend on how long you need the borrowing. Let’s remember that bridging finance is short-term in nature, so it’s a lot more expensive month by month than a standard mortgage.

Fees can be anywhere from 0.5% and 1.5% per month. Therefore, it’s in your interest to repay the loan sooner rather than later.

Equivalent APR rates for comparison usually fall between 6.1% and 19.1%, and you’ll need to cover other costs, such as arrangement fees – usually up to around 2% of the amount borrowed.

What Could I Borrow on a UK Bridging Loan?

Most UK bridge loan lenders consider applications from a minimum of £25,000. Tiny amounts aren’t usually worthwhile given the minimal interest earnings, so other loans are preferable.

Maximum bridge loan values depend on the lender but can be substantial, often up to £25 million or above.

The essential factor isn’t how much you need to borrow – it’s how much you’re borrowing against the total value of the property or Loan to Value (LTV).

Lenders typically need to see a deposit or equity of at least 25%, so they’ll loan up to 75% of the property value. First charge bridge loans often have a slightly higher cap than second charges so that you could borrow more with better security.

What Are the Eligibility Criteria for a Bridging Loan?

What Are the Eligibility Criteria for a Bridging Loan?

Criteria vary considerably, with over 150 lenders offering a vast range of bridge loan products.

Let’s run through some of the average criteria – noting that lenders all have different policies, so you may well be eligible even if you fall outside of these terms.

  • Term – minimum of 24 hours, up to 36 months maximum. Residential loans regulated by the FCA are restricted to 12 months.
  • Property type – hugely diverse. Eligible properties include land, holiday homes, business premises, houses, flats, industrial units and mixed-use properties.
  • Applicant type – you can take out a bridge loan as a private borrower, limited business, partnership or offshore applicant.
  • Age – bridge loan applicants need to be at least 18. Some lenders have upper age caps, and others don’t, provided you can demonstrate affordability.
  • Credit history – bridge loans are more flexible than most other forms of property finance, so you can secure a loan even if you have credit problems such as repossessions, IVAs or bankruptcy. However, note that interest rates will be higher for a bad credit application.

Interest payments on bridge loans are often added to the capital balance, repaid in full when the loan is repaid.

Alternatively, you can set up a loan with a monthly interest payment, meaning that when you sell or mortgage the property, you’ll just need to repay the original value borrowed.

Are There Bridging Loan Alternatives?

There sure are – bridge loans are but one of the thousands of ways to finance a property purchase, renovation project or investment.

If you need a funding solution quickly and aren’t sure whether a bridge loan is suitable or another borrowing product will be more cost-effective, please get in touch!

Revolution Finance Brokers

The Revolution team is available on 0330 304 3040 or via email at [email protected]

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