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