1. What are bridging loans?
Bridging loans are fast, short-term loans that are used to ‘bridge’ financial gaps for a variety of purposes. Bridging loans are ‘secured’ loans, meaning that the lender takes first or second charge over the property or land being financed, which can be repossessed if the borrower cannot keep up their loan repayments.
2. Who are bridging loans for?
Bridging loans can be used by anyone – companies or individuals – who require access to short-term finance for any legal purpose, such as property renovation or to cover the purchase costs of a property until longer-term mortgage finance is in place.
Bridging finance provides loans where conventional lending often does not
For example, someone might consider bridging finance for a property that is difficult to finance with an ordinary mortgage due to severe structural deterioration which would render the property illegible for a mortgage until it had been renovated. A bridging loan can also be used to repay an urgent debt, buy a property at auction or boost the cash flow of a business.
One of the biggest advantages of the speed of securing bridging finance is being able to beat others to the punch when it comes to buying property. It allows you to negotiate the best price and as such buying property at auction remains one of the most common uses of a bridging loan.
3. How much does bridging finance cost?
As a bridging loan is fast and short-term, interest rates will typically be higher than those on residential or buy to let mortgages. The cost will depend on your circumstances and the nature of the finance you require.
It is worth noting, however, that as many bridging loans are for terms shorter than 12 months, the APR figure is less relevant. To find out the interest you might expect to pay on a bridging loan, use our free bridging loan calculator.
4. What other costs are there?
What fees are payable will depend upon the lender; many will charge an arrangement fee of around 2%, and you might also have to pay for the legal and valuation fees. Commercial Trust also charges a fee of 1% of the loan amount for our fully advised bridging service.
Our calculator assumes that the total fees payable will amount to 3% of the bridging loan amount; however, lender fees vary tremendously and for some loans – such as those with higher interest rates – they may be much lower.
5. How much can I borrow?
We can find you bridging loans of between £25,000 and £25,000,000, at LTVs of up to 75%. If you have additional properties to offer as security – for instance, if you own a buy to let portfolio – it may be possible to borrow up to 100% of the purchase price of the asset you wish to buy.
Another factor to bear in mind is that some lenders, if financing property, will lend against the ‘forced sale value’ – the value at which it is expected that the property would be sold after repossession (often around 70% of the market value) – meaning that the LTV of the loan will be higher.
6. How long does a bridging loan last?
A bridging loan can last for as little as one day before it needs to be repaid. In practice, such an arrangement is rare, but it is perfectly possible to access very short-term (and therefore very low cost!) finance.
Longer-term bridging loans can last for up to 24 months.
7. What is involved in a bridging loan application?
The first step will be to discuss your requirements with us. We will need details of the property or properties you will offer as security, the purpose of the loan and your exit strategy.
After this initial discussion, you will receive a free quote based on your circumstances and requirements. Once we have matched you with a lender, we will provide you with an in-depth illustration of the loan you have been offered. If you are happy to proceed with the loan, sign the form and return it to us.
The lender will then arrange a valuation; once this has completed, they will pass the report on to their conveyancer (property solicitor) to complete the legal work. You may need to instruct your own solicitor at this stage.
After this process has concluded, the lender will release the bridging funds to your solicitor, at which point you can access it immediately.
The length of time that an application takes varies widely, though it can take as little as seven to ten days.
8. I am not being offered the lowest interest rates advertised, why is this?
There are a number of reasons why you might not be offered the lowest rates advertised, which include:
- The LTV: as mentioned above, the forced sale value of a property may mean that the LTV would naturally be larger. Higher LTVs are seen to be a greater risk, and as a general rule, the greater the risk, the higher the rates offered.
- Your credit history: Borrowers with adverse credit are also seen as higher-risk; more on this below.
- The location and type of the property: Commercial or semi-commercial properties are financed at lower LTVs and higher interest rates than residential properties. The location and appearance can also have an impact; an isolated or out-of-the-ordinary property is harder to value due to the lack of comparable properties in the area, and may attract fewer buyers if they needed to be sold.
- Your exit strategy: An open bridging loan, or one with a vague repayment strategy, will be viewed as higher risk than a closed bridging loan with a concrete, well-thought-out exit strategy in place.
- Your financial standing: Borrowers who already own a number of assets are seen as lower-risk. Lenders will take a more positive view of you if you are already repaying loans on other properties; in addition, you have more security available should a lender require it, and will likely find it easier to refinance the property and repay your bridging loan (through releasing equity elsewhere in your portfolio, for instance).
9. Can you help me if I have adverse credit?
Any applicants will be considered, including those with adverse credit history, arrears or CCJs (county court judgements) registered against them. Lenders of short-term finance look more closely at your circumstances and repayment plans and make each decision on a case-by-case basis. However, you may have to pay a slightly higher interest rate or borrow at a lower LTV if you have a sub-prime credit profile.
10. How do I apply for a bridging loan?
Because the nature and suitability of bridging finance varies widely between each individual borrower, a specialist broker with expert insight into the products available is recommended; in fact, many of the bridging lenders currently operating in the UK only deal with registered brokers.
For free, expert advice, contact us on the telephone numbers above or fill in an enquiry form and find out how we can help you find the right bridging finance for your needs.