What Is A Bridging Loan ?

08-November-2018 14:36
in Bridging Finance
by Jennifer Stevenson

What is a bridging loan?

A bridging loan is a type of short term finance used to “bridge” a temporary gap in funding to allow a property purchase or a development to move ahead quickly when other finance is not available, or has fallen through.

With a bridging loan you are typically using finance for a short term period from which is normally no more than 12 to 18 months.

This is different to a mortgage which is a long term finance where funding is arranged over a longer term.

Like a mortgage a bridging loan is secured against the value of assets (usually property), and will have a clearly defined exit strategy for the repayment of the loan.

Examples of bridging loans we've arranged for clients:

Closed or open bridge

A "closed bridge" loan is when the date for repayment is set – for example, the completion date for the sale of your home has already been agreed. An "open bridge" is when the exit strategy is agreed (for example, completing renovations and then selling, or refinancing a development deal) but the date is not fixed. 

First or second-charge

A first-charge loan is the first, primary loan taken out against a property.

If the borrower wants to borrow more against their assets but this isn’t possible from their primary lender – perhaps because their personal circumstances have changed, or their lender’s criteria don’t allow for it – if they have sufficient equity to spare in the property they may take out a second charge bridging loan against the same property, for the amount they need, from a different lender. The first-charge loan will take precedence if it comes to reclaiming the value of the property.

Regulated or unregulated

If the property that a bridging loan is secured against (either as a first or second charge) is your own home, or the home of a family member, the terms of the loan are regulated by the Financial Conduct Authority (FCA) and the maximum term is limited.

If the property is not a family home, or if the loan against a family home is for more than £25,000 and intended for business purposes, or if  the borrower is regarded as a high net worth individual, then the bridging loan will be unregulated and may have more flexible terms.

How much does a bridging loan cost?

You will pay interest on the loan, and usually some other set-up fees, but the bridging loan costs don’t all need to be paid upfront.

  • Interest: dependent on... current interest rates; your assets and LTV; your credit rating; whether this is a first or second-charge loan. Current short-term interest rates range from 0.44% pm. Interest is typically rolled up so is payable at the end when you pay the loan back. 
  • Valuation fee: for any survey / valuation arranged by the lender, from £250-£1,000 depending on the value of the property.
  • Lender’s arrangement fee:  usually about 2% of the loan amount, payable only if you take up the loan facility. Again this is normally added to the loan and repayable at the end of the term.
  • Legal fees: including conveyancing fees and a solicitors’ “undertaking”.
  • Broker’s set-up fee: to cover their costs in finding the most suitable lender for you, and getting your application approved as quickly as possible.
  • Exit fee: (occasionally, depending on your lender) covering the legal costs of “releasing the legal charge”.

If all this is looking prohibitive, don’t’ worry: the only costs which need to be paid upfront are the valuation costs, broker’s fee and the solicitors’ undertaking.

All other costs, including the monthly interest payments, can be “rolled up” into the total loan and will be paid for at the end by your exit financing (usually a mortgage, or a property sale you have been waiting to be completed).

Bridging loan Clifton Private Finance

What if I’ve got a bad credit rating?

You can still get a bridging loan if you have a poor credit record:  many private lenders are focused solely on the value and location of the property they are lending against, and are happy to lend to clients with a credit rating that traditional lenders would not consider.

As part of the application you will be asked for details of your income, expenditures, assets and liabilities. Actual proof of income will depend on whether the bridging loan is regulated or not, and you may still be offered a bridging loan if you have no regular income, if you have a good LTV on the asset you’re offering as security.

How long does it take to get a bridging loan?

We can often get an agreement in principle (AIP) in a matter of days for an unregulated bridging loan, by going to a private lender who’s the right match for your criteria.

Getting the approval process completed and the loan paid out can be quick taking anything from a week for an unregulated bridging loan. It really depends on the circumstances and complexity. For a regulated loan the process can take from two weeks to a month, possibly longer – again, depending on your circumstances. 

For anyone with experience of applying for a mortgage with a high-street lender, which can take up to three months to process at the busiest buying times of year, this is reassuringly quick. But for your own protection it’s not instantaneous. 

Using a solicitor who's experienced in property finance can make a big difference. Solicitors are risk-adverse by training - and so they should be - but when you want to move fast you want a legal adviser who understands the usual bridging finance process. 

How long can you have a bridging loan for?

Regulated bridging loans, secured against a borrower’s home (or the home of their partner or a family member) are limited to a maximum of 12 months. (If you need finance for longer than this, a bridging loan may not be the most suitable type of lending for you.)

Unregulated loans on commercial properties can usually extend for up to two years. (Again, for a longer time period a different type of development finance might be more cost-effective.)

You will usually be encouraged to take out a bridging loan for the maximum period possible, to allow for exit contingencies. Your property might not sell as quickly as you’d hoped, or there may be delays on renovation or development works. 

What happens if I can’t pay the loan back at the end of the term?

Lenders will usually be in contact with you as your repayment date approaches, to check that your exit plan is still viable. If there’s a good reason why you need an extension (for example if you have an offer on your property, but your buyer isn’t able to complete in time), most lenders will be prepared to give you more time to complete your exit and repay.

How do I apply for a bridging loan?

A good broker will take your application to a lender they know will consider a borrower with your lending criteria, which speeds up the application process considerably.

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