Bridging loans: how do they work?
Bridging loans are a very useful form of finance for people looking for a short-term loan. They can be really useful for someone looking to "bridge the gap" during a financial transaction. Here at Clifton Private Finance, we specialise in the procurement of bridging loans for borrowers who want to borrow money on a short-term basis.
If you have clicked on this blog, you might be considering a bridging loan. Consider this your introduction to all things bridging loan.
What exactly IS a "bridging loan"?
A bridging loan is a short-term loan designed to fill a financial gap which can arise on occasion in property finance.
- These kinds of loans are designed to last between 12-18 months.
- Usually, these can see lenders providing anywhere between £25,000 to £25M+.
- This can put you in the position similar to a cash buyer, meaning you might be a more attractive buyer for your desired property.
For the right kind of property owner, these loans can be an excellent option.
What are the different kinds of bridging loan?
These can be applied to both personal residential properties (regulated bridging) and investment opportunities (non-regulated bridging).
Bridging loans have the advantage that they’re a fast form of lending – if you’re in a pinch and need a financial solution quickly, it’s often a bridging loan that can come to your rescue.
What are closed and open loans?
There are two types of bridging loans available which are known as closed loans and open loans:
- A closed loan has a fixed date of repayment. This is established at the point of signing the contract.
- An open loan has no exact set date of repayment but does have a clear and established exit strategy. This will be arranged during the process of agreeing the loan.
Both of these options fit well with different needs – for example, if you are looking for a bridging loan to cover the gap when downsizing to a smaller home to ensure you can find the right buyer, then a closed loan might suit you well.
If you are looking to borrow for an investment opportunity then perhaps an open loan may suit your needs better. Generally, open loans have a project repayment time scale of about one year but this is by no means strict. These can vary from lender to lender, and project to project.
A bridging loan generally looks at an interest rate of 0.5% to 1.5% - however, this also obviously varies between each project, so we can do our best to find a loan which suits you.
They are available as both first and second charge loans, depending on what suits your individual case.
How could a bridging loan help me?
There are a whole host of people from different walks of life who might think of applying for a bridging loan.
- You could be looking to downsize from a large family home as you’ve recently realised your nest is empty.
- You could be someone who has just found their dream “forever” home and is looking to upsize, but has not yet found a buyer for your current home.
- You could have struck property gold at an auction but you are worrying about the time-limit of 28 days to secure your bid (as this is not enough for a mortgage to be arranged).
- You could be looking to get your teeth into development and investment.
- You could be an experienced developer keen to buy a fixer-upper property or an area of land with a view to do it up or build, then rent or sell, but you need the capital to get started.
Any of these situations (and many more) can be suited to a bridging loan. You could be a developer who wishes to buy a plot of land (with or without planning permission) and develop property in that location.
In order to get a bridging loan you need to have sufficient equity on property you own, and an agreed exit strategy with a lender at in the agreement in principle.
What does "exit strategy" mean?
In order to secure a bridging loan, you will need an exit strategy.
This is the plan for repayment of the loan, agreed upon during the process of securing the loan.
For example, could get a bridging loan secured against the value of your own home so that you can buy an investment property which you’re going to do up and sell.
The exit strategy is the sale of the investment property. Or it could be taking out a buy-to-let mortgage on the investment property, so you can keep it and let it out. The mortgage would pay off the bridging loan.
An exit strategy could be
- The sale of your bricks and mortar property
- Remortgaging your property
- An expected payout (eg a pension payout)
- A bonus
A bridging loan is regulated if a person’s own family home (or a home a family member/partner lives in) is used as the security – but the borrowing doesn’t need to be used for that property. Your home is a concrete asset which is secured against for the loan. A regulated loan must have interest paid rolled up. This means you do not pay monthly payments, and make one big payment at the execution of the exit strategy.
With unregulated borrowing, you have the option of paying back the interest monthly or choosing to pay it back with the loan during the exit strategy. Depending on your circumstance, either might work better for you.
How much can I borrow?
The amount you can borrow depends on the value of your existing property/properties and the equity you have in them.
For example, if you have paid nearly all of your mortgage on your home, then you would be looking for a very small/low loan to value (LTV) bridging loan. For this, you’ll more likely be offered a better rate.
How quickly can I get a bridging loan?
One of the main features about a bridging loan is that they are quick to arrange. They are short-term loans designed to meet a short-term need.
These can usually be set up in a matter of weeks but, if your situation really needs a quick action, a bridge loan can be arranged in as little as a few days (assuming all the paperwork is in order). The speed of the loan largely depends on the circumstances.
Generally speaking, we can get you a decision in principle from an appropriate lender within 24 hours of you picking up the phone to call us.
Getting a formal offer will usually happen within the following five days, but this can be even quicker if the lender which works for you can do a property valuation online. Usually, you should expect to have the money in your bank within 10 days of the formal offer.
How long can I take out a bridging loan for?
Every loan will have a maximum term – that's just the length of that term that will vary depending on the loan.
For regulated bridging borrowing, the maximum term is usually 12 months. So, if you need financing slightly longer-term than this, a bridging loan might not be the perfect loan for you.
But if you need an extension of a few months, it is usually possible to arrange – for example, if you have a firm buyer for a property which you are selling but you need some more time before the sale is complete. In situations like this, a bridging loan can really help.
How does all this work?
So, now we have a handle on the jargon, let’s discuss how this whole system works.
While you can apply for a bridging loan through a high street bank, other private lenders are only accessible through brokers – which is where we come in.
Since this is a complicated form of finance, here’s a general breakdown of how we’ll lead you through this process:
Step 1: Get in touch
- Give us a call and explain your situation; one of our experienced brokers will be more than happy to discuss the details of your situation and the bridge you want to cross.
- Once we have all the information, we can start to make enquiries to lenders on your behalf.
Step 2: The Legwork
- This is the stage where our experienced brokers will contact and ideally secure a lender for your loan.
- We will use our knowledge and expertise to ‘package’ your details so that they will meet the criteria set out by the lender we think best suits your case.
- This can sometimes take as little as a few days.
Step 3: Decision in Principle (DIP)
- This is the stage of the process where the lender will look at all the packaged information about you’re application provided by us, and make a decision about whether or not to lend you the finances you need.
- You might have heard this described as an "agreement in principle", or experienced the similar "mortgage in principle" in the mortgaging process on a previously bought property.
- Once this has happened, you can start to progress with making offers on your properties – you are now in a position to buy.
Step 4: Valuation and submitting your application
- From this point, you are committed to the loan and will start paying fees for services, such as valuations.
- Valuation of your property the loan is being secured against will be arranged at this point. Depending on what your case involves, valuations will vary from case to case.
- Your credit history is fairly important but a less than perfect credit score doesn't mean you can't get a bridging loan. If you’re concerned about adverse credit references, your broker will talk them through with you.
- Your broker will probably be able to find lenders who will accept your application, though the rate might be a bit higher.
- Your broker will guide you through the documentation that is needed for your application.
Step 5: Completion
- This is the final stage.
- Assuming all has gone swimmingly, at this point your loan will be agreed and this is when the money goes into your bank account.
So… when can I get started?
Now you know how this kind of finance works, get in touch to talk to one of our bridge finance advisors to find out if this will suit you in your situation:
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