What is a bridging loan?
A bridging loan is a short-term loan which is secured against a property. Bridging loans are usually an interim solution, allowing you to release capital before selling a property or securing longer-term finance, such as a mortgage.
How do bridging loans differ from a traditional mortgage?
Bridging loans can usually be taken out for any term between 1 day and 18 months. Some lenders will allow loans for up to 2, or even 3 years.
Bridging loan lenders are usually very flexible and will often consider lending against almost any security, including uninhabitable properties and even land.
The application process tends to be very straightforward, with turnaround times reduced and less information required to secure funding. This allows lenders to complete applications in as little as 5 days, with 14 days being around the average.
Bridging loans lenders will often either add or deduct the interest on completion of the loan, meaning there are no payments to make during the term of the loan.
Traditional mortgages usually show their interest as an annual amount – the amount of interest charged per year. As bridging loans are a short-term product, their rates are usually quoted monthly, as the annual cost is not always relevant.
When should bridging loans be used?
Bridging loans can be used for almost any reason, but the most common are:-
- To meet a deadline for completion of a purchase
- To carry out the refurbishment of a property
- To raise funds to purchase a new property
- To release equity quickly to pay an urgent bill
How much do bridging loans cost?
The 2 main considerations when taking out bridging finance are the interest rate and the lender’s arrangement fee. Although this may seem sensible, it’s important that you consider the total cost of the loan, as other fees and charges can often be added.
Other fees to look out for are lender administration fees, lender exit fees and other fees, which are usually added to the loan.
The interest rate charged depends on several factors, mainly surrounding the level of risk posed for the lender. Residential properties usually benefit from lower rates than commercial property, and loans against land usually charge the highest rates.
The credit history and track record of the borrower is also another key point in pricing a bridging loan. Applicants with a strong history of paying their debts as due and completing projects successfully will naturally be seen as lower risk.
The loan to value – the amount owed in relation to the value of the property is another key factor in deciding the rate charged. Higher LTV applications usually have higher interest rates, with applications up to 50% LTV usually benefitting from the lowest rates.
How are bridging loan applications assessed?
When assessing a new loan, the lender will always look to reduce the risk of default to avoid issues later down the line.
The first factor in understanding the risk is the exit strategy. This is the way that the loan will be repaid at the end of the term. If the exit is considered to be very reliable, then the lender can be confident that the loan will be repaid without issue.
Where the exit is strong, the lender will then consider the time taken to achieve the exit and whether the term is realistic. If the loan will be repaid through the sale of the property, then a reasonable marketing time will usually need to be included. The same applies to refinance to a traditional mortgage, with sufficient time to complete the application being factored in.
Where refinance is being used, the lender will often ask for proof of this by way of an agreement in principle from your chosen lender.
The lender will then consider you as an applicant. They will want to check your experience and your credit record to gain a better understanding of you.
Once the lender is satisfied with both they will instruct a chartered surveyor to produce a survey report on the security property. This will give them an understanding of the security and ensure that it is suitable for the loan being offered.
The pros and cons of bridging finance
- Bridging loans can complete very quickly, allowing you to undertake transactions that wouldn’t otherwise be achievable using a traditional mortgage.
- Some bridging lenders can offer non-status loans, that are backed solely by the property in question, with very little concern for your credit history or circumstances.
- They can be offered against unusual or otherwise unmortgageable properties.
- Some lenders will allow you to borrow the entire purchase price of a property when buying below market value, meaning you can acquire property for very little outlay.
- The interest rates charged are now much lower than they once were, with rates now starting at 0.37% per month.
- Although rates start at 0.37% per month, most loans will be offered at a much higher rate, with 0.85-1% per month common.
- Bridging finance is more expensive than other types of borrowing.
- If your chosen exit is refinance to a mortgage, you will be paying for 2 loans to be arranged – the bridging loan and the mortgage.
- In most cases, the terms offered are very short, so if your chosen repayment method doesn’t work out, you may find yourself defaulting on the loan, which could put your property at risk.