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What Are Bridging Loans?
A bridging loan is a quick, short-term financing option. The loan ‘bridges the gap’ between the borrower wanting to purchase an asset and the borrower waiting for something of theirs to sell to have the necessary funds for it. They can be used for buying or developing a property or making a buy-to-let investment. This loan is quick and flexible, perfect for below-market value opportunities and buyers wanting a quick sale. Between banks and specialist lenders, there are over 100 bridging loan providers.
These loans are far more short-term than mortgages, which can span over 35 years or more to repay. They can be the perfect in-between for cash buying and a traditional mortgage. No matter the type of bridging loan, lenders must see a detailed ‘exit plan’. This consists of details of how the loan will be paid back.
Types of Bridging Loans
These loans do not have a fixed date for repayment, allowing the borrower to pay the loan back whenever funds are available. However, lenders often expect the repayment to be within one year of the loan.
These loans are the opposite and are often cheaper than open bridging loans due to being less flexible. They have a fixed date, based on when the funds will be available. For example, the loan’s term can be for when the borrower’s house sale goes through.
When using a bridging loan to secure a new property, the lender puts a charge on the borrower’s property that is being sold. If the borrower fails to repay the loan, the lender takes the repayment straight from the property sale.
A bridging loan would be a ‘first charge’ loan if the property is owned outright, meaning there are no other loans on it. If the borrower fails to repay this loan, the bridging loan lender receives their payment before anyone else when the property sells.
A ‘second charge’ bridging loan will occur if the property already has a loan (or more), like a mortgage. In this case, if the borrower fails to repay their loan, the mortgage provider would take their repayment first, then the bridging loan lender. ‘Second charge’ loans can be more expensive than ‘first charge’ loans. This is because there is more risk for the lender not to receive their money. Also, in the case of a ‘second charge’ bridging loan, the ‘first charge’ lender (in this case, the mortgage provider) must consent to the loan.
1. Apply detailing the property in question and plans for it (like renovation or expansion to then take out a regular mortgage once it is complete and qualifies for one).
2. Provide the likes of ID and proof of address, alongside details of the costs for the work.
3. The professional lender will evaluate the property and the intended work. An Independent Monitoring Surveyor (IMS) may be involved, which you would pay for.
4. You will receive your official loan offer, if approved, along with T&Cs.
5. Accept the offer and complete the necessary legal work. This will be from the lender and the borrower’s side, who would each have separate lawyers, both of which the borrower would pay for. Once everything is in order, signing contracts and transferring the money will follow.
Just like any loan and mortgage, prospective borrowers must have specific requirements to be considered. Before applying for a bridging loan, or any short-term finance, applicants must:
Other ways are not necessary but can help boost the loan application. Offering a bigger deposit of 40% or higher can help the borrower gain better rates. Also, as bridging loans rely on the value of the asset and a strong exit strategy, proof of income may seem unimportant. However, providing such can help boost your application.
Frequently Asked Questions
Property developers and investors, homeowners, and businesses can take out a bridging loan. Anyone (individuals or companies) who needs to cover a gap with short-term finance can apply for a bridging loan.
Costs include an arrangement fee (1-2% of the loan amount), monthly interest (0.45%-2.%), a possible exit fee (1-2%), plus valuation, legal, and administration fees. In addition, there is a 25% deposit of the property’s value.
Due to interest rates of up to 1%, people deem bridging loans as expensive. However, because they are short-term, flexible, and often alternatives for those not qualifying for a mortgage, they are often more desirable. This is reflected in their rates. Providers see a higher risk in bridging loans, so increase their rates. However, the cleaner the credit and the higher the asset’s value, the better the costs.
In terms of property, lenders can let someone borrow up to 75% of its value. In general, the borrowing amount can range between £5,000 and £25 million. However, the amount available to the borrower depends on their financial circumstances, credit history, and exit strategy. Borrowers can often be leant more for a first charge bridging loan than a second charge loan, too.
From applying to closing, a bridging loan can take as little as 3 days to a few weeks. Paying the loan back is more flexible and determined at the application. It may be by a fixed date, like the day the property sells. However, generally, a bridging loan can be paid back between 1 month to 12.
Are Bridging Loans a Good Idea?
Every loan, whether long-term or short-term financing, comes with risks. It is just having the right information and guidance on what is the best route for you. It always depends on a person’s circumstances.
With the outlook of 2024’s property market and the forecast for rental prices for the next 5 years already predicted, investors are in a better position to make long-term goals. A bridging loan acts as a great middle-ground for investors who may not have the immediate funds to buy upfront with cash and cannot get a mortgage.
In the world of buy-to-let properties, investors and landlords may apply for a bridging loan to expand their investment portfolios to bigger or renovated properties. Otherwise known as a ‘bridge-to-let loan’, landlords can, for example, sell an existing BTL property and use a bridging loan to cover the gap between developing the new property and generating rental income from its new tenants. The rental income can repay the loan or, simply when the property is ready to let, it can be refinanced into a longer BTL mortgage now that it qualifies.
BMV properties may be the best property investment to use a bridging loan for. Resale properties can be up to 20% or even 30% below market value. Also, with most already tenanted, a bridging loan can get an investor towards generating rental income much faster. All investors need are experts in property sourcing to help them find the best BMV deals.
While we cannot offer financial advice, CityRise works closely with several partners who are experts in this field. If an investor is curious or unsure of which direction to take, it is always best to use an investment agency instead of going alone.
Schedule a call with one of our property consultants to discuss your options!
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