Bridging loans are short-term loans that are designed for developers and property buyers. It can be a temporary loan, a mortgage, or a short-term loan.
There are many ways that bridging can be used to finance your mortgage or other permanent financial arrangements. Bridging loans are often called ‘bridges’. Finance to help you get from A to B. Sometimes you may have to “bridge the gap” due to time or monetary constraints.
These funds are much faster than mortgages, and so can be a great option. However, bridging loans are not recommended as an option. They often have high-interest rates and charges and should only be used as a last resort. However, they can be a financially smart choice if used properly.
What is bridging?
Here’s how a loan bridge would work:
- It is impossible to obtain a mortgage if you want to buy a property.
- You have a £50,000 deposit and the property is valued at £200,000
- The bridge is then yours for £150,000 so that you can purchase the property right away
- The property can be sold to pay off the loan and interest, or you can get a mortgage once your finances are in order.
Bridging can often be repaid in one year because interest rates are much higher than mortgage rates.
What is the difference between mortgages and bridge finance?
The similarities between bridging loans and mortgages are obvious. Bridging loan interest is charged over the term until the loan is fully repaid. The property value determines the loan’s value. Bridging lenders may charge fees on assets.
Lenders who offer mortgages will also do the same. Like mortgages, bridging loans can also be offered at fixed and variable rates. Both are regulated and regulated by FCA, but there are some bridging products that are not.
There are differences between a mortgage loan and a bridging loan
A mortgage is more long-term than a bridge. Bridging is a much shorter term. Most mortgages can be taken out for between 25 and 35 years. Generally, bridge loans are offered for one to three years.
A mortgage takes longer to get than a bridge. Mortgages are more complicated and can take several weeks, if not months to release funds. After an application is approved, bridging can take up to 48 hours!
Bridging interest rates are generally higher than mortgage rates. Rates for most mortgages are between 3-5% and 3% with high deposits and good credit. The average rate for bridging finance is between 10-20%, with rates starting at 8%. A positive note is that bridging lenders don’t evaluate income and are generally not interested in rental income if it involves rent to let.
While bridging can be done on any property, mortgage lenders prefer to lend on properties that are brick-built or habitable. Bridging is a popular way for auction buyers to secure rundown properties not eligible for mortgages.
Most mortgages are repaid monthly. After the term ends, bridging loans can be “rolled up” and repaid in a lump sum. This is useful if you are cash-strapped and need funds from either a new mortgage or from the sale of a property.
Different types of bridging loans
Bridging, like almost all forms of finance, can be packaged in many ways.
Your lender may have a first charge against your property if you have a mortgage. The lender will charge you a fee if the mortgage is used to purchase a home. The charges are registered with the land registry, and they are legally binding.
As charges, bridging loans can also be secured against property. A bridging lender may have secured the first charge to indicate they will have priority in repaying your loan if you default.
If you are in the process of selling your home but have not yet sold it, but took out a bridging loan for your new property to help pay the first payment, the loan would be secured against your new property. There are no other charges for your new home.
When you move house, bridging loans are available to help pay off your mortgage. Your bridging loan would pay the mortgage balance to your lender, which would clear their charge on your property. The bridging loan would then be secured as a first cost.
A ‘second charge’ indicates that the bridging lender can access any funds left after the lender has repaid their loan.
A bridging lender might want to charge your home for a mortgage. This would be considered a second charge in this case since the first charge was with your mortgage lender.
Lenders who have already paid the first charge must consent to any additional lenders placing security charges on the property. Lenders are at greater risk when there is a second charge than a first one. As a result, second charges are often higher in rate and more expensive.
While multiple properties can be charged, there is more risk. Bridging lenders can access multiple properties if something goes wrong. A bridging lender can only recover their funds from one property if they have a charge on it.
A second-charge mortgage might be a better choice if you are looking for fast financing but with lower rates over the long term.
Closed-bridge loans can be used when there is an exit strategy. You may find a buyer for your house who has already exchanged contracts but has not completed the purchase.
After completion is complete and you have received funds from the sale of the property, you can repay the bridging lender. This would be classified as a closed bridge loan because the bridging lender has set a completion date and has an exit strategy.
Loans through open-bridge
From the perspective of a bridge lender, open-bridge loans are riskier. There is no set date when the loan must be repaid, this is a risky option. Bridging lenders may request that the loan be repaid within 12 months.
Home-movers who have not yet reached an agreement on the sale of their property may use open-bridge loans. An open bridge loan may be used by a property investor to finance a home that they are buying and renovating.
No matter what type of loan you take out, bridging lenders will ask for evidence that you have an exit strategy.
Open-bridge or closed-bridge loans may be secured at either first or second charges depending on the nature and purpose of your bridging loan.
What are the best uses of a bridge loan?
Bridging loans are available for many purposes and can be used both for residential and commercial purposes. It is possible to buy or sell a property, or build a new property.
Bridging finance is more expensive than mortgages so why would anyone want them? Let’s see.
Homeowners often use bridging loans to help them sell their homes and buy a new one. You may have found the perfect house but are still looking for a buyer. You may only have one option: a bridging loan.
Bridging is a way to get a deposit for your new house. Once your current house has been sold, you can repay the loan. A loan may be a temporary solution if you are part of a chain that is on the brink of collapse due to a withdrawal of the buyer.
Bridging finance is often used by investors and landlords to bridge gaps in existing deals or fund new deals. Bridging loans are sometimes used by investors to secure auction properties when time is critical.
Auction houses require that buyers complete the transaction within 28 days. Sometimes a bridging loan is the only option.
A great deal on a property may be found, but the seller needs to sell quickly and is willing to give the property away at a discounted price. Bridging loans are a great option as they can be released much faster than mortgages.
Investors may be interested in buying, renovating and selling a property. Bridging finance is a viable alternative to long-term mortgages.
Landlords might want to purchase, renovate, and then rent the property to tenants. A bridge could be used in this instance to buy an unmortgageable home and also fund renovations. The property can be remortgaged by the landlord once it is mortgageable. Landlords will then repay the bridging lender and profit from any excess funds.
Real estate development
Property developers can also use bridging loans, and they often do. A developer might have planning permission to build multiple dwellings.
The developer might consider bridging financing to help with the cost of land to build on and the future cost of labourers and builders.
After the development is completed, the developer can either remortgage or move to a commercial loan. Or, he/she could rent the property and pay the bridging lender.
Remember that bridging financing is quick and can be used for short-term purposes. You can purchase any property and use the funds to renovate, buy or build. Development finance is a better option if you are looking to expand your business.
Can I get a bridge loan?
Bridging is mostly based on the property’s value. Good news: Bridging lenders don’t assess personal income, while mortgage lenders do.
Unfortunately, lenders can value properties in different ways. However, this can be a good thing as it opens up more options.
Valuation of property
Your property will be subjected to a survey, just like standard mortgages. A survey will be done by bridging lenders to make sure that the loan is secure and not deemed excessively risky. To inspect the property’s value, a qualified surveyor will be present.
Many homeowners underestimate the value of their property and don’t get the highest possible value. Surveyors can provide valuations that are sometimes considered to be undervaluing.
Surveyors don’t undervalue, but they do so because they have to evaluate the worst-case scenario for the lender. You can request that the valuation be revised if you disagree strongly with a surveyor’s assessment. Revisions can be costly.
LTV (Loan to Value)
The loan to value simply refers to the amount of the loan compared with the property’s value. An £80k loan would be possible with a £20k deposit if there is an 80% LTV for a £100k home. A lender will only offer you £80k if the property is valued at £100k (on an LTV of 80%).
A mortgage lender will not consider the purchase price of a property even if it is cheaper than £70k. A loan amount of £56k would be possible if there was an 80% LTV for a £70k home. Bridge lenders will also follow the same guidelines as mortgage lenders and borrow on the exact same terms.
Some bridging lenders will not consider the price you paid for the property, but they may take into account its market value. This is useful if you need to borrow more money than a mortgage lender will permit.
Gross Development Value (GDV).
Bridging lenders may offer loans based on the Gross Development Value (GDV), of your project. GDV is the value of the property or development after the work has been completed. This is a useful tool if you need to finance not only a purchase but also renovations and the building of a property.
You will also have to repay the loan, or risk repossession because it is secured by a property. In the event of financial difficulties, it is important to have an alternate plan.
An exit strategy describes how you intend to pay off the balance on the bridging loan.
If you want to remortgage a property after it has been renovated, then remortgage is the best option. Your exit plan would be to sell a property if you are still waiting for funds from property sales.
It is important to consider exit strategies. Bridging is only possible with an exit strategy. It’s almost impossible to get a loan without an exit strategy. Clear and concise exit strategies not only help your application but also allow you to plan your projects.
Bridging finance requires that applicants have a plan for exit. Bridging finance is short-term so exiting as soon as possible is key.
Bridging lender discretion
While a valuation is the most important factor in determining how much you can borrow, lenders may also consider other factors. Lenders may also consider other aspects of your proposal, even though your income hasn’t been assessed.
Lenders may also assess your knowledge and experience in the field if you are involved in property development or venture. Lenders will also evaluate the quality of the project. This includes whether the property can be sold or if there are sufficient funds to cover it.
Lenders will evaluate the probability and the projected value of your remortgage if you decide to exit with a remortgage. Lenders will also evaluate whether the loan term is long enough to repay the loan.
Lenders will likely check your income if you plan to repay the loan monthly. Bridging finance is typically repaid in one lump sum at its end.
Bridging lenders may only check if the loan can be secured against a property. This is enough security for them. Although bridging is faster than a mortgage loan, bridging lenders still need to perform their own checks. Each lender has different assessment criteria so it doesn’t necessarily apply to all lenders.
Like a mortgage, credit checks may be performed on you. You may also have to disclose any financial obligations, such as additional mortgages. Although it is difficult to apply for a bridge loan with bad credit, it is possible.
How to obtain a bridging loan
High street lenders don’t offer bridging loans and advisors are often required to broker a deal. The process of obtaining a bridging loan depends on the reason you are seeking it.
- Talk to an advisor who has knowledge of bridging finance and accessing bridging lenders
- Based on your situation and reasons for a bridge, your advisor will contact bridging lenders.
- A bridging lender is contacted.
- Any properties that are involved will be valued by the bridging lender
- The bridging lender will assess the applicant (other mortgages and credit checks, experience).
- You can either approve or decline the loan. If the loan is declined, you have two options: reapply with the same lender or another.
- To handle conveyancing and to place the charge on the property, solicitors are assigned.
- The release of bridge funds
- If you are using a bridge to buy a property, solicitors will do legal work and liaison with your lender’s solicitor.
- After the solicitor of the lender is satisfied, the lender will approve the loan.
It may seem like a lot but an application can be completed in less than a week.
Fast bridging loans
How fast the process moves greatly depends on:
- The rate of valuation
- How quickly your solicitor responds when you ask for information from the solicitors of the lender
- What will the bridging lender ask about your application?
- How fast the primary lender approves a second charge loan if it is approved
- The general bridging lender (typically, the faster you need the funds the higher the rates you will have to pay).
Fees for bridging loans
There are many differences between the products and services of bridge lenders. Some lenders may charge extra fees while others won’t.
So you are prepared, we have listed all fees.
Bridging loans have higher interest rates than traditional mortgages, it is important to keep this in mind.
A bridging loan advertised at 1.5% would equal a staggering 18% APR. Because this type of finance is short-term, rates are typically based on a monthly basis.
The monthly interest is sometimes referred to as “rolled-up” interest. Roll-up interest doesn’t have to be repaid every month and is paid at the end of the term. Some lenders will allow you to repay interest monthly.
There are rarely any early repayment fees if interest is paid earlier than expected. Most bridging lenders require a minimum term of one month. If the loan is not repaid in 10 days, then you will likely still be charged the full month.
If you borrowed the money for 12 months but paid it back within 3 months, you will only be charged interest for 3 months. Fixed or variable rates can be offered for bridge finance.
Bridging finance fees can also be very expensive. The arrangement fees can start at 1% of your loan amount. Exit fees can also apply, which may be as low as 1% of your loan amount.
These fees are usually higher than mortgage fees and don’t include the interest rate. There may also be brokerage and valuation fees.
Lenders who charge lower fees tend to have more stringent criteria. Lenders who charge higher fees tend to lend on more risky proposals. If you require urgent finance, you might be charged higher rates or fees.
Bridging finance: Is it the best option?
Consider all options before you make a decision to take out a bridging loan. Below are some important points to remember before you apply for a bridging loan.
Bridging comes with risks
Bridging finance can be extremely risky. The quality of your proposal will determine the level of risk. Bridging lenders might assess your experience and conduct surveys to verify the quality of your proposal.
Bridging loans are recommended by our specialists as a last resort. A bridging loan is your last resort if you are unable to borrow funds or remortgage.
Bridging finance is expensive. This advice is based upon this fact. If your plan doesn’t work out as planned, you may end up with increasing debt.
If used properly, bridge finance can be a powerful tool. Many of our clients, particularly developers and landlords, have used them repeatedly and made great profits.
Bridging is a great way to make property deals possible. Be cautious and have contingency planning in case things don’t go according to plan.
There are other options available for bridging
Ask your advisor if it is possible to withdraw equity funds through a remortgage. Bridging finance or personal loans may be your only option if speed is crucial in securing your property sale.
Another option is let-to-buy. Let-to-buy allows you to remortgage your home from a residential mortgage, and then switch it to a lease to buy.
You can use the equity to finance your purchase of a new home. Remortgaging is more complicated than bridging so it’s important to evaluate your options.
Talk to a specialist in bridging
Talk to a mortgage broker who specialises in your area. A broker can help you save time and money, regardless of whether you need bridging financing or a standard mortgage. Bridging is a high-risk business that requires the expertise of a broker.
There are many fees associated with bridging lenders. Specialist advisors will work hard to find the best deal for you with minimal fees. A broker will allow you access to more deals on the market. A broker can help you find other options for financing that you might not have considered.
Our advisors have extensive experience in bridging finance. They can assess your financial situation to determine if bridging is an option for you. To get started, you can submit an enquiry today.
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