A bridging loan is a short-term financial product that has been created to enable a purchase while the sale is still in progress.
Bridging loans are commonplace within the estate agency industry where the process of buying and selling a property can be lengthy.
Bringing loans can be used for many reasons including:
- Purchasing a property.
- Developing property.
- A buy to let investment.
- Business ventures.
- Sourcing funding during a divorce.
Such loans are also commonly used by property developers when purchasing property at auction due to the speed of the deposit transaction to secure the property.
Bridging Loans within the Property Industry
A bridging loan for property development provides flexibility to enable transactions to take place either at speed, as per the auction example above, or in stages.
The loans enable property owners to access the equity within their current property or property portfolio’s, utilising this as a down payment towards other property.
The result is that two (or more) properties are technically owned while a sale is concluding. Bridging loans are a method of secured lending and therefore to apply for a loan, the procession of a high-value asset is needed.
Within the property industry, bridging loans can offer a cost-effective option to navigate the property market and purchasing process, especially if there are issues within the purchasing chain that need swift, short term action. However, bear in mind that there are often additional legal and administration fees to cover.
Alike, a standard mortgage, application processes will be applicable and credit searches and scoring will take place to assess the risks of the lending.
Types of Bridging Loans
There are two types of bridging loans as follows:
- An open bridge loan – This loan provides the most flexibility as there is no set end date of when the loan needs to be repaid. Often open bridge loans can last up to a year or sometimes longer, depending on the circumstances.
- A closed bridge loan – A closed loan will have a fixed end date and strategy, which are often linked to best-known assumptions of when you will have funds available to pay the loan back. Closed bridge loans are short term, often offered for no more than ninety days.
Due to the differences between open and closed loans, the costs also vary. An open bridge loan will usually be more expensive due to the flexible nature of the financial product.
Choosing a Bridging Loan
Before researching the market to commence comparing various bridging loans, a few key facts will be required about the loan and properties that will be involved.
- The ideal amount to be borrowed – Typically, lenders will offer bridging loans between £5,000 and £10 million.
- The value of the owned property – The value of the currently owned property will impact how much that can be borrowed and the loan rates available.
- The duration of time the loan is required – Best estimations are used to map out how long the additional funds are required for, for example, the timing of a housing purchase chain and the required legal process. As discussed above, the duration of the loan will define the type of loan needed.
- The equity owned within the property – The level of equity and whether there is a mortgage currently on the property will affect how much additional funds can be borrowed.
First or Second Charge Loans
When a bridging loan is processed the lender will add a ‘charge’ to the property that the loan is associated with for security.
A charge prioritises the order that debts will be handled should the property owner not be able to pay the loans.
- First charge loan – If the property was seized from the owner due to non-payment and subsequently sold, a first charge loan would take priority of being repaid from the funds of the sale.
- Second charge loan – A second charge is used to describe a situation where a loan or mortgage is already in place against a property. In this circumstance, permission from the first charge lender is often required before a second charge can be added.
Bridging Loan Interest rates
Bridging loans are similar to other borrowing in the fact that the interest rates applied often fall into two options, fixed or variable.
A fixed-rate interest rate would apply the same level of interest across the duration of the term, resulting in a flat rate repayment plan, each monthly repayment would be the same.
Whereas with a variable rate, the interest rate can charge, often linked to the Bank of England base rates. With a variable rate, payments will not remain static and can go up and down.
Costs of Bridging Loans
Typically, interest on bridging loans can be fairly high, depending on a number of factors including the values involved, the duration of the loan and the personal circumstances of the person seeking to borrow the funds.
Due to the short term nature of the loans, interest is applied monthly rather than annually. However, there are various methods that the lender can apply interest as follows:
- Monthly – The interest is paid monthly as part of the monthly repayment amount and is not added to the bridging finance.
- Deferred or rolled up – With this option, the lender has pre-stipulated that the interest is paid at the end of the loan arrangement and does not makeup part of each monthly repayment.
- Retained – The total interest is also borrowed for a set period of time and paid back at the end of the loan.
As briefly mentioned earlier, there are often additional fees applicable to bridging loans such as administration fees. Lenders can also apply exit fees, applying an additional cost should the loan be repaid early, or arrangement fees due upon application.
Other costs to be aware of with most asset-based transaction include legal fees, valuation fees or broker fees.
Bridging Loans Summary
As with any financial decision it is best to seek independent financial advice and be aware of the consequences of any decisions, such as what should happen if unable to meet the repayments.
At Mortgageable, we have a dedicated team of advisors that will be able to offer you help, point you in the right direction and provide you with access to some of the best bridging loan deals currently on offer.
Give us a call on 01925 906 210 or get in touch to talk to a bridging finance broker who can give you advice that is personal to you and takes your credit history into account. That way you will know where you stand in the bridging loan market and we can guide you on your route to securing a suitable loan.