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Bridging Loans: Finance Ranging from £10k to £250m with Written Terms in 2 Hours
Swift and versatile, bridging loans provide an effective solution for securing short-term funding against property assets. Bridging loans serve to “bridge the gap” between financial needs and specific events, offering swift access to funds while awaiting other monetary sources to materialize.
Also referred to as bridging finance, these secured loans are tethered to property assets, with interest accrued on a monthly basis until the loan’s repayment. The interest rate is influenced by factors such as the property’s security, loan-to-value ratio (LTV), and individual circumstances.
For optimal terms, the most attractive deals are often extended for residential property loans at an LTV of 50% or lower.
In this guide, we will walk you through the bridging loan process, the ins and outs of borrowing via this method, and offer guidance on securing the best possible deal.
Understanding Bridging Loans
Bridging loans represent short-term financial tools designed for a duration ranging from 1 to 18 months. These loans facilitate a rapid infusion of capital while awaiting the fruition of other financial resources.
These loans find their application in bridging temporal gaps between significant events, such as purchasing one property while awaiting the sale of another. The concept of bridge loans originated in the 1960s when major banks and building societies introduced them to facilitate property acquisitions prior to the sale of the borrower’s existing property.
Today, bridging loans have evolved into a highly sought-after form of finance, with specialized lenders like Together Money, United Trust Bank, and Shawbrook Bank offering them. As of 2022, the bridging loan market has blossomed into a £4.8 billion industry and continues to expand.
Comparatively, while substantial, this niche market is still dwarfed by the mortgage market, which commands an impressive £1,613 billion share.
Mechanics of Bridging Loans
Bridging loans offer swift access to funds, typically provided as a lump sum for property acquisitions or refinancing. Once secured, the interest charges often “roll up” into the loan, eliminating the need for monthly interest payments during the loan’s tenure. This approach is commonly referred to as retained interest.
Upon the loan’s culmination, the entire sum, along with any outstanding charges and interest, is repaid. Simultaneously, the legal charge on the property is released.
Repaying a bridging loan is typically executed through the sale of the property or by opting for a remortgage. The strategy employed to repay the loan is termed the exit strategy.
Central to securing this type of finance are the loan-to-value (LTV) ratio and equity. Lenders place significant emphasis on these factors while evaluating new loan applications. In most cases, regulated bridge loans are willing to extend up to 75% of the property value, though certain instances permit an extension to 80% for unregulated bridge loans (those not under the Financial Conduct Authority’s regulation). The LTV for second charge loans might be even lower.
Substituting Mortgages with Bridging Loans
Indeed, bridging loans can replace traditional mortgages.
These short-term financing options cater to situations where a mortgage might not be feasible, but the necessity for property-backed funds persists. Such scenarios may encompass properties that are non-mortgageable, urgent property acquisitions, or addressing short-term financial gaps, such as bridging a home purchase before the sale of the current residence.
Bridging Loans and Property Investment
Undoubtedly, property investment stands as a primary motivation for pursuing bridging loans. This holds true whether the purpose is financing an investment property, buy-to-let property, or one’s personal abode.
Bridging loans offer rapid property acquisition and the potential to enhance property value through refurbishment or renovation, amplifying their appeal to property investors.
Pros and Cons of Bridging Loans
Advantages:
Speed: Bridging loans can be secured swiftly, often within 5 days to 2 weeks. Some loans even finalize on the day of application, a pace rarely matched by alternatives.
Evolving Costs: The bridging loan market is currently experiencing a price competition, leading to rates starting from 0.47%, with select applications qualifying for rates as low as 0.43%. The historical cost concern is transforming into an advantage.
Flexibility: Bridging loans offer greater flexibility than mortgages or secured property loans.
Deferred Payments: By rolling up or deducting interest, borrowers avoid monthly payment obligations. This feature aids cash flow, particularly during property refurbishments or marketing periods.
Unconventional Property Financing: Bridging loans can provide financing for properties otherwise ineligible for mortgages.
Disadvantages:
Added Costs: Regardless of the loan’s rate, it still incurs costs. This expense factors into the property transaction and necessitates consideration.
Fees and Charges: Comparison of quotes from various lenders and brokers can be intricate. Beyond the lender’s arrangement fee and interest, additional charges such as fund management, application, and inspection fees may apply. The cumulative effect mandates thorough cost analysis rather than focusing solely on headline rates.
Exit Strategy Challenges: Problems with the repayment strategy can lead to complications as the loan term concludes. Inadequate repayment options endanger property and credit scores. Bridging loans necessitate punctual repayment to mitigate risks, given their short-term nature.
Eligibility and Interest Rates
Eligibility: Bridging finance is open to all, hinging on the presence of a property with adequate equity. Loans extend to individuals, partnerships, LLPs, Limited Companies, SPVs, Trusts, and overseas borrowers.
Interest Rates: Bridging loan interest rates range from 0.47% to 1.25% per month. Variables such as property equity, required LTV, fixed vs. variable rates, and credit history influence rates. Larger loans might secure preferential rates. Product type distinctions like fixed or variable rates are often unpublicized, prompting borrowers to seek clarity from lenders or brokers.
Additional Fees: In addition to interest, setup costs form a significant component. Key fees include:
Lender Arrangement Fee: Typically between 1% to 3% of the loan amount, with a common 2% setup fee.
Valuation Fee: Covers property assessment, often mandatory. Some lenders offer automated valuations with no charge.
Legal Fees: Borrowers generally cover lender and their own legal fees, varying with loan size and property type.
Broker Fees: While some brokers levy fees, others don’t. Detailed cost analysis is crucial.
Exit Fees: Charged upon loan repayment, usually 1-2% of the loan amount. Lenders avoiding exit fees are often preferable.
Cost Evaluation: Bridging loans’ average cost ranges between 5.64% to 12.2% per annum. Variability hinges on LTV, credit history, property type, and intended use. The most favorable terms apply to applications below 50% LTV with unblemished credit and residential property security.
Choosing the Best Bridging Loan
To effectively compare bridging loans, consider total costs rather than singular interest rates. Factors to assess include:
Maximum LTV
Setup and Exit Fees
Application Process and Speed
Interest Rate Type (Fixed or Variable)
Late Payment, Default Interest, and Extension Fees
Security Requirements
Lender Reputation
Bridging loans are a form of fast, flexible short-term lending, usually for 12 months or less, which can be used by individuals or businesses. They are sometimes referred to as swing loans or gap finance.
The loan can be used to ‘bridge’ the gap in your finances until either a long-term financing solution can be put in place or alternative funds are received from another source, for example the sale of an asset.
At Compare Your Funding we have helped hundreds of customers get bridging finance for their projects, so get in touch with our experts if you are considering this funding facility.
They are fast to arrange and allow the flexibility to enable you to take advantage of an opportunity that has arisen or obtain a quick cash injection if that is required.
They can be used when you are buying a new business, commercial property, or part commercial/part residential property. They cover most commercial property purchases apart from house boats.
The reason you may need one could be that the purchase is for brownfield sites before planning approval is given, run down commercial premises that are difficult to obtain a mortgage for, or funding for a new small business or start-up.
They are a really fast and often crucial form of funding for many reasons, including to:
– Raise finance quickly or raise a deposit for purchasing a property
– Refurbish a property
– Complete a development
– Purchase a property at auction, or one in a condition which would not get a mortgage with a mainstream lender
– Bridge a shortfall of funding between buying and selling property when a sale is delayed
Bridging loans can be arranged within a matter of hours with funds released within 72 hours although usually this takes a bit longer and can take a couple of weeks. While a bridging loan may be arranged much quicker than could be achieved through a traditional bank, most bridging finance companies still apply sensible and relatively conservative lending criteria. Usually such lenders are smaller nimble operations and specialise in doing all the usual checks that a bank will do but without the encumbrance of bank bureaucracy.
The term of the loan can be as short as one day usually up to a maximum of 12 months. Loan amounts generally start at around £25,000 with no maximum.
Short-term finance is always more expensive than longer term lending but it is a highly competitive market and great deals can be found when comparing lenders. Interest rates will depend on the proposition in question and the amount of risk it carries. They can range from around 0.7-1.5% per month, increasing with the difficult propositions. There may also be other fees to pay but will depend on the charging structure of the selected lender. For example
It is essential to establish a clear exit strategy to ensure the loan can be repaid (either via sale or remortgage) to avoid paying high penalty interest rates and possibly losing the property to repossession if the loan cannot be repaid. As long as you have this you can use the money released in a number of ways. You could inject working capital to cover short term cashflow issues for example.
For landlords, or a landlord company, the exit strategy would usually be to refinance the loan onto a buy to let mortgage, typically after doing some renovations to make the property suitable for rental.
For commercial units, the exit strategy usually involves refurbishing the unit then selling it or refinancing onto a conventional commercial mortgage.
There have been many new lenders coming to this market and with so many to choose from it is hard to know where to begin or what to do for the best.
It is such a specialist area it is always advisable to use a broker – particularly as some lenders only operate through brokering partners. A broker, like us here at Compare Your Funding will take time to understand the property, its location, the borrower’s circumstances, and funding requirements and be best placed to match these components with the most suitable lender.
If this is the case, there are other options available to you. Have a look at our product pages:
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