What Are Bridging Loans?

Bridging loans are a form of short-term finance. Commonly used to support an individual or a business with their need for funds. The intention with a bridging loan is to ‘bridge’ the gap between a debt falling due, and the main line of credit becoming available.

They can also be referred to as “caveat loans” or “swing loans”, however, in the UK they are usually just referred to as a bridging loan.

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    What is a bridging loan and how does it work?

    How Do They Work?

    Bridging loans are structured with the intention of helping people to purchase a property prior to selling an existing property. This type of funding provides a solution to ‘bridge’ this gap by providing fast access to money that can be used to keep a business afloat or secure a residential property, they tend to come with higher interest rates when compared with longer-term funding solutions. The rates of interest are often based on the loan amount required and they usually require collateral, as security.

    Generally, the terms for bridging loans can be anywhere from a couple of weeks, up to 12 months. In some cases, they can extend to last longer than 12 months, depending on the exit strategy and arrangements for the main line of credit becoming available. The loan is repayable in full upon completion of the agreed term.

    Summary
    They are usually used to help people purchase property before they have sold their existing asset/s. Being short-term loans, they tend to average between a few weeks to 12 months in length. Due to the short-term nature, they usually carry higher rates of interest and require some form of security.

    Who is a Bridging Loan Aimed at?

    They are most commonly used by landlords, property developers and investors with the intention to secure a property whilst waiting for an existing one to be sold. More often now, these types of loans are also being used by wealthy individuals looking to take advantage of a simple form of lending, when purchasing residential property.

    Bridging loans are commonly used as a funding solution to get fast access to cash. Outside of home-buyers, landlords and commercial property investors, in some cases, these types of loans are used by people who wish to complete the purchase of a property being sold at auction; where a mortgage may be required immediately.

    For businesses engaged in equity financing for example (raising capital via the sale of shares) there may be the need for working capital during the months it takes for the process to unfold. This working capital, provided by the bridging loan, allows a company to make payroll and cover the ongoing costs of running the business. Once the equity financing is secured the bridging loan is paid off immediately.

    Summary
    Bridging loans are most commonly used by landlords, property developers and investors and sometimes used by wealthy individuals with the intention of providing working capital in the short term.

    When Should You Use a Bridging Loan?

    Bridging loans can work very well to address a number of situations, such as property development, investments and buy-to-let purchases.

    Increasingly, bridging loans are used by borrowers as a supporting form of finance that goes alongside longer-term lending and in some cases they are incorrectly seen by borrowers as an alternative to mainstream lending.

    The reason this type of finance should not be seen as an alternative to mainstream lending is due to the purpose of the loan itself and the key is in the name. This form of lending should ideally be used to ‘bridge’ the gap between needing funds and the main line of more conventional credit coming through.

    If you are considering a bridging loan, you really need to consider what your exit strategy is before committing. An ideal exit strategy from a bridging loan could be a mainstream mortgage, a buy-to-let mortgage and of course, there is the option of selling the property.

    Since high street banks and building societies have become more stringent over lending in recent years and are taking longer to process larger mortgage applications, there has been an increase of bridging lenders that have come into the market.

    This growing sector now affords individuals and businesses more options when seeking this type of funding. With the influx of lenders in this space and popularity increasing across borrowers, the FCA is concerned that advisers may be too quick to recommend a bridging loan, where another form of finance may be more suitable.

    Because of their relatively high rates of interest and large administration fees, they should ideally be used by individuals and businesses with a secure financial situation and, as previously mentioned, with a clear exit strategy in mind for paying the loan off within the agreed terms.

    Summary
    When you are considering funding for property development, investments and buy-to-let purchases. Bridging finance should not be seen as a replacement for longer-term loans, but instead as a supporting form of finance that works alongside them. You should ensure you have a solid financial situation and a clear exit strategy.

    Advantages

    • They are short term, and designed to be repaid in full as soon as the long-term financing arrives
    • They allow you some breathing space to either sell an existing property, or make arrangements for longer-term finance
    • Borrowers have some control over repayment options
    • Can improve credit score if repayments are made on time
    • They are faster to arrange than other types of traditional finance
    • Can offer greater purchasing power since it means you are buying a property with cash
    • They offer a solution when high loan-to-value (LTV) mortgages aren’t available
    • The market is becoming increasing competitive with rates as low as 0.37% per month from some lenders

    Disadvantages

    • More expensive and higher interest rates when compared with traditional mortgages
    • Longer term credit is needed to pay off the bridging loan
    • Commercial bridging is unregulated, so you need to be watchful for hidden charges.
    • There may be additional legal and administration costs depending on the requirements

    What is a Second Charge Bridging Loan?

    ‘Second charge’ is where a property which already has a mortgage on it, is used as collateral for a bridging loan.

    Second charge loans are generally used for improvements to an existing property such as a loft conversion or extension. Since the borrower will have to pay off any early repayment charges from the mortgage, these can represent a saving over traditional bridging loans.

    Bridging Loans for Real Estate and Property Development

    Bridging Loans are most commonly used in the property sector, both in the residential and commercial side, to help unlock a property chain.

    They’re a useful means of securing a property quickly, preventing foreclosure, or seizing a great opportunity before long term financing has been arranged.

    Is it Regulated by the FCA?

    While a personal bridging loan is regulated by the Financial Conduct Authority (FCA), commercial loans secured against investment properties are not.

    Unregulated loans include first charge loans on commercial or investment property, or a second charge loan that is placed on the borrowers loan, though used for investment purposes.

    Can You Get a 100% Bridging Finance?

    While most lenders do have an LTV (loan to value) cap, certain providers do specialise in offering a 100% LTV loan.

    This means that, as opposed to the customary 80% maximum, a bridging loan might cover the full value of the property you want to secure.

    Providers who do offer this do so only where they have cast-iron security in place, which may include either several properties or another asset entirely.

    In keeping with the higher risk, 100% LTV often comes with higher fees.

    How Much Does a Bridging Loan Cost?

    As one would expect from this type of loan, the costs of bridging loans can be higher than some other conventional forms of finance. Bridging loan interest rates are charged monthly, as per the nature of the finance.

    Often, people will focus on trying to find the lowest interest rates and make a decision based on this alone. Keep in mind that some lenders will increase the total cost by charging large exit fees, fund management costs and other costs that may not be initially clear. Please ask about these before committing to any lender and keep the total cost in mind when making a decision about bridging loans. It’s also important to ask about whether there are any broker fees included with the deal.

    Arrangement fees average at around 1% of the sum borrowed, plus a fee of between 0.3 and 1.5% monthly. There are often exit fees of around 1% in addition. There are great bridging loan calculators that help you to break down costs and interest rates online.

    Summary
    Bridging loans can cost more than some conventional loans such as mortgages due to the short-term nature. Don’t focus exclusively on low interest rates, as there may be other fees that drive the total cost up with some lenders.

    What are the Interest Rates for Bridging Loans?

    Bridging Loan interest rates are generally higher than commercial mortgages, to offset the risks to lenders. We do have a bridging loan calculator page that would help you understand the monthly interest rates better. The rates vary widely and can start from as little as 0.37% per month, but here is an example of how the monthly interest rates may be worked out:

    • Amount You Borrow: £500,000
    • Duration: 12 months
    • Security: 1 x Property valued at £500,000
    • Mortgage Balance: £400,000
    • Interest Rate = 0.75% or £3,778 per month.
    Summary
    Interest rates can start from as little as 0.37% per month, however, they do tend to be higher than conventional lending.

    What are the Term Lengths for a Bridging Loan?

    These are short term loans by definition, intended to bridge the gap between two situations. As such, they are usually offered for periods between a few weeks and up to 12 months. In some cases, a bridging loan may be extended for a longer period of time, depending on the exit strategy.

    For those situations where a definitive end date is set, a closed bridging loan may be more appropriate. If you do not have an end date in mind, an open bridging loan may a better option, however, may cost more; so keep this in mind when making your decision.

    If you choose an open bridging loan you can make the interest payments as you go, or retain the interest until the loan is due to be repaid in full.

    Summary
    Usually, these loans last anywhere between a few weeks to a year. In some cases, they can last slightly longer depending on the exit strategy.

    How Long Does it Take to Get the Loan?

    Arranging the loan itself can be extremely fast, sometimes just a matter of hours.

    Actually receiving the money takes longer, however, because there are property valuations to arrange in most cases, as well as credit checks.

    A more realistic time-frame to receive funds would be 3 to 4 weeks. Commercial bridging finance is actually faster than that for individuals as it is currently unregulated.

    Where Can You Apply for a Bridging Loan?

    Bridging loan lenders and companies can be found online and from offline brokers.

    The bridging lenders we work with are regulated by the Financial Conduct Authority (FCA) and are perfectly placed to advise on bridging loans to take and indeed, whether this type of finance is appropriate for your situation.

    You should be sure to do your due diligence when it comes to understanding any of the fees that may be applicable. Some bridging lenders attract people with a lower interest rate and charge larger exit and legal fees, etc. This should be a consideration before you make any decision. Be sure to check the total cost before committing.

    To find out how we can help you gain access to a bridging loan please contact us and we will be happy to advise you on your options at no cost. We may be able to compare bridging products from several providers, depending on your requirements, so don’t hesitate to get in touch.

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