Bridging loans are short term loans designed to ‘bridge’ a period between two situations, usually the purchase of a property and the sale of another.
This highly competitive and rapidly evolving field of finance comes with distinct benefits and risks, and this article will explain.
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Bridging Finance is Quick to Arrange
Commercial bridging finance, which is unregulated, can be extremely fast to arrange compared to most other forms of finance. Without the regulatory burden, lenders are swift, agile and competitive in how quickly they free up funds.
For property deals dependent on rapidly changing factors, the speed of the finance can be a huge attraction.
Monthly Repayment Levels
Bridging finance is often paid back on a ‘retained interest’ basis which means the cost is added to the total loan amount. This can be simpler and more affordable for companies concerned about ongoing cash-flow.
Available for Diverse Situations
While mortgages are generally only available for habitable property, bridging finance is applicable to land deals, refurbishment, even construction projects where nothing has yet been built.
Can be Arranged as 2nd or 3rd Charge
Whereas mortgages are generally only available as a first charge, (meaning the lender has the first call on any funds that come from the property sale), bridging is available as a second or even third charge.
This means they can sit behind finance that is already in place.
Available as Non Status Loans
Most loans require concrete security and an excellent credit rating. Non Status Bridging Loans place the focus upon the potential profitability of the development deal and are hence available to those who might not qualify for other forms of finance.
Usually Without Exit Fees
Most bridging lenders choose to make their money via interest rates and arrangement fees, without adding expensive exit fees should there be early repayment.
Can be Arranged for 100%
A small group of specialist lenders offer 100% Bridging Loans, assuming sufficient security is in place.
High Interest Rates
Bridging Loan rates are usually around 1-1.5% per month as opposed to 5% APR (annual payment) for a mortgage. Roughly speaking this works out as 13-19% APR for bridging finance.
A Range of Fees
Bridging fees include an arrangement fee, broker fees, valuation and sometimes legal fees.
Commercial bridging finance is currently unregulated meaning borrowers have no recourse to the protection of the FCA.
Despite this, all of the lenders we deal with here at Business Expert are carefully scrutinised by us, so that we can be sure the lender fully understands the market.