Bridging Loans
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Bridging Loans
Georgina Gray talks to us about bridging loans.
Bridging Loans
Georgina Gray talks to us about bridging loans.
What is a bridging loan and how do they work?
A bridging loan is a short term loan used to bridge a gap – usually the gap between a debt becoming due and setting up a longer-term financing solution, such as a mortgage or the sale of the asset the loan is used for.
Can you explain the types of bridging loans, for commercial and residential?
There are many variations depending on what you’re bridging against. You can get a bridging loan for both commercial and residential, in line with the intended use for that property.
If it’s going to be a commercial property, lenders will probably see it as slightly higher risk. The interest rates and the fees for the bridging loan will be higher as a result.
You can also get a bridging loan against land which has planning, or even with no planning. It’s really useful for investors looking for development projects, as it helps them secure funds against the land, which they wouldn’t otherwise be able to get.
What are open and closed bridging loans?
The main difference is the repayment flexibility. Open bridging loans have no fixed repayment date, which allows the borrower to repay the funds whenever they sell the asset or secure new finance on it. Usually they have to repay the loan within two years, but that’s quite a long time in the property world.
A closed bridging loan will have a set repayment date, typically based on a known event such as the sale of the property, or when a mortgage will be set up to repay the bridging loan.
Can you have a fixed or variable rate bridging loan?
For bridging loans, the rate is fixed when we submit the application. It will be calculated either daily or monthly, depending on the lender.
Lenders will be determined based on whether it’s residential, commercial or land-only. The higher risk they view the application, the higher the interest rate will be. The amount you pay in interest will depend on how long you keep the loan, so the longer it takes to pay back, the more you pay in interest.
If you want to purchase a property via a bridging loan, it’s always best to have a repayment vehicle in place. That’s something that you can discuss with a mortgage expert as part of the bridging loan process.
Who’s a bridging loan for? Can anyone get one? What can bridging loans be used for?
Bridging loans can be used to buy a new property before selling an existing one, avoiding being part of a chain. If you’ve found the perfect home, a bridging loan can secure the funds so you don’t lose that property. The loan can be repaid from the sale of your current home.
They can also be used for investment purposes, where the investor needs funds quickly. Perhaps a property needs a lot of work and is unlikely to be accepted for a traditional mortgage. A bridging loan allows the investor to complete the work on the property and resell it. Or, they can remortgage and release equity – as the house is likely to have a higher value following that work.
Maybe a kitchen needs fitting and the property isn’t mortgageable for that reason, or it needs a new heating system. In that instance, the investor might keep the property, remortgage it, release some equity and then rent it out for future income.
Bridging loans are also used to buy property at auction, as these can be good investment opportunities.
What is the exit strategy?
Typically the exit strategy will come from the sale of the property or securing a more permanent loan, such as a mortgage – which could either be Buy to Let or residential.
Some bridging loans are first charge and some are second charge. What does this mean?
A first charge loan is secured against the property, and if the borrower defaults on the property and it needs to be sold, the first charge lender gets repaid first.
With a second charge loan, the new lender ranks behind the first charge lender, so they’d get paid second. Of course, it’s riskier for the lender to offer a second charge loan, so typically this will have higher interest rates and stricter terms.
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How long does it take to arrange a bridging loan?
This is fast finance, and that’s another reason why it’s used. They’re typically much faster to arrange than a typical traditional mortgage, making them very appealing to investors.
The average timescale for an offer is usually only two weeks, although more complex cases can take up to four weeks. That’s still really quick compared to a traditional mortgage.
If I have bad credit, can I still get a bridging loan?
Yes, there are options available for people with bad credit, but these come with more stringent terms. As with a traditional mortgage, adverse credit or missed payments will mean you pay higher charges and rates.
I’d definitely recommend speaking with an expert to go through the options available to you – especially before trying to buy a property at auction. Just make sure that there is something available.
What do bridging loans cost? How do the interest rates and fees work?
Interest rates are higher than with traditional loans. Obviously, you get the benefit of receiving the funds sooner, and you can secure these against a property that you may not be able to mortgage. It’s not possible to get a mortgage on a home with no kitchen or bathroom, for example.
Bridging loans are higher risk on that basis. Usually, the interest rolls up and is added to the balance, which is paid at the end. Both fees and interest may be added to the mortgage.
Then, when you either remortgage or resell the property, it’s all paid in one. It doesn’t cost you anything upfront, which can be really helpful, although some loans may require monthly repayments.
There are also arrangement fees and exit fees, which your broker will go through with you once you find a property and a bridging loan that will work for you.
How do I apply for a bridging loan? Is this where a mortgage broker comes in?
Yes, although you can go direct to a very small number of lenders. Most want you to come through a broker for a bridging loan – and that’s going to be the best route for you, because a broker can compare lenders and find the best one to suit your circumstances.
Not all brokers are able to deal with bridging loans or have the experience, so I’d recommend reading reviews and checking what they specialise in.
What are the alternatives to bridging loans?
There are a few alternative options, but it will depend how quickly you need the money and how long for. It’s also going to depend on whether the property is mortgageable. Credit score is also a factor, as we touched on earlier.
If you think this is going to be a good option, speak with a specialist and they’ll advise on the best route for your individual circumstances.
What else do we need to know about bridging loans?
Obviously, there is so much more to them than we’ve covered here. This can be quite a complex area, so it’s definitely worth booking in for a chat. We’ll help you find out how this could support your investment plans now or in the future.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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