BRIDGING FINANCE
What is a bridging loan?
This is similar to a mortgage as it is usually secured against a property or piece of land. There is often a Personal Guarantee required from a borrower too as lenders see this as a high risk loan. It is usually taken out instead of a more conventional 20 year plus mortgage.
How long can I take a loan for?
A bridging loan is designed to be short term and is generally taken out for up to a year, however it is not uncommon for some loans to last up to two years. Some loans only need to be in place for a matter of days or weeks before they can be paid back early.
How much can I borrow?
There is no ceiling on the amount of funding a bridging loan can provide, as long as you have sufficient security and the property is suitable. Funding is generally secured at 75% loan to value (this can sometimes be extended up to 100% with additional security).
One of the most important factors with any bridging or short term loan is how will the loan be paid back within the agreed timeframe. This is mainly because this type of loan may be used in conjunction with other lending and so the security may not be a lender’s first choice; and also the rates of this finance are typically very high.
What is the minimum loan amount?
Typically, this type of finance starts at £50,000 with no maximum figure. As the setup fees are quite expensive, and these do not vary hugely depends on the loan size, it often doesn’t make sense for a loan of less than £50,000 anyway.
Can loans only be arranged on specific types of properties?
No. It is possible to secure lending on residential, semi-commercial, commercial properties and land regardless of the construction, type or use. Bridging lenders are often more flexible than traditional buy to let mortgage providers; they are often also quicker too!
What is the difference between a first and second charge?
A first charge is the primary mortgage or loan secured against a property which takes precedence over all other finance secured against it. If there is sufficient equity in the property, then a second charge could be secured against it. Be aware though, that to secure a second charge the first charge lender will have to agree to this which may not be possible.
How long does it take to get funds?
Each case is reviewed individually like all lending. However, if all the paperwork is complete, you could receive your funds in as little as 48 hours; therefore far quicker than a traditional mortgage. It is important to specify any urgent timeframes to your broker or lender at the earliest opportunity. Of course, with such a quick service, the fees are high and this can make the originally advertised loan rate a lot more expensive with everything factored in.
How long will it take to get a decision?
In most cases, you should get an immediate decision in principle. Often lenders can work off spreadsheets and business plans with desktop analysis of a piece of land or property. Sometimes certain banks and lenders have specific turn-around times that they will notify you of.
Are there any upfront fees?
Sometimes a commitment or application fee may apply but only after a bank or lender has formally produced an offer. However, be aware that application fees are non-refundable and a broker should advise whether a proposed loan meets a lender’s criteria.
What interest rate will I pay?
Interest rates will vary. Rates can start from as low as 0.65% per month and can rise to 1.5% per month depending on customer profile, property type and circumstances. It is helpful to build up a relationship with a lender so they have a track record and this will mean timescales and rates decrease over time.
Can I repay the loan early?
Yes, you can repay the loan early usually without a penalty. However, this will be clearly stated in the Loan Offer and in the agreement signed by the borrower. It should also be articulated clearly by the borrower’s legal advisor or representative (e.g. their solicitor).
What is an exit route?
An exit route is a strategy to enable you to receive funds to pay back your loan within the required term. A sound and viable exit plan is an absolute must in any loan application.
The usual exit route from a bridging loan is to gain longer-term finance, usually in the form of a mortgage that will be on a significantly lower interest rate and this is usually available once a property or piece of land has been fully developed.
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