Bridging Loans Explained

Bridging loans are essentially short term loans that are used to finance the purchase of something, usually property, over a short period where you available funds are otherwise tied up or where you cant obtain a mortgage for the new property until your existing property has been sold.

As bridging loans are secured against you property, either as a first charge on the property being purchased or as a second charge on your existing property if it already has a mortgage on its, bridging loan lenders are often able to move very quickly to complete the application process and release the funds to allow you to buy the new property.

The speed of arranging a bridging loan makes them very suitable for people wanting to purchase a property at auction.  At auction, you usually have to pay around 10% of the sale price on the day you successfully bid on a property with the remainder becoming due within 30 days. Bridging loan lenders can work within this timescale making the funds available to complete the sale.

It is important to note that when you are taking out a bridging loan, it is essential to have a clear position on how you intend to pay the bridging loan back in as short a period as you can. Where you are not expecting existing funds to become available within the required timescale, it will be important to have discussed remortgaging the new property with a normal mortgage lender and obtained a decision in principal (DIP) that a mortgage will be provided to take out the bridging loan.

There are two terms that apply to bridging loans, ‘Closed Bridging’ and ‘Open Bridging’.

• Closed bridging: This term is used when there is a fixed term for the loan to be repaid. This tends to be the type used when contracts have been exchanged but you have to wait for the sale to be completed.
• Open bridging: This term applies where there is no fixed repayment term although it will normally be expected that the loan is cleared within about 12 months.

Essentially, bridging finance can be used for a host of different types of situations where funding is needed to cover a short period of funding shortfall and where bridging loan can be secured against your property or business.

Here are a few examples but there are many others:

• Buying a residential property: you see a property that you wish to purchase but you haven’t yet sold your existing property and if you delay, you will lose the new property. Taking a bridging loan to cover the cash shortfall for a few months can solve this.
• Developing a property: You may want to extend your property but cant remortgage until the work has been completed. A bridging loan can pay for the work and when complete, you can remortgage and clear the bridging loan from the new mortgage funds.
• Buying an investment property: Landlords often purchase rental property at auction where they may see a property that they want to purchase to add to their portfolio and have to make an instant decision to bid. They will then only have a short time to raise the funds and as we already mentioned, a bridging loan can be set up quickly allowing the purchase to go ahead and can later be paid off once the property has been mortgaged through a buy-to-let mortgage lender or when existing funds become available.
• New business ventures: Often the directors of a firm will see an opportunity appearing to advance the business but will need to quickly borrow the funds to allow them to proceed. A short term bridging loan is often the answer.
• Divorce settlements: Divorce can create many challenges for those involved and having access to short term funding can often facilitate the transfer of property or the purchasing of new property in much the same way as described above.

Due to the nature of these types of secured loans and the short borrowing periods involved, the interest rates and set up charges that will be applied by the lender tend to be a bit higher than you would expect on a normal home buying mortgage. However, when you take into consideration that they can make the difference between being able to purchase a new property while your existing property sale has not yet completed, we believe the extra charges are well justified.

• Interest rates: Interest is usually applied monthly but to get a comparison with normal mortgage lending we need to look at the equivalent annual APR rates. These can start at around 6% and could reach to as much as 18% depending on your circumstances. Normal mortgages start at around 2%-4% and go up to around 9% for those with credit problems so perhaps double the APR rate of normal mortgages. Remember of course that these loans are only taken out for short periods, often just a few months so the high rates of interest are usually well affordable.
• Set up fees: These fees normally equate to a percentage of the loan and will generally be in the order of around 1% to 2% but each lender will have their own criteria.
• Valuation fees: If the lender requires the property to be valued, they may charge a fee for their surveyor to look over the property. These fees will vary depending on the type of property being purchased and its current condition. Simple applications may not require a formal valuation in which case the cost may be zero.
• Legal fees: There may be legal fees involved but again, this will be very dependant on the size and purpose of the loan.
• Broker fees: If you use a broker to set this up for you, they may charge a fee for their service but you should benefit from their ability to get you the best deal available.
• Early exit fees: If your contract is for a fixed term and you repay the loan early, their could be an exit fee to pay. This is not very common with bridging finance but worth checking the contract conditions.

As a general rule, anything from between around £25,000 to several millions but for most practical purposes, what you can borrow will be limited to around 75% of the loan security that you are able to provide to the lender.

However, there isn’t an upper limit on the amount of money you can borrow through bridging finance.  It all depends on your individual circumstances and the lender involved. In some cases, very experienced developers may be able to borrow up to 100% of their development costs as a bridging loan.

Our brokers are currently reporting that they are getting bridging loans approved with their lenders within 24 hours where the circumstances are reasonably straightforward.

Once the application has been approved, funds can be available in anything between 3 days to 3 weeks for relatively straightforward cases and where the valuation process does not delay the process.

You can apply directly to most bridging loan lenders but unless you really know what you are doing you would be more likely to secure the best deals if you use a broker who specialises in these loans and who has direct links to the best lenders.

Our brokers are ideally placed to help you and below we outline some of the things that they will discuss with you should you be interested in making an application.

• Required loan: This is the first thing that needs to be established and considered carefully by asking the following four questions.
  • What do you want from a bridging loan?
  • How much will you need to borrow?
  • How long will you need the funds for?
  • How do you plan to repay the bridging loan?
• Your current situation: The broker will need to gather some accurate information about you in order to find the best lender for your needs and the best product on offer. So think about your situation.
  • How much is your property worth?
  • Do you have a mortgage on the property?
  • How much equity do you have in your home?
  • Do you have a good credit rating?
  • Do you have sufficient spare income to repay the loan?
• Completion: Once you have discussed all these factors with our broker and decided to go ahead, an application will be submitted by the broker to the chosen lender and you should then within 24 hours, find out of your application is successful.If the loan is confirmed, you should have the funds available within a few days to 3 weeks, depending on the complexity of the loan.

In the same way as it would when taking out a second charge mortgage, a bridging loan will cause a charge to be placed on your property. This is a legal agreement which sets out which of your lenders will be paid first, should you fail to repay your loan.

Regardless of whether your bridging loan is classed as a first charge loan or a second charge loan, your property will be held as security in case you default on repayments.

Should you have a normal mortgage already on the property the bridging loan will be classed as a second charge loan, meaning that if you failed to make the repayments and your home was repossessed to pay off your debts, your original mortgage would be paid off first.

However, if you own the property outright then the bridging loan would be classed as a first charge loan and  would be repaid first if you failed to make the repayments.

Most bridging loan lenders will accept people with poor credit as their risk is generally considered to be less than what would be the case where a new mortgage was being taken out on the property. Most people applying for a bridging loan will have built up a reasonable amount of equity in their property and this gives the lender a that bit more security.

However, if your credit rating is quite poor the lender may compensate for this by charging a slightly higher interest rate on the loan and you may also find that you are unable to obtain the very best products that are available in the market.

There are many bridging loan lenders out there and selecting the better ones and obtaining the right product from them can be difficult and very time consuming.

Our brokers are very experienced in this and have carried out extensive checks on the market leading lenders and have focused their attention on a group of them that together can offer the best products to suit virtually every situation.

This close relationship that they have with these lenders can often make the difference when applying to have a difficult application accepted

In this example, the clients were looking to downsize to a new home but to be successful, had to complete the purchase before having sold their existing home. The new property was valued at £350,000 while their existing property was valued £850,000 but they have an existing mortgage on it of £400,000.  They have additional personal funds of £150,000 in cash to help with the move.

Their solution was to take a bridging loan for 6 months to fund the purchase and then when the existing property was sold, either pay of the loan from their funds or remortgage the new property to repay the bridge.

As the bridging loan is only 44.4% of the equity the clients have in their existing property, they should be able to get the bridging loan on very good terms.

Base cost of the bridging loan

Interest charge: 6 monthly payments of 0.59% on £200,000  = £7,080.

Arrangement fee based on the lower 1% rate                   = £2,000

Total cost excluding legals and remortgaging costs            = £9,080