Bridging Loans

Bridging Loans
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Bridging Loans
Bridging Loans

Andy Done shares all we need to know about Bridging Loans.

Bridging Loans 

What is a Bridging Loan and how do they work?

A Bridging Loan can be used for short-term borrowing when customers need to facilitate a deal on a first turnaround and this is usually used for things like buying a property from auction, or buying a property deemed uninhabitable by Mortgage Lenders.

Bridging Lenders secure the loan against the property or properties so that the funds can be used for intended purpose. The interest is usually charged and rolled up into the loan, meaning you have no monthly payments, but at the end of the loan you repay the full loan, along with any interest and outstanding charges, and then they’ll remove the legal charge off the property or properties.

What can a Bridging Loan be used for?

There are two different types of Bridging Finance available, Regulated Bridging Finance, which is for customers who want to use their residential property as security to raise funds, and Unregulated Bridging Finance, which is when the property being used as security is for business or investment purposes. A Bridging Loan also becomes Unregulated when it’s taken out in the name of a company instead of a person.

What is the Exit Strategy?

The Exit Strategy is how the client intends to pay off the Bridging Loan. There are different Exit Strategies depending on the deal, but it’s often repaid from the sale of the property or refinancing to another mortgage, if a client uses Bridging Finance to purchase a property to flip.

If the loan is being used to purchase a commercial property that’s being converted into residential units, the Exit Strategy could be the sale of the units. If the investor is keeping the property in their portfolio, it can be refinancing the loan with a mortgage.

What are First Charge and Second Charge Bridging Loans?

If a property that is being used for security already has a mortgage on it, the mortgage will be the first charge and the Bridging Loan will be classed as a second charge. If there is no mortgage on the property, the Bridging Loan will be classed as a first charge.

What if I have bad credit?

Bad credit isn’t as much of an issue with Bridging Finance, as with getting a mortgage, because there are no monthly payments to make, so affordability isn’t really an issue. The lender will check your Exit Strategy and make sure that’s reasonable. If the borrower isn’t able to pay back the loan, the lender will take possession of the property and sell it. Because the Loan to Value offered are quite low, there’s not really as much risk to the lender.

What are the costs involved with a Bridging Loan?

With Bridging Loans, because they’re short-term, the Interest Rates are typically high and calculated on a monthly basis, rather than annually. The fees involved are a valuation fee for valuing the property that you intend to use as security, if you’re using multiple properties for security there will be multiple valuation fees.

There might also be a broker fee for setting up the loan and a product fee from the Bridging Provider. This can typically be between 1- 2% of the loan value, but there are a couple of lenders with niche products that have no product fees, however, the interest rates tend to be very high and there may be an Exit Fee.

How do you apply for a Bridging Loan?

You can apply directly to the lender or use an experienced broker to guide you through the process from application to completion and explain what needs to be done at every step. Bridging Loans are typically used due to time constraints, and a broker can help speed up the process so that you can complete within the desired timeframes. Everything can be done within a matter of days or weeks.

Are there any alternatives to a Bridging Loan?

It is a niche product and there aren’t many alternatives. If you’re lucky enough to have a lot of cash, you could use that instead, or if you were able to do a secured loan instead. Sometimes Bridging Finance might be used for properties that aren’t fully finished, and Development Finance might be more suitable in certain situations.