In recent times, bridging loans have gained significant popularity among individuals who invest in and develop properties. They serve as an essential means for many investors and are crucial in facilitating the timely completion of deals.
This article provides an overview of the functioning of bridging loans and how they can be utilized for the growth of your property business.
We Cover The Following:
What Is A Bridging Loan?
A bridging loan is a financial product that is commonly utilized by property investors, developers, business owners, and individuals who require immediate cash for a short period of time until they have access to other funds or until they obtain a long-term financing option like a buy-to-let mortgage.
This type of financing is frequently employed by savvy investors to initiate or expand their property portfolios because it enables them to rapidly make decisions and acquire property.
What Can A Bridging Loan Be Used For?
Bridging loans have the flexibility and speed to cater to a wide range of needs. They are applicable in various situations, and some of the most frequent uses are:
Bridging loans are frequently utilized to buy a property, obtain money for property improvements, or seek planning permission in a prompt manner.
Typically, the funds can be accessed within a week, allowing investors to take advantage of opportunities and complete deals before they vanish.
Refurbishing A Property
When a property requires a considerable amount of refurbishment or is deemed uninhabitable, most traditional lenders may be hesitant to provide financial assistance.
However, a bridging loan can be a viable option to cover the expenses associated with renovation work.
This loan can later be repaid by either selling the property or through long-term financing such as a mortgage.
Bridging loans enable investors to quickly secure properties at auctions, even before the bank approves their mortgage.
Properties sold at auctions are usually in an uninhabitable condition and require substantial renovation.
With a bridging loan, investors can obtain the necessary funds to purchase the property and complete the needed renovations.
Expanding Your Property Portfolio
A lot of property owners depend on rental earnings to acquire more properties, which can result in a lengthier process in building a portfolio.
However, a bridging loan can aid investors in buying new properties that can be repaid afterwards by switching to a long-term solution like a buy-to-let mortgage.
This approach enables smart investors to expand their portfolios without waiting for an increase in cash flow.
Fast Access To Cash
In case of unavailability of funds, while selling or refinancing a property, a bridging loan can be utilized for commercial purposes such as making crucial payments like taxes and VAT or providing support to the business by meeting essential expenses.
Difference Between A Bridging Loan And A Mortgage?
Compared to mortgages that are typically taken out for 25-35 year terms, bridging loans have a very short-term duration of one year or less.
In addition, the process of obtaining bridging loans is much faster than that of mortgages, which can take several weeks or even months to process. Once approved, bridging loans can be obtained in as little as 48 hours.
However, bridging loans come with higher interest rates than mortgages. While most mortgages have interest rates ranging between 3-6%, bridging finance starts at a high 8%. On the bright side, bridging lenders do not consider income or rental income in buy-to-let properties.
Additionally, unlike mortgages which are repaid monthly, bridging loans can be repaid as a single lump sum at the end of the loan term. This can be useful if you're short on cash and waiting for funds from a new mortgage or property sale.
Who Is Eligible For A Bridging Loan?
Individuals or companies can receive a bridging loan, but the lender will need assurance that the borrower has a solid exit strategy and collateral, such as another property.
Lenders usually do not consider credit history and income proof as important as security.
Lenders generally accept borrowers who are employed, self-employed, or retired, as well as private individuals, partnerships, or limited companies.
The applicant is at least 18 years old and has a registered address in the UK.
Borrowers must also have a form of security, usually in the form of one or more properties, and a defined plan to repay the loan.
How Much Can I Borrow With A Bridging Loan?
In most cases, lenders will provide a minimum loan amount of £50,000 without any upper limit.
However, each lender sets its own maximum limit, which is usually up to 75% of the loan-to-value (LTV) of the gross loan amount. This includes any fees and interest that are kept for the duration of the loan.
For instance, if a property is valued at £200,000, the maximum loan amount will be £150,000, and the net loan amount will be calculated by subtracting the retained fees and interest from the gross loan amount.
Although some lenders may offer more than 75% LTV, Accelerated Finance has access to lenders who can go up to 100% of the purchase price if extra security is given. Have a look at our bridging loan calculator to understand further how much you can borrow.
How Is A Bridging Loan Repaid?
It is crucial to take into account the repayment process before taking out a bridging loan. The loan agreement will clearly outline the repayment terms.
Lenders will need to know about your exit strategy, which typically involves selling the property or refinancing with a long-term mortgage deal like a commercial, residential, or buy-to-let mortgage.
The success of obtaining a bridging loan will depend on having a well-established exit strategy.
What Security Is Needed For A Bridging Loan
When obtaining a bridging loan, it is typically necessary to offer property as collateral.
This may involve one or multiple properties, which the loan provider will secure by placing a charge on them. In the event that loan repayments are not met, there is a risk of losing the property used as security.
How Long Can I Get A Bridging Loan For?
A bridging loan is a temporary measure used until permanent financing is secured. Typically, the development is either sold to generate income or long-term financing is obtained to repay the loan.
The loan term offered by lenders is usually from 1 month to 1 year, although this varies among lenders. In some cases, bridging finance may be available for up to 24 months if the borrower has a low LTV.
The average duration of a bridging loan is 12 months, and if longer financing is required, development finance may be a better option.
Accelerated Finance has connections with bridging loan providers who can provide financing at competitive rates starting from 1 month.
How Much Does A Bridging Loan Cost?
It is crucial to comprehend the expenses linked with a bridging loan, just like any other financial solution. Although the charges may differ marginally from one lender to another, the following is a summary of the regular costs that one can anticipate.
The primary expense related to a bridging loan is the interest, which a lender can charge in three ways.
Monthly Interest: One option is to pay the interest each month without adding it to the loan.
Deferred or rolled-up interest: Alternatively, the lender may choose to add the interest to the total amount due at the end of the loan term, which is referred to as deferred or rolled-up interest.
For instance, if the borrower took out a loan of £100,000 with £1,000 interest added at the end of the first month, the total amount owed would be £101,000. The lender would add £1,100 in interest the following month, bringing the total to £102,100, and so forth.
Retained: When a loan is "retained," the interest is calculated at the start of the term based on the duration of the borrowing period and is paid at the end of the loan term.
To illustrate, if you borrow £100,000 at a 1% interest rate for a year, you will owe a total of £112,000 at the end of the 12 months. However, if you pay off the loan before the end of the term, say after six months, the amount owed will decrease to £106,000.
The calculation of interest rates for bridging loans is based on a monthly basis due to their short-term nature. Interest rates for commercial property loans are greater than those secured by residential properties, and loans against land have the highest rates.
The level of interest rate is influenced by the level of risk associated with the loan, with higher risk leading to higher interest rates.
Lenders Arrangement Fee
Most bridging loans have a lender arrangement fee of around 1-2%, which is calculated based on either the net or gross amount of the loan.
The fee is usually included in the loan amount itself. Additionally, certain lenders may also charge an administrative fee for arranging the loan.
A professional valuation is a necessary step in processing a bridging loan application, and it must be conducted on the property that is being offered as collateral for the loan.
The cost of the valuation will vary based on factors such as the surveyor, location, and asset value. For commercial properties, the expected cost is between £500 and £2000. However, for higher-value properties, the fees may be subject to negotiation, particularly for those valued at over £1.5 million.
Since the valuation must be conducted before the loan is finalized, the fee is paid directly to the surveyor and is not included in the loan amount. This is typically the only upfront fee that borrowers can expect to pay.
When obtaining a bridging loan through a broker, it is common to incur an initial cost or a fee equivalent to 1% of the loan amount.
This fee may be added to or subtracted from the overall loan value. The broker's fee may differ depending on the extent of the services required, but the broker will exert great effort to secure the most favorable terms for you and ultimately help you save money.
Accelerated Finance is a fee-free broker. We obtain a procuration fee from the lender when the finance completes.
When it comes to bridging loans, there are two kinds of legal fees that are typically involved: the redemption fee and the solicitor fee.
The lender usually hires a solicitor to handle the legal due diligence and may require the borrower to cover this cost.
Meanwhile, the borrower must also account for their own legal fees, which can differ significantly depending on the situation.
At the end of the bridging loan, certain lenders may impose an exit fee, which usually amounts to 1-2% of the loan or equivalent to the interest for one month. This fee is included in the loan's redemption.
However, if you choose to repay the loan ahead of schedule, most lenders will not levy an early repayment fee, allowing you to reduce your interest payments.
In case your exit strategy fails and you cannot repay the bridging loan at the end of the term, a few lenders might be willing to extend the agreement slightly, but mostly, you will have to bear additional fees.
The decision to extend the bridging loan is completely up to the lender, and some may start repossession proceedings if the exit strategy is not fulfilled.
The required deposit for a bridging finance loan depends on the lender and the amount they are willing to lend.
Generally, lenders offer 70-75% of the loan to value, meaning borrowers need to put down a deposit of 30-35%.
However, Accelerated can provide bridging loans up to 100% of the purchase price if the applicant meets the lender's requirements and adds extra security.
Understanding All Costs
Bridging loans are advertised with a general approach of ‘rates from’ due to the various factors involved in determining their cost.
While a low-interest rate is ideal, it's crucial to consider all associated costs to find the best option for your project. Comparing fees charged by different lenders is essential to save money.
However, individually contacting each lender is time-consuming, and comparison sites may not provide a comprehensive market view. Therefore, a broker can help you find the most suitable loan for your project and guide you in the right direction.
Further breakdown of fees can be found here
What Do I Need For A Bridging Loan?
When reviewing a loan application, each lender will evaluate it individually. Nevertheless, the majority of lenders will request the subsequent details:
Date of birth
Employment status and details
Borrowing entity (Ltd company/LLP/personal)
Other owned properties
If you want to get a bridging loan, lenders will ask you for a short overview of your history and knowledge in the commercial real estate field, if you have any.
Additionally, they will inquire about the purpose of the loan and how you intend to utilize it. It is important not to leave out any of this information when applying for a loan.
A lender will require any information on the property or land you intend to purchase or refinance using the bridging loan:
Type of property
Use of property
Condition of property
Location of the property
Purchase price and property value
If you are purchasing a property to refurbish, either to sell on or keep as an investment, you may also be asked to detail:
The proposed refurbishments you will be carrying out
The cost of the work involved
The property value once the work has been completed
To obtain approval for a bridging loan, it is essential to provide a clear plan for repayment, including details on the method and timing of repayment such as selling or refinancing.
Loan Amount and Terms
In order to obtain a loan, the lender will require you to provide certain details such as the loan amount you require, the length of the loan, and your ability to provide a significant upfront cash deposit.
It is crucial to include all necessary information when providing these details to the lender.
When considering lending to you, bridging lenders will evaluate the potential risk and usually request collateral in the form of property.
The loans can be secured against either one or a combination of properties. In the event the loan is not repaid, the lender may take possession of the property according to the agreement.
The lender may also require the following documentation:
Proof of ID and address
An asset and liabilities statement
An AIP for the follow-on mortgage
A property portfolio schedule
A detailed schedule of works: costings, timeframes, plans, and planning permissions (if refurbishing the property)
Your bank statements from the last three months
How Do Lenders Assess A Bridging Loan Application?
Before granting or rejecting the loan, the lender will evaluate all the aforementioned particulars. The likelihood of obtaining a bridging loan approval will improve if comprehensive information is provided.
Disclosing any negative credit history or issues at the outset can be advantageous since the lender may face difficulties and hold-ups later on.
The essential thing is to be forthright and candid in your application and communication with your broker. This approach will enable them to adjust the application to increase the chances of its endorsement.
Why Use A Bridging Loan Broker?
When it comes to the property industry, bridging loans are often required quickly due to its fast-moving nature. While some investors have established relationships with their lenders and approach them directly, this may not always be the ideal option.
It is important to be aware of other alternatives, especially if you are a first-time investor and unsure where to start.
A bridging broker can be helpful as they have access to the entire loan market, possess expertise in finding bridging loans, and have built a solid rapport with lenders.
This allows them to prevent potential issues in the application process, obtain the best deal for your project, and even save you money.
As securing a bridging loan with favorable terms is crucial for project success, a skilled broker can make a significant difference by saving you time and money and utilizing their experience in submitting applications.