What is a Bridging Loan?
A bridging loan is used as an option for short-term funding (usually 12 months or less). They are used to ‘bridge’ a gap in an individual or business’s finances before permanent funding is available to them. An increasing number of people and businesses are using bridging loans to take advantage of the flexibility and the speed of which they can be set up to take advantage of opportunities or resolve emergency situations.
How Does a Bridging Loan Work?
A bridging loan can be a very good option for you, if the plan is to borrow the money short-term- the interest rates are generally higher than those of a mortgage, for example. So, it’s not ideal if you need the funds for a longer period of time.
Before any agreements, the lender will be interested in your secured plan of how to pay the money back- for example, selling your property or inheritance. So, before taking out a bridging loan, it is important to be sure of an exit strategy.
What is a closed bridging loan?
A closed bridging loan is when you fix a date of repayment with the lender. This maybe because you already have a buyer for your property where you’ve exchanged contracts and a date is in place.
The benefit of a closed bridging loan is that you may have cheaper interest rates applied as there is more confidence in the repayment.
However, the disadvantage is there may be financial penalties for not meeting those agreed terms.
What is an open bridging loan?
An open bridging loan is when you aren’t certain of when you will be able to pay the money back. This maybe because you don’t have a buyer for your property yet or there is a hold up with your mortgage.
In these cases, an open bridging loan enables more flexibility in uncertain situations- preventing you from paying financial penalties if things don’t go to plan.
The disadvantage of an open bridging loan is that lenders will generally apply a higher interest rate to cover any potential risk with the uncertainty of repayment.
What are the Common Uses of a Bridging Loan?
Bridging loans can be used for both residential and commercial property transactions.
- Quickly Securing a Property - A bridging loan can allow you to quickly purchase a property before selling an existing one to prevent you from missing out on a dream property.
- Fixing a Broken Property Chain - You may be caught up in a broken property chain where the person buying your property withdraws as they are unable to complete the purchase- preventing you from purchasing the property you want. A bridging loan can be taken out to continue with your purchase and then be paid back when your property has been sold.
- Property Auction - If you have had a successful bid on a property at an auction, you would have to pay around 10% as a deposit to secure it, and then the rest of the purchase price is normally due within 28 days. Bridging loans are fast to set up so would allow you to pay the required money within the timescale provided.
- Property Development - A bridging loan can be used if you are considering selling your property but want to refurbish or develop it first to raise the value. The bridging loan can then be paid back when the property has been sold or refinanced. Alternatively, if you want to buy a property that is uninhabitable (It is in poor condition or has no bathroom, for example) and do it up to sell or rent out, a bridging loan can be secured against a property that other lenders may consider to be unsuitable.
- One-time Opportunity - You may see a one-time deal that you want to take advantage of but you don’t have the funds readily available. Maybe a property, vehicle or piece of machinery for your business. As bridging loans are fast to set up, they are ideal for situations like these.
- Building a House - Some people may use a bridging loan for their dream of building their own house.
- Unexpected Tax Bills - This type of loan can be used for individuals or businesses who have been hit with an unexpected tax bill and need to pay the money back quickly to avoid late payment fees.
Bridging Loan Repayment Options
- Settle in Full: Most of the time, a plan will be in place to pay back the bridging loan in one goas soon as you have the funds available. This could either be from selling a property or inheriting money, for example.
- Lump sums: You can choose to pay it back in multiple lump sums. Perhaps you have three properties that you are selling and you want to pay parts of the loan back as each one sells.
- Monthly Repayments: Paying back the loan monthly is an option, however, it is not popular option with lenders.
- Interest: Some bridging loans are structured so the interest is paid in monthly instalments, with the loan facility being paid back at the end of the term. This suits people with a regular cashflow, however, the other options are rolled up or retained interest.
Advantages of a Bridging Loan
- The main advantage of a bridging loan is that it can be set up much faster than other types of loans, like mortgages, for example. The average turnaround is about two weeks but it has been known to be set up within 48 hours. This is particularly useful in pressing situations where you need to arrange funds quickly, or when you want to take advantage of a one-time deal.
- Another advantage is the flexibility of repayment. If you set up an open bridging loan, there isn’t a fixed date of repayment so it makes it easier for people in uncertain situations.
- Unlike other mainstream lenders, you can secure a bridging loan on nearly any type of property.
- Most bridging lenders will accept you even if you have a bad credit rating as there isn’t monthly repayments to worry about.
Disadvantages of a Bridging Loan
- As bridging loans are short-term, the interest rates are generally a lot higher than other types of loans. They could be around 1% per month.
- When setting up a bridging loan there is generally a few fees that are not always made clear. These could be; a set-up fee (up to 2%), a facility fee (up to 2%), and in some cases an exit fee (up to 1%).
- If you set up a closed bridging loan and don’t make the repayment on time, you will be faced with an early repayment charge.
- You must make sure you have a reliable exit strategy, if you don’t, it will be very expensive as the interest will mount up and you may be faced with renewal fees if you don’t repay the loan.
What is the Process of Setting up a Bridging Loan?
With us, setting up your bridging loan is easy and quick- we have a high experienced and efficient team. These are the steps to your bridging loan:
- Call us: When you phone us to enquire about your bridging loan, we will take the time to understand your circumstances and discuss the different options available to you.
- Quotes: Once we have agreed on your best option, the rest is up to us. We will speak to the lenders and find you the best deals we can. These will then be emailed to you to decide.
- Application form: When you are happy with your quote, it is time to fill out the application form. We can either do this for you over the phone, or you can fill it out online- whichever is easier. Then you will need to sign, scan, and email it back to us. Or, you can print and post it if you don’t have a scanner.
- Loan approved: The loan is then approved, subject to valuation.
- Valuation: Your property will need to be valuated before the official loan offer. This can possibly be done from a previous valuation, a desktop valuation, a drive-by valuation or, a full valuation if required.
- Loan offer: Once everything has been completed, you will be given a formal offer.
- Legal Work: The money will be release to the solicitor, they will do any final legal checks and paperwork, then the money will be given to you.
Advice on Bridging Loans
- Exit strategy: Before applying for a bridging loan, it is very important that you have a reliable exit strategy in place. Commonly, this would be from selling a property or refinancing the property with a traditional mortgage, for example. Bridging loans have a much higher rate of interest compared to other loans so they are not sensible for anything other than short-term financing. Most lenders will also charge renewal fees for not re-paying within the agreed loan term.
- Buying at auction: Bridging loans are very popular for people looking to buy properties at auction as they are fast to set up. However, before placing a bid, it is advised to make sure you have the funding in place first. You are normally required to pay a 10% deposit on the day, and the rest of the money is normally due within the following 28 days. Having the funding in place first acts as a safety net if anything was to go wrong.
Bridging loan interest rates depend on:
- The lender
- Whether it is an open or closed bridging loan
- Your credit rating
- The type of security offered
- The loan to value (LTV)