What is a bridging loan?
A bridging loan is a short-term loan, which is secured on a property, that is typically used to help a person or an organisation to go ahead with making a property purchase without waiting for a sale to go through. It is called a bridging loan because it is designed to ‘bridge the gap’ in finances. This an option is typically used to buy a property even if you have not yet sold your existing home, for example, if you wanted to downsize without waiting for the sale of their current home.
This type of loan often has a fixed end date, usually to co-inside with when the borrower knows that funds will be able to repay the loan. They can last between 1 day to 12 months for a regulated bridging loan or up to 2 years for an unregulated one.
How does a bridging loan work for home and property owners?
Bridging loans can help you:
1. Downsize to a more affordable place
If you are looking to move to a smaller or less expensive home, you could use a bridging loan to secure the smaller property whilst you sell the existing home.
2. Secure a new home
When there is a delay between the sale and completion dates, a bridging loan can help you to secure a purchase without having to wait for the sale of your existing property to go through.
3. Repair a broken property chain
A bridging loan can enable you to purchase a new home even if a buyer in the chain drops out.
4. Buy a property at auction
If you buy a property at an auction, you usually need to pay a 10% deposit immediately. The rest is usually due within 28 days. They’re useful for completing the purchase whilst you arrange a long-term solution, either a through a quick sale or a mortgage.
5. Build your dream home/grand design
A bridging loan could help you achieve that dream of building your ideal home.
6. Easy a temporary cash-flow issue
You could use a bridging loan to release equity in your family home. For example, for use in a probate case where inheritance tax needs to be paid on a property, or a divorce settlement.
How do they work for property developers and landlords?
With bridging you can:
1. Buy property to develop at auction
Completion is required to happen within 28 days of the hammer going down, so bridging finance can secure the property until it’s either been resold, refurbished or re-financed. This can be for both residential properties and commercial properties.
2. Buy a property that’s considered uninhabitable
If a property is deemed uninhabitable, it can be hard (if not impossible) to find a lender willing to provide a mortgage. A bridging loan can provide the money needed to fund the building work required to make a property fit to live in, enabling it to qualify for a mainstream mortgage.
3. Renovate a property before a sale
Property investors find a refurbishment-bridging loan useful if they need to fund expensive repairs and/or property development before putting it back on the market with the aim of selling it for profit.
4. Ease a temporary cash flow issue
A bridging loan can be used to capitalise on market conditions and discounted investment opportunities.
How does a bridging loan work for businesses?
Taking out a bridging will help you:
1. Raise capital
Bridging loans can be secured against land and property so that companies can raise money in the form of short-term finance and improve their cash liquidity.
2. Expand quickly
If you needed a new, expensive piece of machinery or extra space to fulfil a large order, by securing a loan against land/property, a bridging loan could provide the funding.
3. Tax liabilities
Businesses can use a bridging loan if a tax demand is made and the amount cannot be accessed otherwise within the required timeframe.
4. Meet business obligations
Bridging loans can be used for short-term funding to overcome temporary financial issues.
What is the most I will be able to borrow?
At Loan.co.uk our bridging loans range from £10,000 right up to £100 million. For example, a couple looking to retire could borrow thousands to help them to downsize prior to their current property being sold. Or, a business could just as easily borrow millions to ease the process of a factory relocation.
Most lenders will lend between 65% to 80% gross (This is the amount paid out, plus interest rolled up and fees added) of the value of the property (LTV), but some will go to 95% or even 100% depending on the circumstances and if there is additional security in place.
Bridging loans are a stopgap solution before longer-term financing is put in place (for instance, funds from selling an asset such as a house to be used as a deposit on a new mortgage for the new property).
Let us say you needed funding to buy a new home before the sale of your existing property. Your current home is valued at £670,000 with an existing 1st mortgage of £335,000. The new property is £900,000 and you have £200,000 in savings to use for the purchase of the new home.
By taking a first charge on the new property and a second charge on the existing home, the lender is able to offer you loan of £764,000, enabling you to buy the new home and pay all the associated fees before the sale of your old home goes through.
You would be charged a fee of around 2% of the advance and interest would apply each month, but this is just added to the loan. Once the exiting home is sold, the bridging loan (including fee, interest and the commission for Loan.co.uk) is settled.
Do I need to have a deposit for a bridging loan?
You would not generally need a deposit as the lender typically uses your property as collateral for the bridging loan application.
What will lenders review in particular before approving my loan?
Lenders look at a number of things when determining your eligibility for a bridging loan, such as:
1. Plan to repay the loan
The key question for lenders is, “How do you plan to raise the finances for repaying your bridging loan?” The answer is known as your ‘exit strategy’. Examples of exit strategies include the sale of a property, sale of other assets or refinancing. Lenders prefer it if you know both how and when you’ll be able to make payment, so ideally you’ll have a confirmed completion date.
2. Secured assets type and value
For many borrowers, this will be the current property.
3. Loan-to-value (LTV) ratio
This is the relationship between the amount you need to borrow and the price of the property you’re buying. The remaining percentage of the property’s price comes from other funds (usually the equity you have in your current house). Lenders tend to favour low LTVs as by paying less of the property’s price, they’re taking a smaller risk.
4. Mortgage status
If you’re a homeowner without a mortgage, lenders will offer you a first charge loan (this loan is the first borrowing against the property). If you have an existing mortgage, you could be offered a second charge loan (this is the second borrowing after the mortgage). Second charges attract higher interest rates as they present a greater risk to the lender. That’s because the first charge takes priority should the borrower default, making it harder for lenders of second charge loans to recoup their money.
Which type of bridging loan is best for me?
To find the right bridging loan for you, contact Loan.co.uk and quickly take us through your needs and circumstances. Then we can quickly deliver the best solution for you.
How is the bridging loan repaid?
Bridging loans are repaid when the borrower’s long-term financing kicks in (most commonly funds from the sale of a property). They can be repaid at any time during the loan’s term and most lenders don’t charge a penalty for early repayment. With Loan.co.uk you will find that there are no early repayment fees. Interest rates for bridging loans are fixed for the duration of the loan (they don’t respond to market changes) and are quoted as monthly. At Loan.co.uk you’ll find market-leading rates.
There are two main ways to charge interest on a bridging loan – serviced interest or rolled-up/retained interest.
1. Serviced interest
This pays off the interest owed each month only. The capital (money borrowed) is repaid at the end of the loan’s term. This is also known as monthly interest.
2. Rolled-up/retained interest
The interest payments for the full term of the loan are calculated from the very start. These are then added to the capital to form one total amount that’s due at the end of the loan. This means no monthly repayments. Some lenders will charge interest on the entire capital and interest (effectively paying interest on top of interest). This is sometimes known as deferred interest.
How much time will I have to repay it?
Bridging loans have a shorter period of repayment than conventional borrowing. Usually the term is 12 months for regulated lending (this is lending against your home and for non-business purposes). This climbs to an average of 24 months for non-regulated lending (lending on something that is not your home and for business purposes). However, with both you can settle at any point, usually without exit fees. At Loan.co.uk you can take out a bridging loan for as little as a month to as long as 24 months.
What are the consequences of failing to repay?
If you find you unexpectedly have issues with repaying the bridging loan, the bridging lender will either agree to extend the bridging loan or repossess the property.
What makes Loan.co.uk such an outstanding bridging loan broker?
With all the bridging loan brokers to choose from, why should you use Loan.co.uk to make your plans happen?
1. We will quickly help you find the best bridging loan for you and your circumstances.
2. You will receive expert advice from an award-winning broker
3. We will take care of everything, right up until you receive your money
4. Borrow from £10,000 to £100 million