7 Things You Need to Know About Bridging Loans
You’ve decided that you need a bridging loan. You’re ready to make an application. Before you do anything else, here are 7 things you need to know about bridging loans.
1) What you can use a bridging loan for?
Bridging loans can be used for a variety of reasons. Often, they are used to purchase a property when speed is of the essence, such as when a property is being bought through an auction. There are also non-property related reasons for taking out a bridging loan, such as to buy a partner out of a business, pay an outstanding invoice or tax bill, or perhaps you need working capital to grow and expand your business using the property from which the business trades as security. Different lenders will have different criteria so check with them first.
2) Important things before you make an application
It is important to think about the application process and be ready to move quickly when you need to. There are costs that need to be paid (see Point 4 below for more details), the paperwork needs to be in order and documents should be ready to be sent to the lender. The more prepared you are, the more likely it is that you will be approved quickly for the bridging loan you need. So, make sure you have all the relevant paperwork ready to send to the lender when they ask for it.
3) What information you need to provide as part of your application
The loan application is an important part of the process. It’s your chance to present yourself and your plans to a prospective lender. The more information you have available at an early stage, the more likely you are to get a quick response and a speedy decision from a lender. So, when making an application for a bridging loan, make sure you have the following information ready to send to a lender:
- Proof of ID – valid passport or driving licence
- Proof of address – a utility bill or bank statement dated in the last 3 months
- The lender’s application form fully completed
- Last 3-6 months bank statements – personal and business
- Proof of income such as a P60/last 3-month payslips/SA302 tax form/tax year overview
It’s also important to provide details of your solicitor as they will play an important role in getting your deal over the line.
Also, if you have any adverse credit history, it is important to be ‘upfront’ and explain the background. It is better to be open and honest with a lender from the outset, rather than try and hide it and let the lender find out at a later stage. This has the potential to work against you.
Finally on this point, always work with your lender or broker and provide all the information they require as quickly as possible.
4) The costs
The bridging loan market is now a highly competitive sector with many new lenders having entered the sector over the past 2-3 years. Consequently, competition amongst lenders is fierce. So, make sure you either shop around or use the services of a good broker with plenty of property finance experience.
Regarding costs, when it comes to interest rates there is a very broad range of quotes. I have seen interest rates as low as 0.45% per month and I have seen them as high as 1.5% per month. Most bridging loans attract an interest rate somewhere in between, and if you assume a rate of around 0.75% to 0.9% per month you won’t be too far wrong.
Regarding fees charged by a bridging lender, typically they are between 1% and 2% of the amount you borrow and these days most lenders do not charge an exit fee or early redemption charge.
The important professional fees to be aware of are the valuation, and the legal costs. Bear in mind you will need to pay the lender’s legal fees as well as your own solicitor’s fees.
5) Valuation Requirements
Once the lender has reviewed your application for a bridging loan, they will issue what are called indicative terms. This is simply a summary of the main points of the deal and the indicative terms will include such information as the address of the property being used as security, the anticipated value, the loan amount required and of course a breakdown of both the interest costs and the fees being charged.
The next step will be to have a valuation carried out. The bridging lender is taking a first charge over the freehold property being used as security, and a valuation of the property will therefore be required.
As a guide, most bridging lenders will lend up to a maximum of 75% of the market value (MV) of the property in question. Some lenders will go up to 80%, whilst others will only lend up to a maximum of 70% or even 65%. But if you work off 75% as a guide, you won’t be too far wrong.
6) After your bridging loan has been approved
Once the valuation is back from the lender, that’s the point at which your bridging loan will be formally approved by the lenders credit committee.
The next stage is for a formal offer letter to be issued and for both your solicitors and the lenders solicitors to be instructed to start work on the legal work.
This is the part of the overall process that can take the longest. Therefore, our advice when it comes to choosing a solicitor, is to make sure that you use a good solicitor who has experience in property law. They may be slightly more expensive, but it will save you time in the long run.
7) The importance of an exit strategy
Once all the legal work has been carried out, a date will be agreed for completion and then the funds will be released via the lender’s solicitors directly to your solicitor.
Congratulations, your bridging loan has now completed!
However, one thing you need to make sure, is that you have an exit plan. This is an important point, and one that needs to be thought about right at the outset of your application. If you haven’t thought about it, the lender certainly will, and one of their key questions they will ask is how you are planning to repay the bridging loan.
This is because bridging loans are short term – usually up to a maximum of 12 months – and they are more expensive than a more traditional loan or mortgage. Consequently, it is vital that you have a ‘thought through’ exit strategy for repaying the bridging loan.
In summary, bridging loans are a great way to raise finance quickly. They can be used for a variety of purposes, and we have many clients who have had real benefit from being able to access this type of funding.
Hopefully, these 7 points will help you identify if a bridging loan is the right solution for your specific funding needs.