Bridging Loan Parameters – The Finer Details
For the past two weeks we have been looking at bridging loans; what they can be used for and what the initial assessment process is. This week, and to conclude this series of blogs, we are considering the bridging loan parameters that a lender will consider in greater detail.
Bridging Loan Parameters
Whilst dictated by your specific requirements, bridging loans can be for a period of 1 month up to 36 months. However, the typical term for most bridging loans is 6 to 12 months. Remember this is intended to be a short term finance option.
The interest rate on bridging loans can vary a great deal and can be from as little as 0.49% per month up to 1.5% per month. In some cases, the interest rate can be even higher.
You need to consider affordability carefully prior to taking out a bridging loan. We can help you to make that assessment and advise on alternative funding where it is more appropriate.
There is huge variance when it comes to the lenders fee for a bridging loan. Typically you can expect to pay an arrangement fee of between 1% and 2%. In addition some lenders charge an exit fee, although many don’t.
However, we have experience of dealing with lenders that do not charge either an arrangement fee or an exit fee. So it is worth doing your research and shopping around, or speaking to a finance broker for guidance.
The minimum loan size for many lenders is £50,000, with a few lenders considering a lower loan amount. The maximum is usually around £5 million although some lenders will consider bridging loans for larger amounts.
Loan to Value
This is normally 60% – 75% as a maximum. Many bridging lenders will use the open market value of the property for working out their maximum loan.
However, other lenders will wish to use what is known as the ’90-day value’ for the property which has the effect of lowering the valuation figure and therefore the maximum amount that can be borrowed.
If you can pay off your bridging loan early, then our advice is to do so. Most lenders do not charge for repaying a bridging loan early. That said, some lenders may have a minimum term for their loan of between 1 and 3 months, so bear that in mind.
When working out how much they can lend, all lenders build in an amount to service their interest during the term of the loan. This is what is known as ‘retained interest’ and is held back by the lender from the initial advance to service their interest charges on the bridging loan.
Because the amount you are borrowing will be repaid at the end of the loan term, a bridging loan is always on an ‘interest only’ basis with no requirement to repay capital during the period of the loan.
Valuations are a must. As the lender is using property as collateral for the bridging loan, they need to know its value.
However, a word of caution, do not do a valuation first. Make your application to a lender and find out what they can do and the terms of the bridging loan they will offer. Then you can do the valuation.
This is because lenders often have a panel of valuers they use, and if you have had your own valuation carried out by a valuer who is not on their panel, the lender will not be able to use it. Which is of course a waste of both time and money.
Because the collateral for the bridging loan is a property, the lender will require a legal charge on that property as their security for the loan.
This is a legal process and solicitors need to be involved. In some cases, the lender will use the same solicitors that are acting for you. However, most of the time, the lender will want to appoint their own solicitor.
When budgeting, bear this in mind, as it is a cost for which you will be responsible.
What Information Does the Lender Need From You?
When making an application for a bridging loan, there is some important information you will need to provide as follows:
- Copy of passport as proof of identity
- Copy of driving licence or utility bill (less than 3 months old) as proof of residency
- Personal asset and liability statement
- Details of the property you are using as collateral for the loan – address/description/value
- Details of what the bridging loan is required for
- How the bridging loan will be repaid – your exit route
Whilst this is not an exhaustive list, providing as much of this information to the lender at the initial application stage as possible, will help speed up the decision-making process.
The Final Word
That concludes our series on bridging loans. As discussed bridging loans can be an excellent funding solution for a variety of purposes. However, you must have a property asset to secure the loan and this should only ever be considered as a short term solution.
Bridging loans can allow you to access funding quickly and are relatively simple to apply for. Nevertheless they can be an expensive way to borrow so it’s important you are sure it is the right option for you. You can use the bridging loan parameters listed above to help you make your decision.
If you would like to discuss your options with regard to applying for a bridging loan, or any other funding options for your business, please do get in touch.