Bridging loans: a funding option that can solve a variety of challenges….
Bridging loans have become an increasingly popular funding option to assist borrowers in a variety of different ways. These include:
- Assisting with another property purchase whilst an existing property is being sold
- To buy a property without planning permission whilst a planning application is made
- To provide short term working capital for a business
- To buy out a partner
- To facilitate a divorce settlement
- To pay an outstanding tax bill or other debt
- To buy a property at auction
MoneySuperMarket.com have written a useful article on bridging loans which you can read here: https://www.moneysupermarket.com/loans/what-is-a-bridge-loan/
Essentially, a bridging loan is a type of short-term funding, typically taken out for a period of 1 month to 3 years, although most commonly they run for a 6-9-month term.
Bridging loans are secured against a property – either residential or commercial – and are normally repaid at the end of the term in one of two ways.
Either, the bridging loan is refinanced onto a longer-term financing arrangement or alternatively, the bridging loan is repaid from the sale of the property being used as security.
Because the capital sum will be repaid from a refinance or sale, a bridging loan is normally on an interest-only basis and it is common for the interest payments to be “rolled-up” during the period of the loan.
As an indication the typical parameters for a bridging loans are as follows:
|Term||Dictated by the specific requirements of the deal but 6-9 months is typical|
|Interest rate:||Varies from as little as 0.49% per month up to 1.5% per month|
|Fees:||Lenders fees vary considerably, but typically lenders will charge an arrangement fee of 1% – 2%, with many lenders not charging an exit fee or redemption penalty when the bridging loan is repaid. |
That said we have one of our lenders who at the moment does not charge either an arrangement or exit fee.
|Loan size:||£50,000 up to £5 million although bridging loans for larger amounts are also available|
|Loan to value:||Normally 60% – 75% as a maximum. Some bridging lenders will work off the open market value of the property, but bear in mind other lenders will wish to work off a 90-day value for the property which has the effect of lowering the valuation figure and therefore the maximum amount that can be borrowed.|
The key is speed. Usually funds are needed urgently and so a bridging loan usually needs to be arranged and put in place quickly.
However, a degree of caution is required when taking out a bridging loan. They are an excellent way of raising funds quickly when deadlines are tight, but they do attract a higher rate of interest.
The important thing to bear in mind therefore, is knowing what your ‘exit route’ is to repay the bridging loan. Will it be the sale of the property being used as security, or will you refinance on to a longer-term mortgage at a cheaper rate?
Bridging loans are great short-term solutions, but our advice is to always take a moment to think through how the bridging loan is to be repaid as part of your due diligence.
We would always advise that because there are so many options when it comes to bridging loans, the best thing is to contact an FCA regulated broker to help guide you through the process and explain the options available to best suit your particular needs.
We would be delighted to help so please don’t hesitate to get in touch. Please email us at firstname.lastname@example.org or give us a call on 020 8949 2122.