Bridging Loans Complete Guide 2017-05-26T11:00:08+00:00

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The Complete Guide to Bridging Loans

Last Updated 10 May 2017.
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Introduction

The bridging finance industry is fiercely competitive and searching online can throw up a lot of conflicting information. Those in the industry understand that it’s very niche and often opaque, with bespoke pricing for loans and very little meaningful information available online. As a result, there are outrageously bold claims made about ever decreasing headline rates and expected completion times, with very little supporting information to back them up.

Bridging loans have been long misunderstood and are seen as risky and expensive. This is not made any better when the terms change on you as soon as you try to apply for the 0.29% per month interest rate you saw online.

The reality is that bridging finance is a very specialist product and needs to be handled by a professional. With the short term and rolled up interest, you have to plan ahead to ensure the loan you take now is not going to cause problems further down the line. Looking at the exit (your way of repaying the loan) before even considering signing up is crucial.

In this guide, we will give you the full picture about bridging loans. We will give you all the information you need to understand the bridging finance market before having to speak to an advisor. We will cover the following:-

  • What a bridging loan is
  • What interest rate you can REALISTICALLY achieve
  • How long bridging loans actually take to complete
  • The costs associated with bridging loans
  • What type of security is required to take out a bridging loan

Alongside these key points, we will cover the other product features and points to consider before taking out bridging finance. Let’s get started…

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What Is A Bridging Loan?

A Bridging Loan is a type of short-term loan used to ‘bridge a gap’. They are often used to secure funds quickly to cover a pressing need.

The main reasons people choose to ‘bridge a gap’ are the following:-

  • Auction purchases
  • Purchase or refinance of a property in need of refurbishment
  • Release funds quickly to pay unexpected bills
  • To cover mortgage delays

Of course, there are many other reasons that a person may need to raise funds quickly and due to the simple nature of certain lenders application processes, a bridge loan can be an appealing option.

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How Does The Process Work?

The application process can be very straightforward, although different lenders have very different approaches. The first decision would be whether you choose to use a bridging loan broker, or apply directly to a lender. In this example, I will assume you’re looking to use a broker.

  1. You discuss your need with an expert and receive an initial personalised quote based on your circumstances.
  2. The forms are completed and the supporting documents brought together for submission to the lender.
  3. The lender will issue an offer at this point – they will outline the full terms and any additional information needed to complete the loan.
  4. The lender will send over all legal paperwork to your solicitor and instruct a surveyor to undertake a valuation report.
  5. The solicitor will run through the terms of the agreement and ensure you fully understand the loan.
  6. If everything is ok with the valuation and you’re happy with the legal terms it is time to sign the required legal documentation to complete the loan.
  7. The funds are released to your solicitor to make the payments required to complete the transaction.
  8. Any outstanding monies due to you are transferred directly by your solicitor.

Often people are keen to find out how long the whole application takes from start to finish. This is an area where the marketing materials tend to be extremely bullish. As a result, the average time to complete a bridging finance application tends to be underestimated. The reality is that the average time across the market to complete a bridging loan as of Q1 2017 was 50 days.

This can be put down in part to the additional time taken to process regulated bridging loans and of course particularly complex cases. Both of these will push the average well up, with some complex cases taking months to complete. Most loans, however, will complete in 7-14 days. Some loans will complete in less than 1 week but they will tend to be at a slightly higher rate, specially treated as urgent by the lender or have a very low risk of financial loss for the lender in the event of default.

Tip – Speed up your application:

  • Be honest – no matter what the issue is, lenders would rather find out about an issue upfront.
  • Be prompt in your responses to the lender.
  • Ensure you do not miss any documents out – supply all required documents as early as possible.
  • If you have a recent valuation, the lender may re-use this so always tell your advisor.
  • Use a solicitor who is experienced in dealing with bridging loans.

There are several main factors that can delay completion, such as:-

  • Complex issues with the title.
  • Undeclared financial or credit information coming to light part way through an application.
  • Issues with the valuation.
  • Legal work taking longer than initially agreed.

Of course, the best way to ensure the application runs smoothly and in a timely fashion is to plan ahead. By preparing your application properly upfront, ensuring the solicitor, surveyor and lender are all working together well and understand your requirement; you can save a lot of time further down the line.

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How Much Does A Bridging Loan Cost?

Bridging loan brokers and lenders tend to advertise very low rates to try to entice people to enquire with them. These loans will often with sizeable fees attached or very strict criteria making it an unappealing option. Due to the individual pricing of loans and the number of lenders out there, it is hard to quote an average rate. In general, most loans will fall between 0.55% and 1.35% per month.

An average is difficult to pinpoint due to the number of different factors that have to be taken into account. In addition, the fact that commercial bridging loans tend to cost more than those against residential property skews the average.

On top of the interest, which tends to be expressed as a monthly figure rather than annually, most lenders will charge an arrangement fee of 2%. Some are now starting to reduce their fee, with some going as low as 1% for certain applications. As the amount of underwriting required to complete a loan is similar regardless of size, you are more likely to see a discount in fees applied to a larger loan.

There will be further fees on top such as broker fees (depending on whether your broker charges a fee for the service you require), TT fees, legal fees and surveyor fees. As with interest rates, these will generally be quoted to you depending on your circumstances. You should expect to be told about all fees at the same time as the interest rate and lender fee.

It is important to understand exactly what you will be expected to pay upfront. Any reputable broker or lender will be able to give you indicative figures up front. The reality is that things can often change when the application has been fully underwritten. This is because new information will come to light during the application, but it is important to know the likely and above all reasonable best estimate of the terms based on the facts.

Bridging loan rates tend to be advertised online using one of two methods. Firstly, websites will often say ‘rates from…’ – this will generally be the sort of low headline rate mentioned earlier. Secondly, there are a lot of websites offering rates between ‘x’ and ‘y’. This approach will tend to see a large variance in potential rates, making calculating your potential costs difficult.

Although there is an element of salesmanship to this tactic, it is the only viable approach due to the wide range of products on offer and the bespoke pricing structure of bridging loan lenders. To be sure of finding the best deal, you would have to compare options from various lenders either yourself or through a broker. Obviously contacting every lender can yourself would be time-consuming, meaning you could discuss your needs with only a few lenders. This is why many people engage an experienced broker to do the legwork for them.

Securing a low interest rate tends to be the number 1 request by clients looking for bridging finance, but it is important to look at the bigger picture. The difference in fees charges between different lenders can be vast. Many lenders will charge additional fees things such as fund management, redemption or administrative fees. If you’re determined to save money, a comparison of all costs, not just the interest rate is crucial.

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How Is The Maximum Loan Calculated?

The maximum loan on a bridging finance application is generally worked out using the loan to value ratio. This works in much the same way as a residential mortgage. Depending on the client’s circumstances, the quality and location of the security property and the intended exit, maximum borrowing can vary.

Commercial bridging loans have different criteria than those against residential property and in general, will achieve a slightly lower loan to value (LTV). Due to the different property types in the commercial property world, it is difficult to state reliable maximum for every situation. As a general guide, the absolute maximum loan would be 70% LTV.

This is lower than bridging finance against residential property where the maximum available LTV is 80%. Taking out an 80% bridging loan, however, is rare and would likely attract a higher interest rate than a loan taken at a lower LTV. On top of the increased rate, the criteria would be a lot stricter. Bridging loans taken at 75% LTV are far more common on residential property and would see a significant cost reduction compared to loans above this figure.

The higher the loan to value, the more risk both the lender and yourself are taking. As you move toward maximising your loan, the risks associated with repaying the loan in full should be considered. It is advised that the exit route is given deep thought prior to taking out a particularly high loan to value bridging loan.

It is common to see 100% bridging loans advertised online and we receive a lot of questions about how these work. The reality is that there will always need to be additional security offered to counterbalance the risk. The additional security would come by way of a second (or more) property offered to bring the average LTV down to the kind of levels shown above.

If you are considering using additional security to fund a purchase without putting down a deposit, but all of your properties have outstanding mortgages, the new bridging lender would take 2nd charge behind the main lender. This means the new loan becomes, in essence, a second mortgage on the additional property. Although this is common, taking 2nd charge will increase the risk for the lender and this may be reflected in slightly increased pricing.

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What Is Rolled Up Interest?

Rolled up or retained interest are terms used when monthly interest on a bridging loan is included in the loan amount, rather than paid monthly. It is often misunderstood that the interest is rolled up on top of the loan, however, this is not the case. The interest is deducted from the loan prior to funds being paid out.

There is a distinction to be made between the ‘gross loan’ and the ‘net loan’. The gross loan is the total amount of money borrowed from the lender, for instance, 70% of the property value, or ‘loan to value’. The retained interest is then deducted along with any fees and charges. This leaves the amount of money that is actually available to you to complete your property purchase or refinance.

The difference in gross and net loan has actually been borrowed from the lender but is not available to for you to use as it has been earmarked to pay for the interest and agreed charges. This can lead to a shortfall in finances if not considered upfront and it is, therefore, important that you’re clear on exactly how much the net loan will be.

Of course, the example shown is a simplified version and any real loan would likely have costs associated, such as legal fees and TT fees among others. It is also worth considering that different bridging loan rates can lead to a large difference in costs.

Factors affecting bridging loan pricing:

  • Loan to value.
  • Risk.
  • Quality of property.
  • Credit history of applicant.
  • Reason for the loan.

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Can I Make The Monthly Payments Instead Of Rolling Up The Interest?

Yes, certain lenders will allow you to make the monthly payments rather than deducting them from the loan. Some clients opt to pay the monthly repayments, often due to a desire to release the maximum possible loan on day 1, with future payments given less priority. Although this is appealing, the ability to comfortably manage the loan is the number 1 priority and we would only recommend this where clear affordability can be demonstrated.

With loans regularly coming in with interest rates of 1% per month or above, we always take account of the effect of those monthly payments on cash flow. A bridging loan of £300,000 with interest of 1.25% per month would cost £3,750per month in interest. This figure would obviously be unaffordable to the majority of people. As such we always work with you and the lender to ensure any loan you take is affordable.

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How Long Can I Borrow The Money For?

Bridging Finance is often referred to as a short-term product. Most loans are for between 1-12 months; however, there are lenders who will offer terms of up to 2 years. Generally speaking, it would not be advised to take out bridging finance for 2 years due to the costs involved. It would be much better to move onto longer term debt or sell the property before this point.

For some clients, a longer term bridging loan will be suitable. For example, when resolving particularly complex title issues in the hope of significant capital gain. Understanding the term you are likely to need upfront is very important, as going beyond this term will likely incur costs and may not even be possible. It is better to do your research upfront to ensure you don’t run into problems further down the line.

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Are There Bridging Loans For People With Adverse Credit?

Yes, if you have suffered adverse credit in the past, many lenders will still accept an application from you. The flip side to this is that some lenders would be unwilling to lend to you and as the level of adverse credit increases, less and less will be willing to lend. This ismainly due to the fact that if the exit route is a refinance onto a long term loan it is less likely that a new lender will lend. If the exit is via a sale of the property the bridging lender may take a view and still accept the application. This will potentially reduce the maximum loan to value and increase the interest rate you pay.

Lenders will tend to consider missed payments on property-backed debt, such as a mortgage or secured loan as worse than other issues. Missed payments on things such as a mobile phone contract or missed electricity bill. As with other types of finance, lenders will take into account your credit history as a factor that either increases or decreases the likelihood of default. This will then be used to calculate pricing.

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What Are Other Factors Taken Into Account When I Apply For Bridging Finance?

The main factor whan a lender looks to lend is the exit route. Lenders do not want to take control of a property unless it is absolutely necessary therefore your broker should make sure they are confident of the exit before submitting an application.

From there, lenders will look at the individual and their experience in completing the task they plan on undertaking. Certain lenders will put a lot of weight behind the experience of the individual, whereas others will be less concerned. The credit history of the applicant/applicants will be looked at by every lender, but as stated above, this is unlikely to prevent lending unless there are current and serious issues.

Lenders have different rules and cover many different areas. The number of factors in a lender’s criteria can be huge. Some lenders will insist that a borrower is no older than 65 years old by the time a loan is repaid, whereas others will lend with no maximum age. Others may be unconcerned by age but particular about past credit conduct.

Regulated bridging loans will be underwritten differently due to the rules associated with regulated mortgage contracts. The difference in process visible to the client can be small. The main difference to you would be the amount of information you have to provide to the lender. Regulated lenders tending to ask for more information such as bank statements and payslips.

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What Is A Regulated Bridging Loan?

A bridging finance application will be classed as regulated when it is arranged against a property in which at least 40% of it is occupied as or in connection with a dwelling by the borrower or an immediate family member. This means that if you live in the property that you want to raise your bridging loan against, the loan is regulated by the Financial Conduct Authority.

This will lead to a stricter underwriting process and will lead the lender to take more interest in your personal circumstances. They will want to be clear on affordability, your method of repayment will be more strictly enforced and your loan will likely take slightly longer than unregulated loans.

A bridging finance application will be classed as regulated when it is arranged against a property in which at least 40% of it is occupied as or in connection with a dwelling by the borrower.

Regulated bridging loan rates tend to be around the same as unregulated loans. It is worth taking note that as not all lenders are able to offer regulated loans, the number of options you have to choose from is reduced. This is more likely to cause an issue for you if you are looking for a high loan to value, or have significant adverse credit, but generally, the options available are still strong.

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Can I Use Bridging Finance To Release Equity From A Property That I Already Own?

When taking out a bridging loan, the funds are secured against a property like a standard mortgage and a charge is taken against the property. Bridging Finance is available as the main mortgage on a property, known as a first charge.

They can also be used to release further funds against a property that already has a mortgage secured against it. Where a current mortgage is registered against a property, a legal charge will be secured against the title of the property. When asking a lender to release more money against a property that already has a mortgage on it would result in a ‘second charge’ being registered against your property.

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How Flexible Are The Lenders?

As with any market in UK financial services, what constitutes a suitable loan varies a great deal from lender to lender. Different bridging finance lenders will take a wildly different view of the same application. Their view will depend on their criteria (the boxes you must tick in order to be eligible to borrow).

Some lenders offer comparatively low bridging loan rates, and as such tend to want to accept a very low risk when lending money. These types of lenders tend to want a lot more information. As such, they may be unsuitable for a particularly complex case that needs to move to completion quickly.

Others will accept a more relaxed view and tend to charge a slightly higher rate as a result. Flexibility will often depend upon pricing and the risk associated with the loan. Lenders will want to be compensated for the risk and will often increase rates for particularly complex or risky applications. This is due to the risk of the loan not being repaid in full. Although this may seem odd to some people, it is not actually too dissimilar to other types of mortgages. Residential mortgage lenders who accept adverse credit often charge a higher rate than those who only lend to lower risk clients.

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What Security Do I Have To Provide?

Bridging finance is generally secured against UK property. There are occasions where a lender will take additional security against another item of high value although this is very rare. Usually, either one or multiple properties would be the basis of the security for the loan.

A valuation, undertaken by a professional surveyor is instructed to ensure the lender is happy with the property. The report will also alert you and the lender to any issues and of course assign a value to the property. This is very much in line with any normal residential mortgage, although the report is generally completed in a shorter timescale.

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What Type Of Property Can I Borrow Against?

You are able to secure against almost any property. Residential and commercial property is both acceptable to a number of lenders across the market. Land with planning permission is also accepted by some lenders. A few will even consider land without planning permission, however, the maximum LTV is likely to be no higher than 60/65%.

Bridging Finance is often used to raise money against property that would be otherwise unsuitable security for a mortgage. Most standard mortgage lenders will not lend against a property that is considered inhabitable (a place unsuitable for living in). In this situation, a bridging loan would often be used to purchase the property and refurbish it, bringing it back up to a habitable standard. Once this is done, it would be suitable for refinancing onto a standard mortgage. Of course, this would be subject to meeting all of the other criteria.

When taking out a commercial bridging loan – a loan secured against commercial property, the lender will strongly consider the likely demand for the property. The lender’s ultimate route to repayment is the sale of the security property if all other routes fail. Because of the nature of commercial property and the number of different types of security, the only reliable indicator of security is how in demand the type of property is.

Across the country, different types of commercial property will see varying demand. As such, a property with a low level of likely demand will be at risk of either taking a long time to sell or may even sell for less than the expected value. As such, properties at risk of being difficult to sell are generally only considered for a lower loan to value.

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Can I Secure A Bridging Loan Against Non-UK Based Property?

Yes, we have lenders who will accept non-UK property as security. This is a bespoke method of funding and as such exact figures are not easy to quote as an average due to the number of locations and types of property.

It would be recommended that you talk to an experienced advisor takes place for any non-UK bridging loan. The market is complex and the products are very much bespoke, so finding the right lender could be time-consuming and difficult.

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Who Can Borrow Money Using A Bridging Loan?

The majority of bridging loans are taken out by individuals in either a sole name or joint names. If there are more than 2 applicants, lenders will often consider more, with 4 or more people regularly taking out loans in joint names.

In addition to borrowing personally, applications are often submitted using a company structure such as Ltd company or LLP. Where a Ltd company is used, a lender will generally want to take a personal guarantee. This is a guarantee from you personally that the debt will be repaid in full and on time. We are often asked about limited company bridging loans without a personal guarantee. Although most lenders insist, there are some who will negotiate around reducing the personal guarantee or even removing it altogether.

Non-resident individuals, foreign nationals and offshore companies are also able to take out bridging finance in the UK. There are several lenders who are happy to lend under these circumstances. Pension funds and trusts are also able to borrow, although this is more of a niche area and finding a willing lender would prove very difficult without using an expert.

Before talking to an expert about your needs, there are a few other factors to consider. Bridging loans are designed to be a route to raising money quickly. Consider these 3 points before applying for your loan:-

#1 Understand what is available to you & the fees and charges due from you – When looking to take out a bridging loan, especially for the first time, it is important that you understand how the loan works and what the likely costs are. The easiest way to do this is to discuss your circumstances with an experienced bridging loan broker who will help to point you in the right direction.

Their experience and knowledge of the market will help you to find the best deal quickly and understand how the loan will work and what is expected of you. Be wary of large broker fees, many, but not all brokers charge a fee on completion of the loan. Some brokers will charge an upfront fee for every application, called either an application fee or administration fee. This is generally non-refundable, meaning that if your application is unsuccessful you will have lost your money. As a result, the risk of this potential outcome should be taken into account before applying.

#2 Consider how you will repay your bridging loan BEFORE taking it out – Bridging loans are generally repaid through 1 of 3 methods:-

  1. Sale of the property.
  2. Refinance to longer term debt.
  3. Money that is due to you but has not yet been received.

Due to the short term of borrowing and the fact bridging loan rates can be high in comparison to other, longer-term types of lending, it is important you are able to pay to loan off. Whether you are looking to refinance onto a cheaper form of debt, sell the property or anticipate money coming to you, it is important you are as sure as possible of the timescales.

When selecting the term of your bridging loan, it is easy to go for the shortest possible term in an attempt to reduce the amount of interest paid or maximise the net loan. If the loan term ends and you are unable to pay it back as agreed you will be in default of the loan and may well be penalised financially.

It is advised that when banking on the sale of a property, you are cautious. Delays are common and in this situation, you could miss the loans end date through no fault of your own. In this situation, you would either have to extend the loan and roll up more interest or agree on an extension but pay the interest each month. The final option would be to refinance elsewhere, which would start the whole process from scratch.

Whichever option you choose is going to cost money and if you’re unable to roll up any more interest due to the loan to value, or other factors, the strain on your finances can be tough to take. A good advisor will help you to negate this risk by ensuring your strategy for repayment is realistic.

The same can be said when refinance or money due to you is the chosen repayment method. Both of these things can be delayed and cause the same situation as above to occur. If choosing to refinance, ensure the application you intend on submitting is realistic and likely to succeed. A lender will be able to give you an initial indication of their intention to lend. By taking this step, you will reduce the risk of failing to repay your bridging finance.

#3 Choosing the right solicitor – Choosing the right solicitor is crucial to ensuring the loan completes on time and without issue. A solicitor who is experienced in dealing with bridging loans will ensure the legal process runs smoothly and quickly.

Your solicitor will act as the sole liaison between the lender and yourself when it comes to your understanding of the legal terms of the loan and the ensuring the legal work is all completed to the lender’s satisfaction. With this in mind, it is advisable that your solicitor is well versed in dealing with bridging loans.

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Conclusion

The bridging finance market has a lot of different sides to it and lenders treat applications very differently. Although potential borrowers tend to focus on securing low bridging loan rates and hope to complete quickly, taking such a simplistic view is not always the most sensible approach.

You must consider the urgency of the loan, how quickly you have to complete and the consequences of missing this deadline. The overall cost is important, as is the lender’s requirements, the speed of completion and the lender’s likelihood of actually accepting the application.

Getting all the facts upfront can be difficult and a time-consuming. Using experienced and reliable experts in each area can greatly reduce the overall cost for you and take a lot of stress out of often high-pressure property transactions.

For more information on bridging loans, head over to our business loan product page. Alternatively, enquire online or speak to an advisor on 01922 620008.

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Purchase or refinance
including rebridging a bridge

Most properties accepted
including residential & commercial

Fast turnaround times
important for auction purchases

Refurbishment accepted
light, medium or heavy