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Securing Your Bridging Loan
If you’re looking to purchase a property quickly, or to raise money for your next project, you should consider taking out a bridging loan. As the name suggests, bridging loans are the ideal tool to bridge a funding gap and they’re specifically designed to complete quickly.
With many new lenders entering the market, lending increasing and interest rates reducing, there’s never been a better time to take out a bridging loan.
Bridging Loan Rates
Bridging loan rates usually increase as the loan to value rises. We offer market leading rates across all property types, and can offer the following bridging finance rates against residential properties:
|Loan to Value||55%||65%||75%|
We can offer special low rate bridging loans from 0.37% per month, however these are only available for select applications.
Understanding Bridging Loan Interest & Charges
Use the below table to find out interest payable on a £100,000 bridging loan based on the interest rate charged. To calculate the costs of taking a bridging loan for a different amount, try our simple to use bridging loan calculator.
|Interest Rate||Monthly Interest|
In addition to the monthly interest costs, the chosen lender will usually charge and arrangement fee. Although the fee can usually be added to the loan, it should still be taken into account when calculating the cost of your loan.
The figures below are for a £100,000 loan.
|Arrangement Fee (%)||Arrangement Fee (£)|
The Pros and Cons of Bridging Loans
Bridging loans are a borrowing tool that are growing in popularity. Before taking out bridging finance, you should always be aware of both the pros and cons.
- Speed – Bridging loans can be arranged very quickly, with applications usually completing in 5-14 days, with some even completing on the day of application!
- Rates are falling – The bridging finance market is currently in a rate war. Bridging loan rates now start from 0.44%, with a rate of 0.37% available for select applications. The main drawback has historically been cost, although this is now becoming a definite pro!
- Flexibility – Bridging finance can be repaid early without penalty. When bridging loans are repaid early, any unused interest is usually rebated, saving you money.
- No monthly payments – Where interest is rolled up or deducted, there are no monthly payments to make. This can be a major help to cashflow during a refurbishment or marketing period.
- They allow lending against unmortgageable properties – Loans be used to purchase properties that you would otherwise be unable to borrow against.
- They add cost to a property transaction – No matter how cheap your bridging loan is, it will still cost something. This will add a cost to your property transaction that must be considered.
- Hidden charges – Comparing quotes from bridging loan lenders or brokers can be difficult. On top of the lender arrangement fee and interest rate, many lenders will charge additional ‘fund management’, ‘application’, ‘inspection’ or other fees. These can really add up and mean that the lowest rate isn’t always the best option. It’s important that you consider the total cost of the loan rather than just the headline figures when comparing products.
- Problems with exit – If you have problems with your method of repaying your bridging loan, this can cause major issues as the end of the loan approaches. If you are unable to repay the loan at the end of the term, you will have to refinance or service the loan, although there is no guarantee your lender would allow you to do either. This can put your property and credit profile at serious risk.
Bridging Loan Example
A client is purchasing a £600,000 investment property at auction, which needs refurbishment. They must raise £300,000 to complete the purchase. This will be secured using a 1st legal charge over the new property and is needed for 6 months.
At the end of the 6-month term, the client will refinance to a buy-to-let mortgage and rent out the property.
In this situation, we could raise the money using an unregulated bridging loan at a rate of 0.44% per month, with a 1% lender arrangement fee.
|0.44% interest (£1,320) x6 months||£7,920|
|1% Lender Arrangement Fee||£3,000|
The arrangement fee can be added to the loan and the monthly payments rolled into the loan, meaning there is nothing to pay until the loan is repaid.
The total to repay would be calculated by adding the total interest and arrangement fee to the loan. In this case the repayment amount is calculated as follows:
|Total to Repay||£310,920|
In this example, the total cost of repaying the loan would be £310,920, including the cost of interest and charges.
This results in a total cost of £10,920.
In addition to the above, the client would be expected to pay a valuation fee, which is usually paid upfront, once the application is approved in principle. In this example, the valuation fee would usually be somewhere between £900-£1,100.
If the cost was £1,100, this would bring the total cost of the loan up to £12,020.
Would a Bridging Loan be Right for Me?
Bridging loans can be used for a wide variety of reasons and can really save the day. Whether you’re looking to bridging loans to save a chain, exit a property development, downsize in retirement, or any of the other dozens of uses, we’ve got you covered.
There are four major reasons why bridging finance may be right for you:
- The property that you wish to raise money against is not mortgageable in its current condition
- Refurbishment is required on the property and traditional lenders will not accept it
- The funds are needed quicker than a traditional lender can provide them
- You are unable to raise money using a traditional mortgage
Whatever your goal, the key is to ensure you are taking out the loan for the right reason and your exit is viable. Taking a bridging loan with no viable exit will generally result in nothing but an expensive delay of the inevitable.
Our advisors work through the entire picture with you to ensure the product is right for you before proceeding. We will assess all your options and ensure a bridging loan is the most suitable product upfront.
Minimising the Risk Associated with Taking Out a Bridging Loan
The biggest risk in taking out a bridging loan is your exit route – the proposed method of repayment. As the interest payments are usually rolled into the loan, even if the interest is high, this often doesn’t cause an immediate problem.
Where monthly payments are rolled into the loan, the only real danger of default lies at the end of the term.
Ensuring the funds are in place to repay is crucial. Where repaying through refinance, this involves ensuring your new lender is happy to lend in principle and that a viable back up plan is in place.
Where sale of property is the proposed exit, always check with local agents to ensure you fully understand the market. An understanding of not only the likely sale price, but also the likely timescales for achieving such a price, and marketing periods of similar sold properties in the area.
By taking these additional steps, you will remove a large amount of the risk from taking out a bridging loan.
Repaying the Loan at the End of the Term
Bridging loans are issued on an interest-only basis. They work in much the same way as an interest-only mortgage, in that they must be repaid in a lump sum at the end of the term.
As the term ends, the lender will contact you to ensure your repayment method is on track and the loan will be repaid.
Finding the Right Bridging Loan Deal
As with other types of mortgage, there are lots of bridging loan products available. Some of the lowest bridging rates in the market compete with comparable mortgage or commercial mortgage rates.
Residential bridging loan rates are now starting from just 0.37% per month, which is just 4.44% per annum.
100% Bridging Loans – Borrow Up To 100% of The Purchase Price
100% bridging finance is a short-term loan against a property with no cash deposit used towards the purchase. There are two main types of funding this, using another property or asset as extra security or buying undervalue, at say 70% of the open market value (OMV).
If a portfolio of repossessed properties valued on the open market at £1m were available to buy at £700,000, 100% of the purchase price (£700,000) would be available, in theory. Alternatively, if a client wanted to buy a property for £50,000 to renovate and sell and has no available cash deposit, he could for example use his own house or a buy to let property as extra security for the loan, assuming there is enough equity.
100% bridging loans usually work out at 70 – 75% of the open market value of a property. Although called 100% bridging loans, you can’t borrow 100% of the open market value unless there is another asset to use as extra security, this could be another property or a luxury asset such as a classic car.
Compare Bridging Loans
With so many new bridging finance lenders entering the market, and the differences in their pricing and fees, it’s becoming more difficult to find the best deal. That’s why we’ve built our easy to use comparison tool, so you can easily read through the latest market-leading products and use our bridging loan calculator to work out your likely costs.
Remember that you shouldn’t base your decision on rate alone, all fees and charges must be considered. It’s often cheaper to choose a product with a higher interest rate if the fees are lower.
Whether you want to compare rates online and calculate your costs or talk through your circumstances with an experienced advisor, we’ve got you covered. ABC Finance Ltd. can help you through the entire process from start to finish, making the process as simple as it can possibly be.