Bridging loans: Common terms & definitions
A charge, or legal charge is the tool used for a lender to enforce their rights to a property and is registered at HM Land Registry. When a charge is registered against a property, it will show up in a Land Registry search of the property, alerting other potential lenders to your outstanding debt.
It’s not uncommon for a property to have more than one legal charge outstanding against it.
First charge bridging loans
A bridging loan is considered to have first charge where there are no other charges outstanding against the property.
Second charge bridging loans
Second charge bridging loans are short-term, property-backed loans that are secured against properties that already have outstanding debt secured against them. They are called second charges are they are placed behind your main lender in priority.
Heavy refurbishment is the name given to a significant refurbishment of a property. Different lenders have slightly different definitions of the term, but generally, some structural works would be required for a bridging loan to fall into heavy refurbishment.
The interest rates charged tend to be slightly higher for heavy refurbishment loans.
Interest only is a method of loan repayment, whereby the borrower is only required to pay the interest each month. The capital is then subsequently repaid in full at the end of the loan term, or earlier, if the borrower is able.
Regulated bridging loans
Unregulated bridging loans
The gross loan is the total loan, including any fees, charges and interest that has been added to the loan. This is the total amount owed to the lender.
A credit search is a check carried out by the lender. It allows them to look at your previous borrowing and whether you made the payments on time and in full.
A soft search is a credit search which is undertaken without leaving a ‘footprint’ on your credit file. This means the credit search is not visible to other lenders if they credit search you. This is important as too many credit searches in a short time can reduce your credit score.
Debt consolidation means using a new loan to repay other outstanding debts and is often used to reduce either the interest paid or the monthly repayments.
Loan to Value (LTV)
LTV, or loan to value is a term used to express the loan amount as a percentage of the property value. LTV can be calculated by dividing the loan amount by the property value and multiplying by 100.
A guarantor is a person who guarantees to pay another person’s loan for them in the event of default. A guarantor of good standing can sometimes be used to strengthen a loan that would otherwise not be acceptable to the lender.
A SIPP (self-invested personal pension) is a type of pension scheme. SIPPs allow the owner to make their own investment decisions, which can include investing in property. SIPPs can even take out borrowing, within certain, tightly controlled rules.
A SSAS (Small Self-Administered Scheme) is a type of UK occupational pension scheme.
A personal guarantee is often used in applications for a Ltd company and is a promise to repay the loan, should the company default. A personal guarantee ensures the individual is personally liable for the debt in the event of default.
Security, in terms of bridging loans, refers to the property or land which is offered to the lender to ensure they can get their money back in the event of default.
The borrowing term is the duration of the loan. Most bridging loans have terms between 1-12 months, meaning the loan must be repaid at the end of that period. Some lenders are willing to offer a term of up to 36 months, whilst others will offer an open-ended term.
Conveyancing in bridging finance is the process undertaken to carry out legal checks and execute the mortgage deed, allowing the loan to be drawn down.
Decision in principle
A decision in principle, or agreement in principle is an arrangement to lend based on an initial assessment of your details and the overall application. A decision in principle will usually either have full lending terms documented on it, or will be supported by a separate document with such details.
Draw down means many different things in different areas of financial services. In terms of bridging loans, draw down refers to the point at which funds are released by the lender and the money sent to your solicitor for completion of the loan.
Equity refers to the amount of value held in a property that belongs to the owners, debt free. Equity can be calculated by deducting the mortgage amount from the value of the property.
Repossession is the action of taking back a property in the event of failure to repay the loan as agreed.
Adverse credit is a term used to describe failure to make certain payments in the past. Adverse credit shows on a person’s credit file usually as either missed payments, defaults, CCJs, bankruptcy or an IVA.
APR – Annual Percentage Rate
APR (annual percentage rate) is the annual interest rate charged for borrowing. It includes other fees and costs to give a ‘true cost of credit’.
Arrears are payments that have failed to be paid when due.