Bridging loans are a particular finance option which in particular is specialised in property payments. Effectively, even the word ‘bridge’ implies it is an easier way or a ‘gap-filling’ payment for the time between when you have to pay for something but have not yet received the money you need.
Bridging loans effectively allows you to buy a property with any money received from a loan, while you wait for your existing home to be sold and receive the funds from this. The reason bridging loans are mainly used for buying properties while the sale of another is pending, Is because a bridging loan is a secured loan.
In other words, you must have a moderately high-value asset to put against your application before being granted a bridging loan. This usually is something such as land or property. The good thing about this type of loan is it has an extremely varied range of how much money you can get.
Most lenders offer loans that can range from £20000 up to £10 million. (This of course heavily depends on your credit rating and the value and security of the property or land you are using to support your application and bridging loan.)
This also will have certain limitations to it. Such as You’ll typically only be allowed to borrow a maximum loan to value ratio of up to 75% of the value of the property- this is to avoid lenders giving out money that you may not be able to repay in the future.
What are Bridging Loans are Used for?
Bridging finance can be used for the purchase of nearly any kind of property (e.g. flat, bungalow, semi-detached house, detached house).
They can also be used for refurbishment costs, buying a property at auction, repossession prevention, property development, to solve business short term cash flow problems, to purchase: Shops, restaurants, bars, garages, parking spaces, offices, industrial units, holiday homes or land.
Regulated Bridging Loan vs Unregulated
Regulated loans are loans for a property that you are living in or going to live in. For regulated loans, it’s expected that you use a property or high-value asset as a form of security against your application.
They are regulated by the FCA (Financial Conduct Authority), ensuring extra protection for consumers.
As it is mainly for residential usage, regulated loans ensure to give customers a higher level of protection against any faulty lenders or finance brokers.
An unregulated business loan is effectively not for individual use- these are most commonly used for corporate properties; Ones that you are not going to live in or use for other exceptional circumstances.
With an unregulated bridging loan, you can only use a second charge (explained below). If you are taking out an unregulated loan, as these are more for commercial use, these are not protected and do not have a high level of supervision.
Although this may mean you have more flexibility, you will not get much guidance on your repayment terms and may not be given a substantial loan.
Open and Closed Bridging Finance
There are two different types of bridging loans you can get. In general, the main difference is the term in which you can take out your loan for
– Open bridge loan: This is a loan which has no set end date- meaning that they can be altered, or you can pay back anything you have borrowed whenever your funds become available to you. In general, bridging loans can last for up to a year, or sometimes even longer depending on how long it takes for you to receive any pending funds.
– Closed bridge loan: These have a fixed end date, and are based on when you’ll be able to pay back your funds- these are normally less flexible and are sometimes known as short-term bridging loans, which last just a few weeks or even months
The Costs Involved in a Bridging Loan
In general, open bridging loans are usually a lot more expensive to take out, as opposed to closed bridging loans (in terms of interest payments)- this Is because they’re much more flexible and can be paid back over a more extended time.
You will need to be the one to decide whether you wish to apply for an open loan or a closed loan. This will depend on factors such as; How much you want to borrow, how much your property is worth (that you can put against your loan), and how long you need to borrow for.
It would help if you also remembered that there are different categories of repayments surrounding bridging finance other than an open or closed bridge loan. There is also first and second charge bridging loans.
Effectively, when your application has been approved, and you take out your bridging loan, a ‘charge’ will be put on your property; This is to ensure that lenders will be repaid first, should you fail to repay your loans on time.
If you still have a mortgage on your property, you can still take out a bridging loan. However, this will be a second charge loan. This means that if you fail to meet repayments, your mortgage would be paid off first, as opposed to your lender.
It doesn’t matter whether you have a first or second charge loan, either one can cause your whole property to be seized as security if you are unable to pay.
Unlike most other mortgages and loans, bridging loans are priced monthly as opposed to annually- this is because most often, people take them out for a shorter period of time.
If you calculated the monthly rate over a period of a year, this would be the equivalent annual percentage rate (APR) of between 6.1% and 19.6% on top of your actual loan.
For reference, the interest fees per month are approximately between 0.5% and 1.5%. In addition to the high-interest rate you may have to pay, there are usually also set-up fees that you need to take into account- in total these are generally around 2% of the full loan you want to take out.
Here is a breakdown of the costs
- Monthly Interest
- Arrangement Fees
- Valuation costs
- Legal Fees
In general, anyone can apply for a bridging loan, so long as your credit history is complimentary, and you also have something such as property or land to use against your application as security.
Of course, as with most loans, you must be aged 18 years or over to be eligible for the loan.
In addition to this, your lender will need to view evidence of your income. As well as using a property or high-value asset as security for your loan, some lenders may also offer the option to use other personal possessions and assets as a security, if you are not purchasing a property with a large value.
This can include things such as cars, watches, antiques and artwork. In general, you can discuss any issues you may feel you can run into with your lender and discuss your options for what you can use as a security asset based on the amount of money you wish to borrow.
The Speed of The Application
Surprisingly, bridging loans are known to be approved very quickly compared to other, standard loans.
If you have correctly and accurately submitted an appropriate application, you should expect to receive approval and funding from between 5-14 days on average, from a typical lender.
However, this does depend on the lender- a cheaper lender will undertake a more thorough and in-depth application process- therefore, this can take anywhere between 14-21 days to get approved.
It would help if you understood, that while a bridging loan offers many different options and flexibility that can appeal to you, they may be a costly way to borrow money.
Therefore, ensure that you do not intend to take out this loan for a prolonged time.
Generally, bridging loans can be outstanding as it takes away the pressure of matching up settlement dates, such as the date you sell your home and receive your funds, to the date that you can pay for your new home.
It effectively allows you to sell your home without worrying about not being able to pay for your new one.