Bridging Loan FAQs
- How does a bridging loan work?
A bridging loan is a form of financing that is typically taken out against a property and for a short period of time. This type of credit can be used for many reasons such as to quickly securing the purchase of a property, to release equity in a property that you own and to cover your property purchase prior to obtaining a mortgage. If you release funds from a property you own, you are free to use the funds for any reason you like such as covering business cash flow issues or emergency bills.
The loan can be both first charge and second charge. A first charge means you have no other loans on the property; a second charge basis means the loan is in addition to your current lenders.
- Who can apply for bridging loans?
Almost anyone can apply for a bridging loan. This includes limited companies and limited liability partnerships, as well as individuals.
- Why would you take out a bridging loan?
Bridging loans are a type of short-term finance. As such, capital is typically available for 18 months. This can be extended by six months should you need the loan for longer. More extended loans of three years are available to investors who purchase HMO and buy-to-let properties.
Despite, or perhaps because of their short-term nature, bridging loans can be used for a variety of reasons, including:
To quickly complete a property purchase. Individuals and developers may be able to secure better deals if they can quickly complete a purchase. This may mean that they don’t yet have a mortgage in place or haven’t yet sold their previous home in order to fund the new purchase.
To release cash. Cash flow problems happen. But business owners and individuals often have a source of cash locked away in their property. A bridging loan can be used to help them access this equity in order to meet cash flow problems or to pay unexpected bills whilst a long-term solution is being established.
To fix a broken chain. Being stuck in a transaction chain when purchasing a property can be a pain. But it’s even worse when one transaction falls through and breaks the entire chain. When this happens, a bridging loan can be acquired to make sure that the sale completes through refinancing one of the houses in the chain. This allows contracts to be exchanged as normal.
To buy a property at auction. Buying a property at auction, means you need to pay fast. Payment usually must be made in under a month after the time of purchase. Acquiring traditional forms of financing, such as a mortgage, wouldn’t be achievable. But obtaining a bridging loan is possible. Doing so gives you funds to pay for the property and time to acquire a mortgage later on.
To buy an uninhabitable property. Not every home you purchase at auction will even be fit to obtain a mortgage against. Many auction properties are uninhabitable, something that makes a regular mortgage impossible. With a bridging loan, however, you can fund the purchase and allow time for work to be carried out to improve the property Once it is habitable, you can then arrange a mortgage or try to sell the property to repay the bridging loan.
To purchase land. Many developers use bridging loans to buy land requiring planning permission. Once this has been granted, the owner can refinance or sell after an improved valuation to pay back the loan.
To fund lease extensions. Traditional and high street lenders won’t lend against leases that fall below around sixty to eighty years. A bridging loan provider will do, however. That allows homebuyers to purchase at a much-reduced price, renew the lease and then refinance after an improved property valuation.
To develop or refurbish a property. A bridging loan is an excellent way for developers to fund property purchase and development costs. Once work has been completed, the property can either be resold or refinanced to pay off the bridging loan and release profit to the developer.
- What property can be used to secure a bridging loan?
Almost any kind of property can be used as security for a bridging loan. This includes residential property (and includes your current home), commercial properties and land (regardless of whether or not it has planning permission). In fact, the property doesn’t even have to be finished to obtain a bridging loan.
The full list of properties that a bridging loan can be secured against:
- Residential property
- Commercial property
- Residential developments
- Commercial development
- Residential investment property
- Commercial investment property
- Retail units
- Auction properties (fit for habitation or not)
- Do you need a particular employment status for a bridging loan?
It doesn’t matter what your employment status is and, frankly, bridging loan providers aren’t interested in your job. That’s because bridging loans are secured against a property. That being said, you will have to show sufficient earnings if you choose to pay interest on the loan on a monthly basis.
- For what length of time can I have a bridging loan?
Bridging loans are a type of short-term finance. Typically, they are for periods of up to 18 months, but they can be extended to two or even three years. Of course, you can have them for shorter than this, and terms of just one month are available. The best thing about them is that you pay interest only for the days you have the loan for. It would be a smart move to take out the loan for slightly longer than you think you need it, however. You don’t know what might happen and it’s good to have additional leeway if you need it. That’s because once the initial term ends, the lender will usually charge borrowers an additional arrangement fee on top of the additional interest.
- How much money can I borrow with a bridging loan?
Bridging lenders will require you to take out a minimum of £30,000, but there is no upper limit. The only restriction is whether your property matches the minimum loan to value requirements and is suitable for security. If this is the case, you can take out a bridging loan that runs into millions of pounds. Use our handy calculator to find out what your repayments on a loan will be.
- Can I find out if I’ll be accepted?
We are one of the country’s leading bridging loan brokers. We have a team of highly talented consultants who only work in the bridging loans and development finance sector. They will immediately be able to show you what kind of loan you will qualify and provide an example of the rates available to you.
- How long does it take to complete a loan application?
Bridging loan applications typically take between two to six weeks to complete. But it really hinges on the complex nature of each case. In some circumstances, we have been able to arrange loans within a week. That is an exception, however. The faster your solicitors are able to comply with our request for information, the quicker we can get things moving.
- When can I expect to receive the funds?
Funds are usually released on the same day as the loan completes. Your solicitor will receive the funds from your lender and then transfer them to your account.
- Will I have a credit check carried out against my name?
Credit checks will only be carried out when a formal application has been made, and you have agreed to terms with us and permitted us to make a search. We will only do so with your permission, however. Having poor credit should not pose a huge problem for a lot of lenders as the loans are secured against a property.
- How does the application process work?
The first thing we do is hold an initial consultation with you to discuss which type of bridging loan is most suitable for you. Once we have agreed on terms, we will conduct a search, presenting you with the terms of the most suitable loan and an outline of the costs. If you are happy to continue, the lender will issue you indicative terms which you will need to sign and then return with proof of identity. At this point, your lender will instruct their valuer and both parties will notify their respective solicitors. Assuming the valuation report mirrors the property’s anticipated value, the lender will carry out due diligence, complete the loan and release the funds.
- Do any fees need to be paid upfront?
We don’t charge upfront fees. The first time fees will be required is the point at which your lender instructs the valuer. This will be payment for the property valuation.
- What interest rates can I expect with bridging loans?
Interest rates will be tailored to the individual circumstances of the lender, the size of the loan compared to the value of your property and the kind of property that you offer as security. The very best rates will start at 0.4% per month (4.8% per annum). With these rates, you would be required to make a payment of £480 each month on a loan of £100,000.
- Can I repay a bridging loan early?
Absolutely. You are free to repay the bridging loan whenever you like over the agreed period. Remember, you only pay interest on the days you have the loan. That means interest is owed only on the days before your repayment. Our loan calculator can help you calculate the amount you owe according on your initial loan size.
- What is my exit route?
Before providing you with a loan, lenders will want to understand how you plan to exit the loan. Your exit route is how you will source the funds needed to pay off the loan. Typically, this will be a sale of your property against which you took out the loan. But it can also be securing an additional loan, such as a mortgage, or receiving funds from an additional source, like the sale of company shares or probate. Essentially, the lender wants to know that you will be able to pay off the loan in full at the end of the term.
- What is the cost of a valuation?
The costs of valuation are typically calculated as £100-£150 per £100,000 or the property’s total value. If the property has been valued at £500,000, the assessment will be charged at £500-£750. This will be payable as soon as you accept the initial offer and instruct the lender to carry out a valuation.
- What will solicitors costs be?
With bridging finance, you won’t just have to pay your own solicitor fees, you will also have to pay those of the lender. This amount will be agreed in advance with you by the lender and will have to be paid before solicitors are instructed. Alternatively, you can have your solicitors provide the lender’s solicitors with an undertaking that they will be paid upon completion. The good news is your legal fees are able to be deducted from your loan drawdown.
- Do you have to pay an arrangement fee?
Yes, virtually every lender charges an arrangement fee. Typically, this is between 1% and 2% of the value of the loan. You don’t need to pay it upfront, however. Instead, it is taken away from the loan advance.
- Are there exit fees?
No, bridging loan lenders don’t usually charge exit fees.
- How is interest calculated and charged?
Interest is charged monthly by bridging loan lenders. That means if the rate were 0.5% a month, it would mean a yearly rate of 6%. One of the best things about bridging loans is that interest is only paid on the days when the loan is in use. Following on with the same rate, if you took out a £100,000 loan for a year, it would result in £6000 interest being payable, equating to £500 a month.
Rolled up interest. The interest you pay on a bridging loan is commonly rolled up and prepaid. This means that your interest payments are automatically taken off the loan advance. So, following on from above, if you took out a £100,000 for a year at 0.5% per month, £6,000 would be deducted, and you would only get £94,000 as a loan. If you repay the loan early, say within six months, the lender would repay the £3000 you paid upfront for the term that you didn’t use.
Monthly interest. This is the usual way of paying other loans like a mortgage. You can also pay monthly interest on a bridging loan. So, carrying on the example, rather than pay the interest up front, you would pay £500 each month and receive the entire £100,000 loan. It is in this case when you would have to show the lender your income that is enough to pay the interest repayments.
- What loan-to-value rates are available?
As we have mentioned, bridging loans are available in first and in second charges, and this affects the loan to value ratio you can get. If you take out a first loan charge, you will be able to get a loan of up to 75% of your property’s value. That being said, if you use the equity in a property to acquire another, you’ll be able to get up to 100% loan-to-value. The same is true with second charges. You will typically be able to obtain a loan of up to 75% of the value of your property, but this can be increased to 100% if they several properties are involved.
- What if I have bad credit?
Because bridging lenders secure their loans against property, your credit history doesn’t matter as much as it does on a mortgage. In fact, we know several lenders who don’t have an issue with bad credit ratings. Some bridging loans are even available without going through credit inspection. This makes them a saviour to people with bad credit ratings who can’t obtain an appropriate mortgage. Interest rates will always be higher if you have bad credit, but loans will still be available to you.
- Do you need a certain amount of income for a bridging loan?
You do not need to have proof of income to secure a bridging loan if you roll up interest and prepay it. If you want to pay interest monthly, however, you will need to prove to the lender that you can cover monthly payments.
- What happens if I can’t pay back the loan at the end of the term?
When you secure a bridging finance loan, you agree a time period (usually under 12 month) by which you time you agree to repay the loan in full. If this isn’t possible, there are a couple of things you can do. The first is to extend your current loan. Doing so will usually require you to pay an arrangement fee. The second is to arrange an additional loan with another provider.
- How are bridging loans regulated?
A bridging loan may be regulated or unregulated. If you are intending to live, or are currently living in, the property against which the loan is secured, this will be considered a regulated loan. These are rigorously tested and are treated much more like a mortgage than other bridging loans and fall under the purview of the (FCA) Financial Conduct Authority.
If you aren’t living in the property, or if it is a commercial property, then the bridging loan is considered unregulated and is not held to the regulation.
- What kind of terms can I expect?
The terms of your bridging loan will refer to the terms which you agreed prior to going forward with the loan. This will include the period of the loan, the interest, whether it is rolled up or paid monthly, and the fees to be paid. All of these terms will depend on the loan to value ratio of the property your loan is being secured against and the type of that property.
- What is a typical interest rate on a bridging loan?
Interest rates on bridging loans can vary day to day. Over 100 lenders in the UK offer bridging loans. Some of these are high street lenders, but most are specialist lenders who receive funding from institutional investors and charge anything from about 0.37% and up.
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