What is a bridging loan?
A bridging loan is essentially a short-term loan that is often arranged within a short time-frame and may be made to an individual or a company and secured against residential or commercial property. The defining characteristic is that it is a loan that bridges the gap to an exit, which is usually a refinance or a sale of the asset. While a bridging loan may be arranged much quicker than could be achieved through a traditional bank, most bridging finance companies still apply sensible and relatively conservative lending criteria. Usually such lenders are smaller nimble operations and specialise in doing all of the usual checks that a bank will do but without the encumbrance of bank bureaucracy.
The term of the loan can be as short as one day usually up to a maximum of 12 months. Loan amounts generally start at around £25,000 with no maximum. Unlike longer term lending a decision in principle can be arranged within a matter of hours with funds released within 72 hours if required.
Many individuals and businesses including professional landlords, property investors and developers all use bridging finance as part of their overall property funding strategy and can be arranged on a second charge basis.
The main reasons that property professionals use bridging loans are:
• To raise finance quickly
• To refurbish a property
• To finish a development
• To buy at auction
• To purchase property that would not secure a mortgage in its existing condition with a mainstream lender
• To bridge a shortfall of funding between buying and selling property when a sale is delayed
• To raise a deposit for purchasing property
Is it expensive?
Short-term finance is always more expensive than longer term lending; however, with more and more lenders entering the market it is competitively priced. The interest rate charged will depend very much on the proposition in question; however, current rates range from 0.8-1.5 per cent per month, potentially with even higher rates on more difficult propositions. However with many different lenders in the market there is a wide variety of charging structures so, in addition to the interest rate borrowers may pay a variety of other fees to the lender:
Lender’s arrangement fee
A fee is usually charged by the lender for providing the facility and is typically two per cent. In most instances it can be rolled up into the loan.
This is a fee which may be charged by the lender when the loan is repaid. If charged, it is typically one months interest and is charged irrespective of whether the loan has run to its full term or not.
A fee will usually be payable to the firm hired to survey the property.
As with a standard mortgage, bridging finance must be processed with all the usual legal requirements. However in many cases lenders have in-house lawyers and their costs may be included within the lender’s arrangement fees.
Typical lending criteria
Bridging financiers will look at the credit profile of the borrower, the strength of the asset, the exit strategy and require that the borrower has a sufficient upfront cash contribution.
What are the risks?
It is essential to establish a clear exit strategy to ensure the loan can be repaid (either via sale or remortgage) to avoid paying high penalty interest rates and possibly losing the property to repossession if the loan cannot be repaid. Borrowers should remember, just like a mortgage, the property may be at risk if the loan repayments are not kept up to date.
Choosing a lender
There are an increasing number of short term lenders entering the market and choosing one can be a minefield particularly as some types of bridging finance require a regulated lender. For landlords and property investors however, the type of bridging loan required is usually of the non-regulated variety so it is not essential to use an FSA registered lender. Many reputable bridging lenders are members of the Association of Short Term Lenders, a self-regulating body which operates a strict code of conduct to ensure that borrowers are treated fairly.
Bridging finance is such a specialist area, it is always advisable to seek the services of a specialist broker or independent financial adviser. They will take time to understand the property, its location, the borrower’s circumstances and funding requirements and be best placed to match these components with the most suitable lender.
If you would like to apply or discuss your requirements for short-term finance with one of our specialist consultants then please contact us on 0845 345 6788 or fill out our online enquiry form.