How long does it take to arrange a bridging loan?
Speed really is the key for bridging lenders and they are fully geared up to work at lightning pace. WE have seen cases go to offer within 48 hours and complete a few days later, although the average turnaround time from application to completion would be 10-15 working days. 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.
How do bridging loans work?
The loan amount will depend on how much equity you have. Usually the maximum loan including interest is limited to 75% LTV. The loan would be secured on the property or across multiple properties to raise funding. The loan is then repaid when the property is sold or by raising finance through a regular mortgage application.
In the same way as a normal mortgage, you will need to put down a deposit (20-40%) and will pay interest – this is usually quoted as a monthly rate of interest, rather than annual. The lender will charge an arrangement fee (usually 1-2% of the loan amount) and there may also be early repayment charges. Bridging lenders are more open to properties which are in a poor state of repair, and they can act incredibly quickly.
The loan terms can be as short as one day, and usually up to a maximum of 18 months. Loan amounts generally start at around £50,000 and some lenders have no maximum.
Types of bridging loans
Closed bridging loans
Closed bridging loans have fixed repayment dates. These loans will usually be used if you are waiting for your property to sell.
Open bridging loans
Open bridging loans don’t have fixed repayment dates but you will usually need to pay it off within one year.
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.
Why get a bridging loan?
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
How much will a bridging loan cost?
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 0.7-1.5% 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 month’s 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.
What about broker fees?
By using a broker, they can look at the various bridging loan options available to you and can help you select the best one. Although there will be a broker fee, in the long run it can save you money.
Typical bridging loan 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 of using a bridging loan?
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.
What are the advantages of using a bridging loan?
The main advantage of applying for a bridging loan is that you can receive money quickly. You can also apply for a large sum of money and the lending criteria is fairly flexible.
Bridging loan alternatives
There are a number of alternative options to using bridging loans, they are:
- Remortgage: you can remortgage your current home or other investment property to release funding. If you want to search for remortgaging rates you can use our remortgaging calculator here.
- Second mortgage: You can consider getting a second mortgage. If you have thought of buying a property in the UK that you want to rent out, you can estimate your BTL rates by using our buy to let calculator.
- Secured loan: These would require monthly payments and are usually taken over a longer term.
- Personal loans: These would also require monthly payments and generally start from £1000 to £25,000. Sometimes up to £50,000 can be offered but you would need to offer security to lenders for amounts higher than this.
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 FCA 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 0345 345 6788