Bridging loans are short-term loans that are available for a number of purposes, but how do they work and are they as complicated as they might seem?
What are bridging loans used for?
Originally, bridging loans were simply to ‘bridge the gap’ between purchasing a new house and receiving funds from selling an existing house. They can still be used for this, but their use has broadened.
If you purchase property at below market prices because it needs refurbishing, a standard mortgage lender will probably not release mortgage money until the necessary building work has been completed. A bridging loan can be used to finance this work.
If you are the winning bidder at a property auction, you need to pay 10% of the purchase price to secure the property and the rest of the money within 28 days. If you have been approved for a mortgage on the property, however, it could take around five weeks for the funds to be available, meaning you will miss the purchase deadline. A bridging loan can be used to complete the purchase and repaid when mortgage funds are available.
Bridging finance is available for new build properties and to purchase development land. Many developers use it to fund home renovations before selling properties.
A business can use bridging loans to secure short-term capital. They can be used to buy workspaces or for other business reasons, including help during temporary cash flow issues, to purchase bulk stock or to buy equipment.
Who can apply for a bridging loan?
Both individuals and businesses can apply for a bridging loan. A business could be a sole trader, a partnership or a limited company. Landlords can use a bridging loan to purchase and improve buy-to-let property.
Open and closed
Bridging loans can be open or closed. A closed bridging loan has a fixed repayment date, whereas an open loan has no fixed repayment date, though the loan will have a maximum period and payment needs to be made before the end of the loan expiration date.
A typical use for a closed bridging loan is when contracts have been exchanged on the sale of an existing house and the completion date has been fixed. A bridging loan can then be used to purchase a new house and repaid from the proceeds of the existing house on the completion date.
The advantage of closed loans is that the interest rate will be lower than an open loan, but obviously, you need to be certain that funds will be available on the repayment date.
The exit strategy
Whatever type of bridging loan you choose, you need to provide documentary evidence of how and when you can repay the loan. This is known as the exit strategy, and a loan application will not be successful without a clearly defined one.
A borrower must have an asset to be used as security for the loan. This will usually be in the form of property, but for a business, the lender will consider alternative assets such as equipment, the value of outstanding invoices or equity in the company.
Interest is charged on a bridging loan, but there is no fixed interest rate; it is calculated based on various criteria including the size of the loan, type of security, whether a closed or open loan and the risk assessed by the lender.
Interest is often paid at the time of repaying the loan, through some borrowers can make arrangements to pay the interest monthly. On top of the interest will be an arrangement fee. The lender will need a valuation report prepared on the property used as security, for which the borrower must pay. On top of these charges are legal fees.
There are no penalty charges for repaying the loan early.
How much can be borrowed?
A bridging loan is usually for between 70% and 80% of the value of the property used as security – a figure known as Loan to Value or LTV. Most lenders have a minimum loan size of between £10,000 and £25,000, but there is no maximum loan amount. Businesses have been known to borrow millions of pounds provided there is sufficient security and funds available to repay the loan.
The length of a bridging loan
A bridging loan normally lasts for 12 months or less, though it is possible to negotiate a loan for a longer period.
The application process
The first part of applying for a bridging loan is to talk to Ascot Mortgages, where an expert bridging loan advisor can explain all the available options, then contact lenders for an initial loan offer. This can usually be made in less than a day.
The lender will specify what documents are needed to support the loan application. These can include proof of identity plus bank statements and pay slips that show your financial status. A credit check will probably be carried out. If you are applying for a business bridging loan, you will need to provide up-to-date company accounts.
A valuation of the property used as security will be undertaken before a firm loan offer will be made. Solicitors acting for the lender and the borrower are then instructed so that they can carry out the necessary legal work. If the borrower chooses their own solicitor, it helps if they have experience in bridging finance.
Soon afterwards funds are forwarded to the borrower’s solicitor.
How long does all this take?
It is possible to have funds available within 48 hours if the bridging loan is regarded as a priority case. In most circumstances, a bridging loans will take a few weeks, but usually less than the five weeks on average it takes for a standard mortgage to be completed.
The first step
If bridging finance is right for your borrowing needs, the first step is to talk to Ascot Mortgages. As expert briding finance brokers, we can find the best loan deals for your individual situation and assist you all through the application process.
Bridging loans are useful and flexible ways to raise short-term finance solution for individuals and businesses alike.