A bridging loan is an interest-only, short-term loan secured by real estate. Typically, they are accessible up to 75% of the property’s value. The loans are available on residential, development, and commercial properties and can be taken out for up to 24 months (and sometimes on land).
The interest rates for bridging loans are either fixed or variable. These rates are expressed monthly rather than annually, and the borrower has several options for repaying the interest. They have the option of paying monthly, on a specified date, or at the conclusion of their term, when they repay the principal plus interest. Bridging loans typically come with a variety of fees in addition to the interest, which can dramatically raise the overall cost to borrowers. It’s critical that brokers explain these fees to their clients.
Bridging loans, both open and closed
Bridging loans are classified as either open or closed. An open bridge does not have a set repayment date (but it does have a maximum period), whereas a closed bridge does. Buyers whose property chain has gone down are likely to benefit from closed bridging loans. Perhaps their purchasers have backed out when negotiating the purchase of their new property. They can utilize the loan to bridge the gap between buying and selling their current home.
Landlords and developers who can’t guarantee time (though they’ll still need to offer a schedule of works) and need the loan for a longer duration typically use open bridging loans.
Bridging loans are classified as either regulated or unregulated.
Some bridging loans are regulated by law, while others are not. This is usually a regulated bridging loan if the borrower is buying a home to reside in (or for a family member to live in). The loan is normally unregulated if the borrower is buying or refinancing a property as an investment rather than a dwelling.
Bridging loans can be taken out as a first or second charge loan, though regulated bridging loans must only be taken out as a first charge loan.
Who is eligible for a bridging loan?
Homeowners, homebuyers, landlords, and property developers are all examples of borrowers. They all have one thing in common: a requirement for quick, short-term financing guaranteed by real estate. A bridging loan allows them some breathing room until they can sell a property, access other cash, or secure long-term financing.
Customers might benefit from a bridging loan in the following scenarios:
- They are purchasing a new home but have not yet sold their previous one.
- Homeowners in their eighties and nineties who desire to downsize before selling their current home
- The property they are purchasing must be completed quickly.
- They are purchasing an unmortgageable house with the intention of renovating it before renting it out or selling it.
- They need to raise money for their firm or to pay a tax bill.
- They are bidding on a house at an auction.
- They are divorcing and need to immediately release equity from their property in order to pay for the divorce settlement.
How do bridging loans work?
If you uncover a consumer who could benefit from a bridging loan, you must first gather all of their information, just as you would with any other factfinder. You can find a product through some specialized sourcing methods, a packager, or by contacting a reputable bridging lender.
The lender or packager will guide you through the procedure and advise you of the information and documentation they require before making a decision. This generally takes only a few days. The offer, like a mortgage, will be contingent on a valuation, which will be completed next. There is a legal process to follow, as with any secured loan, but it can be accelerated depending on the circumstances.
What is the maximum amount that clients can borrow?
Bridging loans are available in amounts ranging from £5,000 to £50 million or more. The amount that consumers can borrow is determined by the reason for the loan. The lender will consider the worth of the existing property, any equity or additional savings, and the chances of being able to refinance onto a mortgage if they need to bridge a gap between the purchase and sale of an existing property. This is to assist them in determining how much they can lend.
If your customer intends to purchase a home and then renovate it in order to resell it for a profit, the lender will calculate how much they may borrow based on the present value, the cost of improvements and the worth after the improvements have been made. They’ll want to know how the consumer intends to return the loan — in other words, what their exit strategy is. This is typically accomplished by selling a home, refinancing into a longer-term loan, or repaying the debt with funds from another source.
Advantages of bridging loans
The following are some of the most important advantages of a bridging loan:
- Bridging loans are simple to set up; you can have an agreement in a day or two and the funds in a week.
- Borrowers have access to significant sums of money that are secured by real estate.
- Time-sensitive buying possibilities are available to investors.
- Non-standard borrowers can get loans that are flexible.
- They’re available on out-of-the-ordinary houses.
Finding the ideal bridging loan
A bridging loan is available from a variety of lenders, ranging from large banks to smaller specialized lenders. Some exclusively offer regulated loans, while others only offer unregulated loans. Although the rate is clearly vital for any loan, keep in mind that bridging finance is typically used for a short period of time, thus other qualities may be just as important.
Fees can drastically affect the entire cost of the loan, so be sure you understand exactly what the consumer will pay upfront, at redemption, and if they are unable to pay. If a customer has special circumstances or a credit blip, they can still acquire a bridging loan, but their lender options will be limited. If speed is vital in the transaction, search for lenders who have quick response times.
Consider the lender’s service to both you and the borrower. Will they meet up with them to talk about their project? Is it possible to get a named point of contact? Bridging lenders frequently work directly with brokers as well as through specialist distributors who can help you locate the best deal for your customer from a variety of lenders. They are bridging finance professionals with strong ties with lenders, so they can be a viable alternative if you are unsure about advising in this sector.
Many lenders are willing to engage with brokers directly, even if they are new to bridging finance. We’ll walk you through the procedure step by step so you’ll know what to expect and when. Bridging finance is a versatile, quick, and simple option to obtain secured financing, and the industry is quite competitive. This is beneficial to both brokers and customers. Lenders and trade organizations are also working hard to educate brokers and customers about these products and ensuring that the industry becomes more professional, fair, and transparent.