Bridging finance better know as a Bridging Loan is the finance type that is often used in order to resolve cash flow issues that can occur when you buy a business or property. An example of this may be when you have finally found the home you have your heart set on, but the sale on your existing home has fallen through. You can choose to use bridging finance to secure your purchase on the new home straight away.
To put it into simple terms, bridging loans are defined as short-term mortgages. In the similar way in which the standard mortgage works, the bridging loan will be “secured” against your home. This means if you run into a financial issue and you start to default on your mortgage payments, your lender will then take the home back in order to recoup their money.
The bridging loan is more costly when compared to a standard mortgage as the interest will be charged at higher rates. In addition, you can expect an “arrangement fee” that covers administrative costs involved in releasing funds to you as quickly as possible. In the ideal world, bridging finance should be an option when you are very certain that you will be able to repay this loan back over a short period of time. Bridging loans can also be used by individuals that struggle to secure the standard mortgage loan. This includes people with a credit history that is poor or self-employed individuals.
When Do You Need it?
The bridging loan is the ideal choice for individuals in search of immediate funds in order to successfully make a purchase on a property. The name bridging loan has to do with that they assist in bridging a gap between a sale of an existing property and buying a new property. It can be extremely frustrating to miss the opportunity of your dream home just because your existing home is unsold.
This is when a bridging loan can offer you with a solution. This loan offers accessibility to immediate funds in the way of using your existing home as collateral. The bridging loans may be associated with a higher interest rate, but because these loans are set over a shorter time frame, the repayments are still comparably good in their value.
How It Works
Bridging finance is a classified as a type of short-term loan that provides the borrower with a set time frame, before refinancing their loan. In simple terms, it offers a “bridge” to the borrower. While the funds are usually released within a few short days when it comes to bridging finance, the lender will follow the same method on the circumstances of the borrower like the mainstream mortgage providers.
The bridging loan is another word for a short-term mortgage and similar to mortgages, this loan is also “secured” against property. When you default on this type of loan, the lender has the right to take back the property in order to recoup their money. The bridging loan is typically secured on an existing home, the next home, or in some cases both.
In order to be accepted for this type of loan will be dependent on a valuation of the property. This involves the lender obtaining a professional valuation in order to determine the actual worth of the property. Lenders will typically advance a loan up to 65% of the value of the property, less any of the existing mortgages.
An example of this:
When your property is valued at £100,000 the lender can advance up to an amount of £65,000. Standard bridging loans can range from £25,000 up to £500,000.
Two Types Of Bridging Loans
The Closed Bridge
These type of bridging loans is already predefined and will have an “exit clause” that involves that you need to repay this loan, before an actual “bridging loan” can be taken out.
An example of the closed bridge usually occurs when the borrow is offered finance from the mainstream lender before they obtain bridging finance. In these situations, the borrower could require a bridging loan in order to buy another property fast or for a business opportunity or a buy-to-let opportunity by avoiding having to wait for a mortgage to be finalized.
The closed bridge loans are often utilized at auctions. For example, a borrower has agreed on a mortgage with a lender but is still waiting for the advancement of these funds. The borrower can use the bridging in order to settle a property transaction and avoid penalties that can come about when the transaction has not been paid by the stipulated settlement date.
The Open Bridge
This type of bridging loan occurs when a borrower is not able to come up with an exit. The lenders will typically expect that the borrower will have an “exit strategy” when it comes to repaying their loan. When it comes to open-bridging loans the “exit strategy” will not be stated.
An example of an open-bridge occurs when a borrower will need to settle on a transaction within a short time frame and they have not had the chance in order to arrange standard funding for this refinance. In these circumstances, the borrower usually has a relationship that is already established with their bank that are likely to give the borrower the loan, but the application for this finance has not been submitted yet.
Normally, the bridging loans will typically achieve up to 80% loan-to-valuation. But, this can reach 100%, when you have additional security or you are buying a property that is less than the market value. There is also typically a once-off facility fee and interest rates of between 1% to 2% each month.
Unlike the standard loans, bridging loans are obtainable even when you have a less than perfect credit history. The general rule when it comes to bridging loans is that the lenders will look at your affordability. The companies that provide bridging loans won’t lend on the basis of your income multiples but rather see the amount you are able to afford when it comes to paying back the loan.
The Costs Involved
Bridging finance will be charge according to the pre-agreed “set” interest rate. For example, if you were to borrow an amount of £100,000 at 1.25% each month, your repayment each month will be set at £1,250 each month. It is always advisable to do your home work in order to arrive at a fair deal and always check on the markets to make sure you are not over paying when it comes to the interest rates. If you have minimal tax records or you happen to be self-employed, you are regarded as a higher risk to the lenders, which means you will typically be charged with higher interest rates.
When you apply for bridging finance, there are often additional costs that you may need to budget for. These may include:
The Arrangement Fee
This is the fee that can be charged by a broker or third party that is used in order to initiate this bridging finance. This amount is typically paid from the proceeds of the loan as soon as the transaction is completed.
The Completion Fee
This fee will typically be charged by a lender when the bridging-finance process is completed. It will typically be calculated as a percentage of this loan that is used to cover administrative costs.
The Deposit Of Good Faith
This deposit is usually returned to you once you agree to take the loan on offer. If you change your mind once the application process is already in place, then these funds will be retained by your lender in order to cover costs involved in the administration.
The Surveyors Fee
The fee is paid over to a company that was hired in order to survey your property or the property you are interesting in buying.
Similar to the mainstream mortgages, the bridging loan is a process with legal requirements. These fees are paid in order to cover costs associated with the solicitor’s fees.
Pros And Cons
Before you decide to apply for bridging finance it is essential to know about the pros and the cons. It is also important that you have a Plan B. For example, in worst case scenarios, when your home won’t sell on the market, are you able to rent the home out or put it up for auction? You always will need a good exit strategy when it comes to bridging loans.
Bridging Loan Points
The bridging loans are usually set up fast. For example, it is possible to arrange finance within a few hours.
• Payment Levels
If you have chosen to retain the interest, you won’t have to pay back the interest until the entire loan has been repaid.
The fees for the bridging loans are often pricey. You will be required to pay a fee of around 1.5% that is deducted from the loan along with broker fees, legal and valuation fees. Keep these fees in mind when it comes to working out your overall budget.