Briding Loans Explained
Typically, a bridging loan is a sum of money lent by a bank, lender or other financial institution, which is intended to cover an interval between two transactions.
For example, the purchase of one property before the selling of another.
Usually, bridging loans are short term loans, usually of 12 months or less.
Bridging loans can also be used for property development, or for purchasing a property at auction for renovation, where there is a clear intent to sell on the property after the work has been completed, or an alternative funding vehicle, such as a mortgage, is set to repay the bridging loan.
There is no doubt about it, bridging loans are an excellent solution to finding short term funding. However, rates can be quite high, and there are usually administration fees included. These costs need to be factored into any purchase or business forecast, and you should only take one out if you are confident that you will only need it for a short period of time.
How bridging loans work
Typically, there are two types of bridging loan, closed and open.
– With a closed bridging loan, there is fixed repayment date. You will normally get a closed loan if you have a clear exit strategy in place, i.e. you have exchanged contracts but are waiting for a property sale to complete.
– With an open loan, there is no fixed repayment date. However, it is likely that the lender will require repayment of the loan within one year.
Whichever type of loan you opt to take out, the lender will be looking to see evidence that there is a clear repayment strategy in place. This could be using the equity from a property sale, or taking out a mortgage to replace the bridging loan.
You will also need to provide the particulars of the development project, or property that you are planning to purchase, along with price details, as well as proof that you have another property to sell if relevant. You may also have to provide a back up plan in case your repayment strategy fails, i.e. if a sale falls through.
How to apply for a briding loan
Once you have decided that a bridging loan is the right way to go, there are a few things that you need to get in place before approaching a lender:-
- 1 – How much do you want to borrow
This might sound a little odd, but you need to consider the amount that you wish to borrow. When discussing options with a lender, it will greatly improve your chances of being granted a loan if you know with certainty the amount that you wish to borrow. If you change your mind during the application process, it can cause delays in getting the funds through.
2 – How quickly do you need the money?
One thing you need to know is that the sooner you require funding, the more it is going to cost. If you are in a position to wait 4 to 6 weeks, and you have a good credit record, then you are more likely to secure a better overall deal. If you are not able to wait this long, then you need to be prepared to pay a higher interest rate and higher fees. Typically, most bridging loans are completed within 4 weeks.
3 – What will you be offering for security?
In simple terms, the more you have to offer in terms of security, the higher you chances of success. If, however, you struggle with meeting the LTV requirements, then you may be required to provide more supporting documentation or be asked more questions. A lender needs to feel comfortable that they will be repaid.
Other things that you need for the application are as follows:-
- Proof of ID – A passport/driving licence, and two utility bills in your name (under 3 months old)
- Application Fee – this varies from lender to lender
- Arrangement Fee – This is typically between 1% and 3% of the amount borrowed. This is usually settled as part of the loan.
- Valuation Fee – (of security offered) This is not always required. If the amount that you are looking to borrow is small in comparison to the security you put up, then a valuation may not be required. However, if the lender does decide that a valuation is required to ascertain the value of the security offered, look to pay between £300 and £1000.
- Exit Fee – some lenders have an exit fee clause in their contracts, meaning that there will be a final fee to pay when the loan is repaid. This is often done as a way of loading some of the costs on to the end of the loan rather than lumping them all together at the start.
- Legal Fees – you may have to pay legal fees in some cases with some lenders. Here it pays to have all facts and figures as accurate as possible. If you are economical with the truth on certain things which creates more legal work, then you could pay dearly for it. Be warned!
- Solicitor Fees – you may be required to visit a solicitor to either verify ID documents or sign legal documents in front of them.
- Field Agent – In some cases, the lender may send out a Field Agent to meet you, collect copies of your bills etc and get you to sign the loan agreement.
Here at InterFinancial, our aim is to help you through the process as quickly and easily as possible, with minimum stress and hassle. We will put you in touch with the right finance provider to suit your requirements.