The Ins and Outs of Bridging Loans
Bridging finance, also known as short-term finance, is an alternative to conventional mortgage financing that has become increasingly popular in the last few years. If you are aware of these types of loans but aren’t sure exactly how they work and when they are appropriate, this handy guide is here to help.
As well as providing an overview of what bridging finance is and in which situations it’s most beneficial, it also explains what to expect when applying for one, how quickly a decision can be reached and the finer points of repayment. You can even take advantage of our easy-to-use bridging loans calculator to help you get an idea of the terms and repayment schedule of a loan for your unique circumstances, equipping you with all of the information necessary to make an informed decision.
What is bridging finance?
Bridging finance takes the form of a short-term loan, providing those in need of large sums of money in a short timeframe with a financing option. Since the annual interest rate attached to a bridging loan is generally higher than those offered by high-street banks and other traditional lenders, they are not appropriate for long-term repayment schedules. Normally, bridging loans are repaid over a 12-month schedule or less, although on occasion they can last up to two years.
When are bridging loans appropriate?
Bridging loans have been a useful component of a property developer’s toolkit for many years, affording them with the ability to act quickly and take advantage of investment opportunities as and when they come along. Access to a large amount of capital at short notice equips an investor with leverage when negotiating with a seller and gives them an advantage against other buyers.
One example of where bridging loans are particularly effective is at a property auction. Given that most property transactions which take place in an auction house must be completed within 28 days of the auction itself, successful bidders must come up with the necessary funds or risk losing all or part of the deposit they put down on the property at the time of bidding. In this scenario, a bridging loan could be the ideal option for an investor who wishes to bid without worrying about whether they will be able to access the requisite funds to complete the transaction.
Of course, there are plenty of other situations where bridging finance makes sense, including:
For the refurbishment or redevelopment of a piece of property or parcel of land
For the purchase of a new home without finalising the sale of your previous one
For the construction of a property which will be sold upon the completion of the works
For those who require upfront cash to pay off unexpected business outgoings or tax bills
For the establishment of a new start-up business
For those whose pension payments have not yet come through
How quickly will I receive a decision on my bridging loan application?
As long as you make your enquiry to us within the normal working week, we can generally give you an initial decision with minutes. We’ll then follow this up with an email confirmation within the hour, at which point you can decide whether or not you wish to proceed with the process further. If you do, we’ll send you our finance pack which contains all of the details we will require to file an application (including any necessary documentation we need from you). Once we have all of the information we need, we’ll then handle your application process from start to finish.
While some websites may claim they can grant you access to the funds from bridging finance within a matter of hours, the truth is that a bridging loan must follow all of the same legal procedures as a conventional mortgage. As such, it’s unlikely that those websites can actually follow through on their promise, but you can rest assured we will do everything we can to expedite the process as much as possible. In a best-case scenario, it’s possible to receive the funds in your account five working days afterwards, however, in reality, it may take longer to arrive at this point.
As a general rule of thumb, you should expect an initial decision on whether you’re eligible for a bridging loan with 48 hours. A formal offer will follow within a maximum of two weeks, while the funds will arrive in your account between two and four weeks after lodging the initial enquiry. Of course, each case is different, so the exact amount of time it will take to process your application will vary depending upon your unique circumstances.
How can I ensure my application is successful?
In the wake of the economic crisis of 2007, all financial providers are now exercising far more caution when approving loan applications than they once might have done. This means that there is no guarantee your application will be successful, but the number one criteria upon which any bridging finance provide focus will be your ability to repay the loan.
With that in mind, you can give your application the best chance of success by having a clear exit strategy for how and when you plan to settle the balance. Most exit strategies take one of two routes: either by selling the property and using the equity to repay the loan, or else refinancing the property onto another product (such as a conventional mortgage) for a higher value than the loan itself.
If you are able to provide evidence of a clear exit strategy and the security to guarantee your solvency, it’s highly likely that a lender will approve your application. On the other hand, if they are not satisfied by either your exit strategy or the security you provide, they will more than likely reject your application.
How much can I expect to borrow? Try our Bridging Loan Calculator
The amount of money available for you to borrow will depend upon a number of factors, with the assets you intend to use as security chief among them. Those looking to secure a bridging loan that is regulated by the Financial Conduct Authority (FCA) against their home address can generally expect to receive a loan-to-value (LTV) ration of up to 70%. Those wishing to use a property in which they do not reside as security can access an LTV of between 75% and 80%.
Those calculations are based on the total loan amount, including all attendant interest charges and fees. The actual net amount that you can access will generally be between 5% and 10% less than this. Depending upon your situation, you may wish to pay the interest monthly throughout the duration of the loan’s term, or else wait until the expiration of the deal to pay it all in one lump sum.
For some people, it might be beneficial to put up two or more properties as security for the bridging loan, since products with a lower LTV are generally more affordable and offer more preferential rates of interest than those with a higher LTV.
Why not try our Bridging Loan Calculator to get an idea of how much you can borrow and the indicitave rates and costs for your Bridging Loan.
How long do bridging finance arrangements last for?
In general, most bridging loans are taken out over a period of six months, since this usually gives the borrower enough time to realise an alternative source of funding or move the arrangement onto a more conventional mortgage product. However, the specific terms of the deal you broker may vary depending upon your circumstances and it is not unheard of for bridging loans to last for anywhere as little as 24 hours to anywhere as long as 24 months.
What if I find myself incapable of repaying the bridging loan at the expiration of the term?
As short-term financing options, bridging loans are always intended to be paid off in full within the timeframe agreed upon at the outset. However, even the most responsible borrowers can suffer unforeseen obstacles to repayment. The bridging loan provider will normally contact you around three months before the expiration of the term, in order to check that you are still on track to make the payment in full.
If, for whatever reason, you find yourself unable to satisfy the terms of the arrangement, the lender may advise alternative courses of action (such as lowering the asking price for a property you wish to sell) in order to free up cash and avoid defaulting on the loan. As long as you are fully transparent about any complications which arise and keep your bridging loan provider abreast of the situation, it’s highly unlikely that they will look to recoup their losses by selling your assets.
Use our bridging loan calculator
We understand that while many people may be interested in learning more about bridging loans and whether such an avenue of finance is applicable to their situation, the commitments of everyday life can make sit-down meetings or even phone calls inconvenient. That’s why we’ve created a bridging loan calculator, which allows you to see at a glance the type of loan suitable for your needs, as well as giving you an idea of the amount you can borrow and the repayment structure.
After you have used the calculator to work out the amount you wish to borrow, we’ll contact you via email to take things to the next stage. Alternatively, you can get in touch with one of our advisors directly by giving us a call on 0330 304 3040 during normal working hours. We’re always on hand to help you navigate the bridging loan application process at every step of the journey.
The benefits of our bridging loan calculator
By using our bridging loan calculator, you can get an instant quote online and gain a better understanding of the options available to you. Here are a handful of the reasons why it’s a good idea to do so before progressing any further with your decision:
Complete transparency. Our bridging loan calculator has been designed with you in mind, which means it automatically highlights all of the charges, fees and interest rates associated with this type of finance. As such, you won’t suffer any nasty surprises when it comes to completing your application.
An understanding of your repayment responsibilities. Our bridging loan calculator is not only able to give you a breakdown of the amount you can expect to borrow, but also a picture of how long the terms of the loan will last and what your repayment structure will look like. This helps you prepare in advance of committing to any deal.
No credit or income checks. People suffering from a poor credit rating or without a demonstrable source of income – including the unemployed – may find it difficult to secure lending from a traditional finance provider. Bridging loan applications are always assessed on a case-by-case basis and more emphasis is placed upon the security of the borrower than their credit history or current income.
Though they may not be the preferred option for every situation, bridging loans can represent the best approach for many people to whom conventional mortgages are unavailable or unattractive. Our bridging loan calculator can equip you with the knowledge you need to get the ball rolling on your application and bring your dreams one step closer to reality. Give it a go today and if you need any help using it please don't hesitate to contact us!
Try our Residential & Commercial Bridging Loan Calculator now!