Bridging loans are a popular option for those in need of short-term funds. But with any loan, the question always remains: are they worth it, especially if they’re expensive?
To explore this further, it’s important to consider why someone might take out a bridging loan and the associated costs involved. With this in mind, let’s take a closer look at the value of bridging loans and how cost can be kept under control.
For those seeking to bridge a financial gap, bridging loans have become increasingly popular due to their convenience and flexibility. By providing quick access to capital without any long-term commitment required – unlike most mortgages – they offer an attractive alternative for those who require money quickly and don’t want to be tied into long-term repayments.
What is a bridging loan and how does it work?
A bridging loan is a type of short-term finance used to cover an immediate financial need while longer-term financing is being arranged. It is always secured against property, allowing funds to be released quickly and effectively.
Bridging loans usually last between one and twelve months with higher interest rates applied than on traditional mortgages due to the shorter time frame and higher risk involved. The amount available from a bridging loan depends heavily on the value of the security offered and lenders may only offer up to 70% – 80% Loan To Value (LTV).
In order for a bridging loan to be approved, borrowers must provide a strong exit strategy, this is the method of repayment.
What are some common exit strategies for bridging loans?
Although usually more expensive than other forms of property financing, they can be useful during periods where time is of the essence in order to complete transactions before deadlines pass – such as purchase bidding wars or auction purchases.
Are bridging loans expensive?
It is true that a bridging loan tends to come with higher interest rates than a standard mortgage. However, there are many advantages associated with these types of finance which make them an attractive option for those needing short-term and flexible funding solutions.
Bridging loans can be used for a wide range of needs and in some cases, may be the only form of financing available to individuals looking to purchase or refinance property quickly.
When taking out a bridging loan, borrowers do not need to wait long for their funds as these loans can be approved within a few days whereas traditional loans may take several weeks or even months to process.
And while the rate of interest on bridging loans is typically higher than the mortgage rate, the loans are only setup for short terms and can be used to raise money for any purpose.
Overall, bridge loans are a more expensive but valuable option for those who need quick access to large amounts of money in order to meet tight deadlines. With this in mind, it is important that borrowers research lenders thoroughly before signing any contracts and ensure they understand all terms clearly before making any commitments.
What are the costs of a bridge loan?
When taking out a bridging loan, there are several costs to consider. These include:
-Interest Rate: Bridging loans are charged at a higher interest rate than a standard mortgage. The interest is also calculated monthly.
-Arrangement Fees: Most lenders will charge an arrangement fee which covers the administrative costs associated with setting up the loan agreement. Budget for 1-2% of the loan amount.
-Valuation Fees: This covers the cost of a valuation report for the property being offered for the loan .
-Legal Fees: A solicitor is required in order to confirm all legal aspects of the loan and to make the necessary entries with Land Registry.
-Exit Fees: These are not always charged but you should always check.
-Broker Fee: Your broker will charge a fee for arranging and advising on the bridge options.
Bridging Loans Guide
In this guide, we will provide an overview of bridging loans and offer some tips on how to get the best deal when looking for short term finance.
Bridging Loans
Bridging loans are a popular way to raise finance quickly and easily for a variety of purposes, including buying a new property before selling your old one, carrying out refurbishments, or even raising working capital for a business.
What affects the costs?
Lenders in this market will price each loan application on its own merits.
There are deals to be done, and the lenders are happy to take extra risks, but this all comes at a price.
INTEREST RATE
The interest rate charged will be expressed as a monthly percentage. ie 1% per month. It may or may not be linked to the Bank of England base rate but rates will change when the base rate is changed.
LOAN TO VALUE
The loan to value is a key metric in how much you are charged. LTV is a risk factor for a lender.
If you wish to borrow at their maximum of 75% LTV, then this will attract a higher monthly interest rate than a loan at 50%.
TYPE OF LOAN NEEDED
Bridging loans are so flexible that it’s almost impossible to list out every way that they could be used. But there are some uses that pose a lower risk to the lender and some that have a higher risk.
For example, a bridge against your main residence to enable you to purchase a holiday home will probably be priced quite keenly.
However, a bridge used to buy a building that then requires major development work is a lot riskier and the loan will cost more.
PROPERTY CONDITION
Bridging lenders famously lend on houses that you cannot live in. So called unmortgageable or uninhabitable properties. Typically these will have no kitchen/bathroom/ heating etc.
And while lenders are comfortable with this, they only lend against the valuation. And the valuation must take into account that the property cannot be lived in. This may mean a small increase in the interest rate but it will mean a large reduction in the property value and the available loan.
PERSONAL FINANCES
These short term loans do not require any monthly payments and so the lenders don’t worry too much about your own financial position or proving your income.
However, if you do have other assets and forms of wealth then the lender may be willing to price the loan more competitively, with the knowledge that you can afford to pay them back, even without the sale of the asset.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
What can a bridging loan be used for?
Bridging loans offer borrowers an opportunity to secure a new piece of property with speed and flexibility – allowing them to take advantage of attractive investments while managing liquidity more efficiently than other forms of finance.
Whether it’s buying at auction, funding home improvements, paying inheritance tax bills or simply taking advantage of a lucrative opportunity – a bridging loan can make it happen quickly and effectively.
Furthermore, they enable individuals to access equity from their current property by allowing them to make an initial payment on another property before selling their existing one.
In short, you can raise money for pretty much any reason.
If you are buying a commercial property there’s even a VAT Bridging Loan, which will fund the upfront VAT bill on the property.
How much can you borrow?
In money terms bridging loans are available from £25,000 to several million.
They are an asset driven form of debt, meaning that it is the valuation of the property that determines how much you can borrow. This is capped at a loan to value percentage of 75% for most lenders.
Unlike a typical mortgage, a short-term bridge lender is not so concerned with your income and affordability position. They are lending against the property as an asset and if you default they simply sell the asset!
This approach allows you to borrow against properties that are dilapidated or uninhabitable, although they would be valued as such.
This is risk based lending and so a loan at 75% LTV would be priced higher than an equivalent at 50% LTV.
A cross collateral bridge requires more than one property as security but can allow 100% funding in some cases.
How much can you borrow with a VAT bridging loan? – You might be pleasantly surprised at how generous some lenders can be.
How long does it take to get a bridging loan?
When it comes to the time required to secure a bridging loan, the process can be completed quickly and efficiently. The entire process, from application to approval, generally takes only a few weeks, depending on the complexity of the situation.
As such, bridging loans are ideal for borrowers in need of fast access to capital who don’t want to be bogged down by lengthy bureaucracy and paperwork. So if you’re looking for quick financing, a bridging loan could be just what you need.
How do you pay it back?
Unlike a normal mortgage, a bridging loan requires no monthly repayments.
Instead, the lender adds the interest charged onto your balance each month and you then repay everything at the end in one go.
Your plan of how to repay the loan is called your ‘exit strategy’ and typically will involve selling the asset or refinancing the asset with a long term mortgage (buy to let etc).
Are they worth it?
When it comes to bridging loans, it really depends on your situation and what you’re hoping to achieve.
While it’s true that bridging loans can be more expensive than other types of finance, they are often worth it if you require quick access to cash to solve an immediate problem. Additionally, many loan providers in the UK offer competitive rates and terms which make them a good option for those who need short-term finance but do not want to be tied into long-term repayment plans.
Ultimately, if the cost of a bridging loan is within your budget then it may be worth considering as it could enable you to quickly acquire the necessary funds or secure a better financial position.
As with all lending products, it is a good idea to weigh up your options before proceeding, and compare the cost of each option.
Although an ‘expensive’ bridging loan may cost you 1% per month, if the funding allows you to acquire a property below market value, because you can complete quickly, it is likely to be worth it. You need to consider the opportunity cost of not being able to raise the finance.
FREQUENTLY ASKED QUESTIONS
Can you pay off a bridging loan early?
Yes, and this should save you some interest charges.
How much deposit do I need?
Lenders generally go up to 75% LTV so you will need a 25% deposit.
Which banks offer bridging loans?
You can’t really get a bridging loan from a high street lender. There are many specialist providers that are only accessible by using a bridging loan broker.
Do I have to use a broker?
It is possible to find a lender and then apply direct. But in doing this you won’t be able to compare deals from all those available, meaning that your loan could be a lot more expensive than it needs to be.
Can you get one with bad credit?
Yes, a small amount of bad credit is normally OK. Applications are assessed individually so it will depend on the LTV, exit strategy and property as well.
How long do they last?
When applying you can choose from just a few months up to 24 months, a few lenders will offer 36 months.
