Are you considering taking out a bridging loan to purchase a property or bridge a financial gap?
Bridging loans can be a useful tool for property investors and buyers, but it’s important to have a plan in place for repaying the loan.
By understanding how bridging loans work and implementing successful repayment strategies, you can ensure a smooth process and avoid potential financial difficulties.
Keep reading to learn about the ins and outs of bridging loans and strategies for repaying them successfully.
Bridging loans are short-term financial products that are designed to bridge the gap between purchasing a property and securing long-term financing. They are typically used by property investors, developers, and homebuyers in the UK.
The main purpose of a bridging loan is to provide quick access to funds when normal forms of financing, such as a traditional mortgage, are not yet available or take too long to secure. For example, when a property is being purchased at an auction, or when funds are needed to complete renovations on a property before it can be sold or refinanced.
While bridging loans can be a useful tool for property investors and buyers, it’s important to have a plan in place for repaying the loan.
This is because bridging loans typically have higher interest rates and fees compared to traditional mortgages. Therefore, it’s crucial to understand how bridging loans work and to implement successful repayment strategies to avoid potential financial difficulties.
How Bridging Loans Work
Bridge loans offer individuals and businesses a short-term solution for financing their immediate needs, whether it’s purchasing a new property or solving a cash-flow issue.
When money is tight due to slow sales or delayed payments, bridge loans can be highly beneficial for covering necessary expenses. There are numerous situations where bridge loans can prove invaluable:
Buying a property before selling your existing one – this helps ensure that you don’t miss out on the ideal home of your dreams due to long wait times between buying and selling.
Refinancing existing debt – bridge loans offer flexible solutions for consolidating high-interest debts until more favourable terms become available. This should be used with caution.
Buying at auction – Auctions are a great place to pick up a bargain property, and short term loans are popular because they can be arranged so quickly and work with uninhabitable houses.
Covering operational costs during times of financial instability – bridge loans allow businesses to pay key suppliers (or staff) at critical points in the year while they wait on payment from larger clients.
Launching a new product or service – obtaining a short-term loan allows companies to finance research and development expenses while they wait on an initial product launch to generate revenue.
Acquiring businesses – similarly, investing in acquisitions through bridge loans can give organisations the necessary capital to expand quickly without having to wait for long-term finance to be approved.
There are two types of bridging loans: open and closed. Open bridging loans have no set repayment date but must be paid off in full before the term expires. While closed bridging loans have a set date for repayment, usually within 12 months.
To be eligible for a bridging loan, you need to have a suitable property to put up for security and be able to demonstrate that you have the means to repay the loan. You will also need to provide a clear exit strategy, outlining how the loan will be repaid.
The application and approval process for a bridging loan is generally faster than that of a traditional mortgage. Once your application is approved, the funds will be released quickly, usually within a week or two.
Interest rates and fees for bridging loans are more expensive than those for traditional mortgages. This is because the lender is taking on more risk by providing a loan with no set repayment date. It’s important to factor in these additional costs when considering a bridging loan and when creating a repayment plan.
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.
Experience
Not having prior experience in the property industry does not necessarily disqualify you from obtaining a bridging loan, as there are lenders who are willing to work with first-time borrowers.
However, having experience, particularly with development projects, can be beneficial as it can demonstrate a track record of success to lenders, increasing the chances of securing good terms. Lenders may request evidence of past projects as proof of experience.
How much can you borrow?
The way that bridging loans are assessed is very different to a standard residential mortgage.
The lender isn’t really too bothered about your job or regular income and you can even get away with a few minor issues on your credit report as you can be approved with bad credit.
But the most important factors are the property and the method or plan for repayment. If one of these doesn’t suit the lender then they will probably decline the application or offer a lower amount.
If all of the above is OK, then generally bridge lenders will offer upto 75% of their valuation of the property.
Why is an exit strategy so important for a bridging loan?
An exit strategy, or a clear plan for repaying the loan, is a crucial factor that lenders consider when evaluating an applicant’s eligibility for a bridging loan. Since bridging loans are flexible and intended for short-term needs, lenders expect the loan to be repaid within the set time-frame.
Having a feasible exit strategy is vital for lenders to have confidence in their loan being repaid. Without a strong plan for repayment, it becomes difficult to secure bridging finance as it may indicate that the borrower may struggle to repay the loan.
The importance of an exit strategy cannot be overstated and a well thought out plan upon application will be appreciated by the lender.
Repayment Strategies
Without a clear plan for repaying the loan, most individuals will not be eligible for a bridging loan. Having a solid repayment plan, known as an exit strategy, is crucial for any bridging loan transaction. The more detailed and viable your plan is, the more favourable terms and interest rates you are likely to receive.
Selling the property
One of the most common ways to repay a bridging loan is by selling the property. This can be done as soon as the property is purchased or after renovations are completed. A variation on this strategy requires planning gain finance, enabling you to buy land without planning consent, and then selling when it is granted.
Selling another asset or property
If you have other properties or assets, these can be sold (or refinanced) to provide the money needed.
Refinancing
Another option is to refinance the bridging loan once the property has been purchased or renovations have been completed. This would involve a longer term mortgage, such as a residential mortgage, holiday let mortgage or perhaps a commercial mortgage or mixed-use mortgage.
If this happens within 6 months of purchasing a residential property, then the six month mortgage rule may cause some issues.
A finish and exit development loan is used to refinance the original bridging loan, providing more time and money, so that works can continue until they are completed.
Using personal savings or investments
Personal savings or investments can also be used to repay the bridging loan. However, this should be approached with caution as it can put personal finances at risk.
Each strategy has its own pros and cons, and it’s important to weigh these carefully before deciding on the best option for you.
Are bridging loans paid monthly?
No, in fact there are no monthly payments required.
The loan will be set up as interest only and the interest you get charged for borrowing the money will be added to the debt each day/month.
This does mean that you will be paying compound interest (interest on interest) after the first month, but most borrowers are grateful for the cashflow boost.
When it’s time to settle the loan, you will pay everything in one go:
- Amount borrowed
- Loan interest
- Any other charges or fees
Can you repay a bridging loan early?
There are several situations in which a bridging loan can be repaid early.
Many short-term loans are taken out to bridge the gap before more long-term financing is obtained. For example, if you are waiting for a mortgage application to be approved, a bridging loan may be used to purchase a property before mortgage funds are available. If the mortgage application process is completed sooner than expected, the loan can be repaid early.
Another scenario is when a bridge loan is used to purchase a new home while an existing home is still on the market. If the existing home sells sooner than expected, the bridging loan can be settled early.
What to do if you can’t repay
Default consequences
If you are unable to repay a bridging loan, like any mortgage, the lender can take possession of the property and sell it to recover the outstanding debt. This can lead to significant financial loss and damage to your credit score.
Communication with the lender
It’s important to communicate with the lender if you are experiencing financial difficulty or are unable to repay the loan. They may be able to offer a repayment plan or loan restructuring options. Sometimes the term can be extended to give you more time.
Repayment plans or loan restructuring
It’s important to consider alternatives such as repayment plans or loan restructuring before defaulting on the loan.
Alternative options
Selling the property or filing for bankruptcy may be alternatives options to explore.
Seek professional advice
It is important to seek professional financial advice when exploring options if you find yourself unable to repay the loan, and don’t ignore the problem as this will only make things worse.
Are bridging loans available throughout the UK?
For the most part, yes. In England and Wales, the criteria for obtaining a bridging loan are consistent across the country, although some lenders may have minimum loan or property value requirements that exclude the lower value properties.
In Scotland, the availability of bridging loans is more limited, but the rules and criteria for obtaining a loan are largely similar to those in England and Wales. However, the options for lenders may be further limited in certain regions of Scotland, especially those located away from the mainland.
