Everything You Need To Know:
Bridging Loans Explained What Is A Bridging Loan?
Bridging loans are a form of short-term funding, usually set up for a maximum term of 12 months. They are typically used to facilitate property purchase, lent to ‘bridge the gap’ between transactions and cover an interval period for borrowers. In recent years, the demand for bridging loans has surged, and as banks have grown reluctant to lend, more people are turning to FCA-regulated firms like 24hr Bridging Loan.
Why get one? Bridging Loans have a number of purposes and can be used to support both residential and commercial property transactions, renovation and development projects and auction purchases. The bridging market has seen a rise in popularity as people grow more confident in the housing market, giving investors the opportunity to renovate properties that could not be financed from a standard mortgage.
The History Of Bridging Finance
Bridging loans became extremely popular following the recession of 2008. In just three years, gross lending more than doubled from £0.8 billion in 2011 to £2.2 billion in 2014. At the same time as this, banks grew more reluctant to lend or grant mortgages, and this is when the bridging market truly expanded. The combination of new loan products, lenders, increased availability and lower pricing from competition saw bridging loans continue to grow as a valued short-term finance solution. Read More »
How Do Bridging Loans Differ To Mortgages?
The biggest different between bridging loans and mortgages is the duration period. Typically, you take out a mortgage for 25 years or more, but bridging loans are short-term finance generally taken out for a maximum of 12 months. Read More »
Mortgages are also concerned about the condition of the property in question. When it comes to bridging loans, the state of the property doesn’t usually matter, you can even take out a bridging loan for an un-mortgageable property. Unlike mortgages that take months to arrange, bridging loans can be accessed within just 72 hours.« Show Less
Who Can Use Bridging Loans?
Bridging Loans are available to any person or business with equity in their property or an available cash deposit. They are used by homeowners, builders, landlords, property developers and investors. Because bridging finance is a type of secured loan, you will need property, land or a high-value asset to qualify. Read More »
This short-term, flexible financing solution enables individuals to secure property deals that arise, when they would otherwise not have been able to do so. Opportunities can be taken advantage of and financial emergencies can be resolved, and whilst bridging loans can be more expensive than other loans, increased competition has reduced interest rates substantially in recent years.« Show Less
Find Out If Your Eligible What Are Bridging Loans Used For?
Useful to homeowners, property developers, investors and businesses, bridging loans have a number of different purposes. When finance is only required for a short period of time, bridging loans can provide the cheapest option for raising money, and are able to be secured on all types of property. In this section we’ll touch on some of the reasons you might choose to use this finance option.
Property Developers & Investors
- Renovation and development of property or land
- Take advantage of discounted investment opportunities
- Fixing dilapidated, un-mortgageable properties
- Refurbishment of properties in the student let and HMO market (HMO = house in multiple occupation)
- Using land or property to secure capital in a short time frame
- Take advantage of discounted investment opportunities
- Fix temporary cash flow issues and meet financial obligations requiring a short-term loan
- Rectify tax demands when the money can’t be accessed in time
Homeowners & Property Owners
- Largely used to help people purchase a new property before selling their existing home
- Expand current property portfolio
- Repairing a broken property chain if a buyer drops out
- Help to build a house
- Used predominantly by the elderly to downsize, can buy before the sale of their property
- Helps people complete transactions when buying property at an auction
- Can be used as a temporary cash flow cover
- Converting barns or similar buildings into residence
Refer to gov.uk for building regulations & planning and development guidance.
At 24hr Bridging Loan we will consider any applicant that is over the age of 18 and is a property owner. While some lenders tend to require income proof, they are more concerned with the amount of security an individual can offer as well as the feasibility of the planned exit route.
Because bridging loans are secured, as long as there is sufficient collateral, proof of income and credit history prove far less important. This means that even people and businesses with bad credit, CCJs, defaults and arrears can access bridging loans.
The ‘exit route’ is the plan you have in place to repay your bridging loan when the time comes to repay it. If you aren’t able to repay the loan it will be defaulted.
Top Tip: It’s a good idea to consider your exit route against the timescale you have available. It’s much better to borrow for a longer period than needed than to run out of time, as most bridging lenders won’t charge early repayment fees.
Types Of Bridging Loans What Are The Options?
At 24hr Bridging Loan we offer a variety of bridging loan products suited to different needs. There’s lots to consider when choosing a bridging loan - one of these considerations is whether to use an ‘open’ or ‘closed’ bridge, as this will impact both your repayments and the amount of interest you end up being charged.
Open Bridging Loans – With an open bridge, the borrower proposes an exit plan to repay their loan, but there is no definitive date set out. Open bridging loans don’t have a set repayment date and can be used by borrowers who are unsure when their expected future finance will become available. Read More »
Open bridging loans are harder to come by than closed ones, they provide greater flexibility but because of their additional risk and uncertainty, they are usually more expensive. For an open bridge, borrowers need to provide more evidence that they will be able to repay the loan in the near future in order to be granted access. « Show Less
Closed Bridging Loans – When it comes to closed bridging loans, the borrower has a set, fixed date when they know the loan will be repaid. A closed bridge can be used by people who know exactly when their funds will become available – for example, the borrower has already exchanged a sale on a property that will repay the loan and the completion date has been fixed. Read More »
Because closed bridging loans offer greater certainty, this type of loan has lower rates of interest and are more easily accepted by lenders. However, if borrowers do not manage to meet the agreed terms, financial penalties for missed payments can be significant. « Show Less
Why Choose Us? As bridging finance specialists, at 24hr Bridging Loan we sort out short-term property solutions, arranging bespoke lending terms to help you receive the money as quickly as possible!
When applying for a bridging loan there is a charge added to the property or valuable asset you are offering as security. This charge means that if you default, the lender can obtain the collateral to obtain repayment of your loan. The terms first charge and second charge determine the level of priority of debts if unable to pay the loan off.
First Charge Bridging Loans – Are given when it is the first and only time that the property has had borrowing secured against it. (i.e.: the primary mortgage)
Second Charge Bridging Loans – Are secured against property that already has an outstanding loan of mortgage listed. Second charge loans are considered second in priority compared to first charge loans. This is because with second charge loans, the lender will only be able to recover repayments when all pending liabilities of the first charge are recovered.
Due to the fact the risk is higher from the lender’s perspective, second charge bridging loans have higher interest rates and are harder to get approved for.
Residential Bridging Loans
Residential bridging loans are most commonly used when a person wants to purchase a new property but has not yet sold their existing property. This short-term finance enables the individual to take out a short-term loan that can be repaid when the old property is sold. Residential loans can also be used to repay debt, pay off home improvements or renovations, recover uninhabitable properties or purchase new investment.
Commercial Bridging Loans
Commercial bridging loans are used exclusively for transactions and developments involving commercial property. In order to qualify for this type of loan, a minimum of 40% of the secured property must be used for commercial purposes. This type of loans proves popular for entrepreneurs and startups buying new businesses and property premises, as they offer a variety of benefits.
Land Bridging Loans
Builders and developers find land bridging loans beneficial as they enable them to quickly arrange finance to develop sites fit for projects with potential. Land in popular prime development areas can sell quickly, so bridging loans can help prevent people from missing out on potential opportunities due to a lack of funds. There are lenders that will give loans on brownfield sites, commercial land, residential zoned areas and development property.
Property Auction Finance
There is normally a 28-day period that successful bidders have to purchase property at an auction. When it comes to property auctions, a successful bid is typically as legally binding as contracts in standard property transactions. There are strict financial penalties imposed on bidders that don’t manage to produce funds within the given timeframe.
After successfully bidding for a property, you can expect to pay a deposit equivalent to 10% of the purchase price for the property in question. Bridging loans can be used to pay this deposit, but bear in mind that the bridging lender will need to agree to this prior to the auction date.
Find out more about buying property at an auction.
Bridging Loan Regulations
Regulated bridging loans refer to loans secured by first or second charges against property which is, or will be occupied by the property owner. Regulated loans give homeowners protection through the Mortgage Code of Business rules (MCOB).
In contrast to this, unregulated bridging loans do not offer protection to the property owner. Unregulated bridging loans cover loans used for business purposes, the purchase of investment or commercial property.
In principle, unregulated bridging loans pose a higher risk to borrowers. But when applying for an unregulated loan through 24hr Bridging Loan, you can be sure that all advice and product offered is transparent, fair and clear.
Expert Advice: Always double check that your bridging loan lender is legitimate. All authorised lenders are registered with the Financial Conduct Authority, so check that they’re on the Financial Services Register before agreeing to the loan!
The Application Process How Do Bridging Loans Work?
In general, it can take a period of two weeks to one month to complete a bridging loan and access the required funds. While each application varies in complexity, at 24hr Bridging Loan we pride ourselves on offering quick access to funds and in most cases can arrange bridging loans that can be accessed in as little as 72 hours.
Step 1: Complete our 1-2 page online application form, providing a detailed summary of the deal, evidence of the available security and a clear exit plan.
Step 2: You will be offered an agreement stating the terms of the proposed bridging loan and the specifics of what is required to obtain the loan. A valuation of the property used as security will be made to further assess the loan amount and repayment terms.
Step 3: You review the lender’s terms and conditions, signing and returning the required documentation.
Step 4: The bridging loan amount will be sent directly to your account, so you could access the funds in as quick as 72 hours.
When applying for a loan through 24hr Bridging Loan, there are relevant documents that you will need to have to hand in order to complete the form. When it comes to submitting an application, the more details you are able to provide, the quicker we will be able to process your application.
As part of the application form you can expect to have to provide:
- Personal details
- Loan details including the purpose, amount required and repayment term period
- Bank account details
- Credit history
- Information about the main security you are offering (estimated valuation, purchase price, property type, list of property owners)
- Outstanding mortgage details – if applicable
- Any additional security being offered
Declaration and signature
Why is the valuation needed? Even if you have your own valuation on a property, the lender will want to get their own valuation done, which will probably come as part of the overall cost of your loan. Use Home Owners Alliance free instant property valuation tool as a starting point. It’s important not to be too optimistic, so to reduce the risk of a valuation impacting your chances of obtaining a loan, try to work with conservative numbers.
Why Choose Us? At 24hr Bridging Loan, we use 256-bit encryption to ensure that all your details are kept secure and remain 100% confidential. You can rest assured that your details will never be passed on to third parties without your permission.
Factors To Consider Before Applying Benefits & Drawbacks Of Bridging Loans
It’s important to understand the positives and the potential pitfalls of bridging loans, that way you can determine whether or not this type of short-term finance is right for you. In this section we’ll give you both the advantages and disadvantages, as well as some questions you should ask yourself before going ahead and applying.
Why Are Bridging Loans Beneficial?
Fast funding: When taking out bridging finance, the application process can be completed in a matter of minutes. Applying through 24hr Bridging Loan you can apply at anytime and you won’t need any follow-up phone calls or call backs. It is also possible to receive funds within 72 hours, which proves hugely beneficial for property purchase where quick access to additional funds is needed. Read More »
Prevents selling quickly: Taking out a bridging loan means you can avoid the hassle of having to sell quickly, potentially receiving a better price on your house by not being in a rush to agree to terms.
Don’t require monthly payments: Unlike mortgages, bridging loans don’t typically require monthly payments. This means that even if you have a low income, you can still qualify to receive a loan.
Can borrow large amounts: Bridging loans cater for extreme maximum loan sizes, with 24hr Bridging Loan you can borrow up to: ??
Flexible lending criteria: The primary concern for lenders is the amount of security being offered, so even with a poor credit score, low income or previous CCJs and arrears you could still be considered.
All property types considered: Generally bridging loans can be arranged on all types of building or land, no matter the condition they are in. This is different to mortgages, which can’t be used for land purchase and are generally only arranged on habitable property. « Show Less
What Are The Drawbacks Of Bridging Loans?
Expensive Option: Bridging loans can be an expensive short-term funding solution. With high interest rates and even higher fees, if you aren’t careful the cost of a bridging loan can add up. At 24hr Bridging Loan we recognise this and unlike most bridging loan brokers, we don’t charge any administration or arrangement fees. Read More »
Short repayment period: Payments are larger because you have to repay the loan faster than if it was a long-term loan. As a form of short-term finance, lenders are less likely to be flexible when it comes to late payments and additional fees and penalties will usually be charged. At 24hr Bridging Loan we make sure that all borrowers are aware of their bridging loan terms and offer free, helpful advice for keeping on top of payments. If you find yourself struggling with repayments, contact your lender as soon as possible. Citizen's Advice provides further detailed guidance for dealing with missed payments and arrears.
Potential reduced sale price of existing property: If you don’t manage to sell your property as quickly as you thought, you might have to reduce the price in order to pay off your bridging loan on time. It’s important to make sure the speed you anticipate to sell your collateral is realistic, even probable to prevent this from happening. « Show Less
Factors To Consider Before Applying For A Bridging Loan
As there are lots of different loan options on the market, it’s important to make an informed decision and to do this there are several questions you should ask yourself:
- How long do you need the money for?
- How long will it take you to get your current property ready to go on the market?
- Are you building a new home or buying an established property?
- Are you interested in buying residential property or property for investment?
- What is the average time on the market in your area? How long roughly will it take for your current home to sell?
- Do you have a strong exit plan and the means to repay the loan at the end of its term?
Top Tip: Always consider the total cost of the loan, rather than chasing the lowest interest rate. Make sure you ask for a breakdown of the total cost of taking out the loan before proceeding.
What Can Be Used As Security?
Bridging loans can be secured against lots of different properties including land, commercial, semi-commercial and residential. Before being approved, your proposed security will require a valuation, but the only stipulation beforehand is that the property is located in the UK.
When applying for a bridging loan, the property that it is being secured against is one of the most important factors. The amount you are able to borrow will correlate to the value of the security you’re offering, and can be used to purchase all types of property; including shops, commercial units, flats and apartments, land, rural property and light industrial.
Building & Renovating Properties:
- Barn conversions
- Building a house
- Refurbishment projects
- Housing developments
Properties to buy:
- Buy-to-let purchases
- Auction purchases when agreed pre-auction
- Quick completion property purchases
- New residential property
- New commercial property
- Investment / trading property
Raising Funds For Properties:
- Dilapidated, un-mortgageable properties (no bathroom, no kitchen etc.)
- Buying before ready to sell
- Short-term cash flow solutions
Understanding Interest Rates & Additional Fees Bridging Loan Rates & Costs
The amount of money you are able to borrow with a bridging loan depends entirely on the lender and the property or land that you are using as security. As a standard, most lenders will lend up to 70% of the total value, but some may go higher (75% - 80%).
Loan To Value (LTV)
The LTV is a ratio that lenders use to set how much money you will be able to borrow. Put simply it is the size of the loan in comparison with the property value.
For example: If you owned a property worth £100,000 and were looking to borrow £65,000, your bridging loan would have a 65% LTV.
The interest rate paid on bridging loans will depend on a number of different factors including:
- The level of risk to the lender
- The size of the loan in the LTV
- Whether the loan is open or closed bridging
- The type of security provided
- The lender (regulated lenders are more competitive than unregulated)
- In some cases, the credit score of the borrower
Because bridging loans are short-term, you can expect to be quoted interest rates on a monthly basis as opposed to an Annual Percentage Rate (APR).
With bridging loans, interest can be charged in three ways:
1. Monthly Interest Some bridging loans are structured so that you pay the interest each month and it isn’t added to the balance of the loan that you pay at the end of the term. Monthly interest suits people that have access to a solid cash flow for the loan period, and can ensure they will be able to meet the monthly payments.
2. Rolled Up / Deferred Interest There is also the option of paying all the interest at the end of the loan term when the original loan is repaid. Rolled up interest benefits borrowers that aren’t able to make the monthly payments. Whilst you don’t have to worry about a monthly expense, rolled up interest is compounded, which means the end repayment will be larger.
3. Retained Interest With bridging loans taken out on a retained interest basis, the borrower doesn’t have to make monthly payments. Instead, the interest is added to the balance of the loan and gets paid off automatically when it is due each month. The retained interest remains part of the sum of the loan, so interest will be charged. In other words, you are borrowing the interest payments on top of the actual loan.
Bridging loans are associated with high additional fees, so it’s important to be aware of the potential added fees and tread with caution. When taking out a bridging loan you could be charged:
- Arrangement / Facility Fees – the cost of setting up the loan (usually 1-2%)
- Broker Fees – pays the work of finding the loan (no broker fees are charged for 24hr Bridging Loan)
- Valuation Fees – the cost of surveyors for carrying out a valuation
- Legal Fees – a set rate covering the lenders solicitor fees
- Administration Fees – the cost of paperwork at the end of the loan
- Exit Fees – similar to the facility fee but is charged and added to the loan when it is redeemed
Why Choose Us? These standard fees will range from lender to lender, but at 24hr Bridging Loan, we guarantee no additional fees or costs, so you can rest assured that you aren’t being taken advantage of or ripped off when you take out a loan with us.