Are you currently on the lookout for short-term property financing options? Perhaps you’re looking to finance a property development project and finding traditional mortgage lending methods are unsuitable… then a bridging loan could be the perfect solution for you.
With many High Street lenders becoming more risk-averse when lending across the UK property market, bridging loans have become a versatile lending solution for situations involving;
- Home-owners who need to sell but want to secure a dream house purchase
- Short-term lending for developers or investors to fund land or property with or without planning permission, construction or refurbishment.
- Property auction hunters who often need quick loan facilities
However, while bridging loans have become the most efficient method of borrowing money for a quick turnaround. There are definitely benefits AND risks that you need to consider. Interest rates, associated fees, and lending terms vary greatly between lenders, so you need to know what to look for.
That’s why here at Advias, we’ve created a go-to bridging finance guide including the pros and cons of bridging loans, and an Advias Bridging Loan Calculator tool to help get you started.
So, what Is a bridging loan?
Bridging finance has become a huge growth market in the UK. As a result, bridging loans have made obtaining short-term, interest-only loans far more accessible for individuals, partnerships, and businesses looking to fund temporary property development projects or purchases.
As bridging loans are secured against a loanee’s property asset(s), and interest is usually not serviced on a monthly basis, lending requirements for bridging finance are more relaxed – this can accelerate the loan approval process and ensures funds are available almost immediately on approval. However, this can depend on the bridging finance lender, where their funding comes from and their processes.
How do Bridging Loans work?
No matter what you intend to use a bridging loan for, the loan amount, the repayment options, and the term length are calculated on an individual requirement or project basis.
While bridging loans typically range from £500,000 to £10 million, the maximum loan is usually calculated at between 70% – 80% of the Loan to Value (LTV). However, it’s worth noting this is the maximum gross loan, which includes the lender’s fees and the interest due.
Depending on your circumstance, there are several ways you can repay the bridging loan and the interest charged, through ‘Serviced’, ‘Rolled-up’ or ‘Retained’ repayment plans.
Like an interest-only mortgage, interest is paid monthly or quarterly and not added to the final loan repayment at the end of the term.
Here the cumulative monthly interest repayments are added to the final lump-sum payment at the end of the bridging loan. This method avoids you having to make interest payments throughout the term to help keep monthly project overheads to a minimum.
This method requires borrowing the interest payments upfront for an agreed set period. This does add to the initial bridging loan amount, but it helps avoid monthly loan repayments. Additionally, bridging loans that are repaid early often benefit from any unused interest being refunded.
Depending on your lending requirements, bridging loans have two exit strategies available in the form of a ‘Closed Bridging Loan’ or an ‘Open Bridging Loan’.
Closed Bridging Loans refer to transactions where the surety offered has already been exchanged for sale. This is not a typical scenario, however, this scenario will offer much greater comfort to the lender as they will have certainty over their repayment.
An Open Bridging Loan, on the other hand, is more typical, where the security offered has not been exchanged and the lender is exposed to the risk of the borrower finding a suitable buyer or arranging alternative financing.
What are the Advantages of a Bridging Loan?
- Multipurpose Loans:
Loans can be used for financing a range of property needs, including; funding advanced property purchases and property development projects and renovations.
- Non-property needs:
Bridging loans for tax bills or business investments.
Bridging loans can be secured quickly, and funds released in just 48 hours.
- Repayment Options:
Bridging finance can offer borrowers a choice of monthly or deferred repayment plans.
- Availability: As borrowing is leveraged against a property asset(s), unlike a traditional mortgage – your age, credit score, and proof of income become less critical as lending criteria.
- Second or Third Charge Lending:
A bridging loan can provide additional funding on a property where a mortgage or existing finance is already in place.
- No Early Exit Fees:
With the cost of a bridging loan primarily made up through interest payments, lenders tend not to charge exit fees for early repayment.
- 100% Bridging Loans:
Providing additional project funding when leveraged against additional property assets
What are the Disadvantages of a Bridging Loan?
Compared to longer-term borrowing methods, bridging finance for property development, renovations, or onward property purchases incur a steeper interest rate.
Bridging Finance Fees:
Higher rate fees are often applicable to property bridging loans which can include; a valuation fee, arrangement fee, administration fee, legal fees, and broker’s fees. However, these do vary from lender to lender.
While uncommon, failure to repay a bridging loan can result in the loss of any assets used as capital.
With so many variable interest rates, fees, and term lengths, Advias can help you navigate which exclusive lenders and repayment plans can help draw maximum returns from your property investment. At Advias, we pride ourselves on providing expert bridging loan advice and guidance to secure the most efficient bridging finance loan for you.