Bridging loans are short term finance secured against a property. Borrowers typically use bridging loans for some time until a longer-term finance facility is acquired.
The loans known also as bridge loans, caveat loans, bridging finance or swing loans depending on what part of the world you reside.
Bridging loans are typically offered for no longer than 12 months, the average time borrowed would be around eight months.
Unlike a standard home mortgage, the bridging finance interest rate is calculated monthly, and interest can typically be paid at the end of the term. So, there are no repayments during the duration of the borrowing.
Specialist bridge lenders offer bridging finance, and the application is straightforward and swift, taking just a few days to 2 weeks to process.
The borrower would need to own land or property to apply for a bridging loan, and typically used for:
- Buying property at an auction
- Funding Un-inhabitable properties
- Financing repossessions
- Fast funding required for property under market value
- Refurbishment and restoration work
- Property Developments
What are the Pros
Bridging loans have their uses when fast finance is required. It is also advisable to weigh your advantages and risks when considering bridging finance as they carry risks.
The Pros:
- Fast access to capital – the application is processed in 1 to 2 weeks.
- The bridging market is saturated and highly competitive, which has reduced interest rates. Great time to borrow!
- There are no monthly payments as the interest can be rolled or retained to pay at the end.
- There is no penalty occurred for repaying the loan early.
As with most finance facilities, there are some risks, and with bridging finance, there is no exception. Let us look at some disadvantages:
The Cons:
- Even though rates have reduced, they are generally more expensive compared to a standard mortgage.
- Failure to repay on time puts your secured property at risk of repossession and extensions can be excessive.
- Only available to those that own land or property.
Features of Bridging Finance
- Borrow 80% loan to value (LTV)
- Borrow 100% Loan to Cost (LTC)
- Borrow from £20,000 – £25 million
- Access to fast capital
Costs Associated
As mentioned before, bridging loans are more expensive than a standard home mortgage, and there are additional costs besides the interest rates.
The costs can include:
- Arrangement Fees
- Legal Fees
- Valuation costs
- Admin Fees
- Broker Fees
The arrangement fee costs around 1% to 2% of the loan amount, the lender may include an admin fee also. A valuation of the property put up as security must be done and you as the borrower will pay. Then you have legal fees on both sides which you must pay. If you use a broker, then the broker is likely to charge a 1% Fee.
As you can see they can get expensive, here is an example breakdown to give you a better understanding on the costs.
Cost break down on $500,000 bridge loan for 6 months.
| Arrangement Fee | $10,000 |
| Admin Fee | $500 |
| Valuation Fee | $5000 |
| Legal Fee | $5000 |
| Interest Fee 1% | $5000 monthly |
| TOTAL COST FOR 6 MONTHS | $55,000 |
The Exit Strategy
The main concern to a bridging loan lender is that the borrower is unable to repay the loan in time.
Before applying for a bridging loan, it is essential to have a clear-cut exit strategy to repay.
Some exit strategies could be the sale of your existing property to repay the loan or to refinance your newly acquired property with a standard long term mortgage.
Lenders expect you have a planned exit strategy before applying; this minimises the risk to them as well as to the borrower.
Some Examples of Bridging Loans in Use
Buying a New home
John want to buy his dream home he has viewed but he does not have the finance to do so as he is awaiting the sale of his existing home.
He could lose the home he wants to another buyer unless he gets the money quickly.
John approaches a bridging lender and after discussing his requirements the lender agrees on lending 80% LTV of his existing home and for 6 months.
After some due diligence conducted by the lender, John received the money in one week.
John used the money to buy the home he wanted and 3 months later managed to sell his old home and used the money to settle his loan with the lender.
For Property Development
Anna wants to buy an uninhabitable property to fix up and sell to make a profit.
Anna approaches a bridging loan broker for the finance. The broker finds the best deal in the market and puts the package together and sends the information to the lender. The lender agrees to funding Anna at 65% value of the property for 10 months.
Anna puts in her own money of 35% and buys the property, after renovating and selling the profit at a profit Anna pays back the loan with profit left over for her business.
Conclusion:
Bridging loans are risky and specialised finance facility and it is advisable you get advice from a professional before taking out this type of loan.