Bridging Loans
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Bridging Loans
Joe Eden explains all about bridging loans.What is a bridging loan and how do they work?
A bridging loan is like a mortgage on a property – but simply for short term use. A lot of people use bridging if they need speed; say if they’re buying at auction or to purchase a property quickly.
Bridging lenders usually act quicker than mortgage lenders, plus bridging loans can be used to buy unmortgageable properties. These are homes in bad states of repair or that have lease issues.
So it’s a short term finance facility. Typically you might have a bridging loan for three to 12 months – it’s not a 25 year term like a typical mortgage.
What can bridging loans be used for?
Bridging loans can be used for many different things. Non-regulated bridging is typically for landlords buying investment properties with the intention to let them out, or to refurbish them and sell them.
Regulated bridging loans are for people buying a residential home with the intention to live in it. A bridge is literally what it says on the tin. It’s bridging the gap while you make a property mortgageable. Another example is if you’re moving on to a new property but lose your buyer at the last minute – sometimes we can get a bridging loan to allow you to purchase the property while you wait for your existing property to sell.
So it can be for residential home movers and investors buying rundown properties – anything you need to move quickly on.
What is the ‘exit strategy?’
The exit strategy is probably the most important part of a bridging loan. Ultimately a lender doesn’t want to repossess your property, so they will always be looking at the exit strategy and stress testing it to make sure it’s viable.
The exit strategy is essentially how you are going to pay off this bridging loan. Are you buying the property with the intention to sell it in three month’s time to make a profit? Or are you buying it to rent out?
An exit strategy might be to sell the property or remortgage it once it’s in a mortgageable state. It’s important from the underwriter’s perspective and from your own angle as well – it’s about making sure you’re not going to be stuck on an expensive bridging facility, because fees do start to add up quickly if you default on a bridging loan. It’s the last thing anyone wants.
What does ‘first charge’ and ‘second charge’ mean with a bridging loan?
First charge means that a particular lender is the only and main lender on that property. If you purchase a property for £200,000, a traditional bridging lender might give you £150,000. They’re putting a ‘charge’ on the property for that £150,000, and whether you want to remortgage it or sell it in future, the lender essentially will get their money first. That’s what first charge means – they’re first in line to be paid off.
If you get into arrears with that particular lender, in the development world we would call that senior debt. They are going to be paid off first.
Second charge then sits behind the first charge. So in that same example, one lender gives you £150,000 on the £200,000 property, then you might have another provider that lends you £25,000. They would sit behind the first lender.
The first lender gets paid first if you sell the property or remortgage it, and the second charge lender gets paid next. It still works the same way – they’ve got a charge over the property.
How long does it take to arrange a bridging loan?
We’ve done bridging loans in as little as four days. A lot of people have a perception that this is a really expensive facility and you should stay away from it – but it really fits a purpose.
One particular client was buying a property at auction, in which case you usually agree a price and exchange contracts on the day. That means you’re obligated to buy the property and usually you need to complete within a certain timeframe. Traditionally you’ll have 28 days to pay in full.
This particular client decided to apply for a Buy to Let mortgage. I’d rarely recommend that because Buy to Let lenders can be slow or more fussy which can cause delays. He had put a 10% deposit down on the purchase and was set to lose around £20,000 if he didn’t buy the property as agreed in the contract.
We managed to get a bridging facility for the auction purchase within four days and the purchase was completed within another four days.
So it can be really quick, but that will depend on the client and what they want. Sometimes one lender will be a little bit cheaper, but they might take longer. Or you can choose a more expensive lender that will move faster. With auction finance it is usually around ten to eleven days for the offer to be issued, which still gives you ample time to complete the purchase.
Speak To an Expert
Our typical process is that someone will get in contact with us or they might be referred to us by an agent. We’ll have an initial five minute chat to address any burning questions, then we’ll set up a Zoom call or a meeting and spend an hour or so going through your affordability and any advice that we can offer at that stage.
That’s entirely free. No matter what type of finance we do, whether it’s residential, Buy to Let, bridging finance, we don’t charge a penny until we physically apply for a product for you.
How does bad credit affect getting a bridging loan?
I won’t go too deeply into the structure of bridging, but it’s not perfect for everyone. Some lenders are less focused on the client’s personal profile and more focused on the property type, the loan amount and the exit strategy.
If you had bad credit or a relatively low income we could do a ‘retained interest’ bridging loan. On the day that you complete you might pay 12 months’ interest payments upfront – that way you’ve got no monthly payments.
If you pay that lender off sooner than the 12 months, they’ll refund you all the money that you haven’t used. That’s called retained interest and gives the lender more control and reduces the risk to them.
So bad credit doesn’t cause a huge issue. It won’t fit with every lender but some would be happy with bad credit depending on the details and severity.
What do bridging loans cost?
The actual interest rate is fairly high, but a lot of people forget that this is a short-term fix. I’m investing in property myself and I’ve used bridging loans, because they fit the purpose.
If you pay that bridging lender off within three months, you’re only paying three months’ interest. So yes, the rate might be 10% per year (as an example) but if you’re only paying three months of interest, it suddenly isn’t such an expensive product. Some bridging lenders can be really creative and good to work with to buy quirky property.
Interest rates vary massively but they start at around 0.7% to around 1% per month. It will be a monthly interest rate as opposed to an annual rate. In terms of fees, some lenders don’t charge arrangement fees but typically they will be between one and two percent of the borrowed sum. So if you borrowed £100,000 you might have an arrangement fee of £1,000 to £2,000.
How do I apply for a bridging loan?
Our commercial finance department solely focuses on this type of borrowing: bridging loans, development finance and commercial mortgages. You can go to lenders direct but a broker will give you specialist advice. We have good relationships with lenders and understand what’s needed.
You might talk to one lender that agrees on the surface to accept you, but then something starts to unravel over the next few days or weeks. We would explore your deal and your profile before approaching to reduce the risk of any problems unfolding. So do speak to a good broker about applying for a bridging loan.
Are there any alternatives to bridging?
It is a unique product, and there aren’t really any alternatives other than a Buy to Let mortgage. But that’s very risky if you’re buying at auction – because you’re obligated to buy that property, you might lose your deposit.
Bridging can reduce that risk. I’m not saying that mortgages are always super slow to arrange. But in the last couple of years lenders have been moving slower. You certainly can’t beat the speed of a bridging loan, but a standard mortgage is an alternative option.
It’s important to be aware that you cannot use Buy to Let mortgages or any long-term mortgage product if you intend to repay that borrowing within a couple of months. It won’t be long before you’re blacklisted, because mortgages are lending for the long term.
If you want to buy property and sell in a few months time, that’s very much frowned upon. For a short term facility a bridging loan is really the only route.
