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What is a Bridging Loan?

A bridging loan is very different from a regular property loan, in what way? this article explains the ins and outs of a bridging loan and their uses.

A bridging loan is a short term property backed finance. They are typically used to fund you for an agreed amount of time while permitting you to either find a longer-term finance solution or the sale of your asset.

Bridging loans are sometimes offered for between 6 to 36 months, with the loan and interest payments due at the end of the agreed loan term.

In contrast to alternative types of borrowing, the monthly interest is commonly rolled until the term ends or you exit, therefore you have no further payments during the loan term.

The application method is typically way less complicated than for regular loans or mortgages and of other borrowing methods and the loan process can be completed within a week or two.

Bridging loans are offered typically against real estate assets and the money is used for the following purpose typically:

  • Buying a property via auctions
  • Buying repossessed property
  • Building work such as conversions or refurbishments
  • Purchasing “below-market property”
  • Buying a property being sold quickly for cash

Bridging Loans Pros & Cons

Take into account bridging loans are a risky proposition if you don’t know what you are doing, it is wise to understand what you are using such a loan for and to think carefully before taking such a loan for your projects.

The Pros:

When money is needed fast, the process can be completed within 10 days.

No monthly fees so as such cash flow is available without worrying, although the asset will be under “charge”

Purchasing a property under market value and getting the loan according to its current market value.

Borrow money on assets that you would not be able to raise capital for from a regular loan, such as repossessed or worn down property.

The Cons

Bridging loans come with higher interest rates, although they are getting cheaper due to the competition within the industry, they are still much dearer than a regular mortgage for example.

The loans are very short so you have no room in making mistakes with your project or goal.

Things to consider before choosing a bridging loan option:

Take into consideration the costs involved, remember the high-interest rate and other charges that come with this type of loan. There may be hidden charges, its prudent to use a bridging loan calculator. Learn more here
Have a clear exit strategy before taking out a bridge loan.

Is your project viable? the asset could be at risk if you don’t pay the loan as agreed.

If for example, the exit strategy is to sell the property and make a profit, make sure you have time available to put the property on the market and find a buyer or you may have to sell it quickly if time is running and miss out on full profits.

If the exit strategy is to get a long term to refinance, make sure you will pass the application process or you could be stuck in a dilemma.

Getting the best deal, always check with a few lenders rather than a sole lender to get the best possible deal for your project.

BRIDGING LOANS: HOW MUCH CAN YOU BORROW?

A bridging loan can be defined as a type of short term property backed finance. They are mainly used to fund borrowers for a shorter time duration while allowing for refinancing a long-term debt or selling a property. Bridging loans are mostly offered across a time duration of 1-18 months. The principal (loan amount) is payable at the end of the period in full. The monthly interest cost.
Bridging Loans are particularly helpful when it comes to solving time property purchases, which might include properties bought at auctions, financial gaps when downsizing or upsizing, or securities that cannot be mortgaged. However, the overall amount that can be borrowed in such circumstances relies on a number of factors, which are mentioned below.

How Does a Bridging Loan work?

When a bridging loan is financed, the lender mostly takes over the mortgage, on the existing property, as well as the financing of the new feature. The amount that is borrowed in this regard is referred to as the peak debt and includes the balance on the existing property, the contract purchase price of the new property and further includes all the additional costs that might be required to complete the purchase process. Examples of such expenses include stamp duty, legal fees as well as lender fees.
As far as the repayments are concerned, it can be seen that the minimum repayments on the bridging loan are computed on an interest-only basis. This means that interest might be capitalized till the point when the existing property is sold off.
After the property has been sold off, the net proceeds of the sale are then used to reduce the Peak Debt. The remaining amount, referred to as the End Debt, is repaid as a consideration of a standard mortgage product beyond this point.

Factors Impacting the Amount That Can Be Borrowed. 

Role of the Lender

This is a significant factor that determines the overall extent to which money can be borrowed. The purpose of the lender is essential in this case, mainly because of the reason that lender profiles are usually very well-diversified in terms of the amount they are willing to lend, and the charge they are ready to charge against it. As far as bridging loans are concerned, many lenders are prepared to offer bridging loans, if the application is correct and includes all the correct details. In this regard, a good property broker is most likely to have insights pertaining to lenders, in terms of the amount they are willing to lend, for the respective application. Therefore, they are going to approach the lender directly, and therefore, have the application processed. 

Financial Position of the Borrower

Financial position and credit scores are critical when acquiring bridging loans. This also directly impacts the overall extent to which money can be borrowed for different circumstances. This provides the lenders with a security blanket, with regards to the overall ability of the borrower to honour their debts. In this regard, the role of the broker is also vital, because brokers are able to advise their borrowers on ideas relating to improving their credit scores, in addition to getting their outdated adverse credit issues fixed. 

Valuation of the Underlying Asset

The underlying value of the property also tends to be one of the primary reasons that can influence the overall extent to which funding can be obtained. In this regard, a healthy practice is to hunt for lenders that opt for drive-by/desktop valuation, which is really helpful in speeding up the application process. Most lenders, understandable so, are fascinated by high valued properties, and therefore, this is directly correlated to the amount of credit that buyer is likely to extend. 

Loan to Value Ratio

Loan to Value Ratio determines the overall attractiveness to the lenders because they are most fascinated with a lower ratio. 

Property Location

Property location is another factor that directly impacts the amount of lending that can be extended. As a matter of fact, properties located at a prime location are valued at a higher price, because they are able to secure a larger pool of funds since they appreciate with time, and therefore, the overall risk to return ratio tilts in favour of buyers.

Types of Bridging Loans

There are two main types of bridging loans, which are open bridging loans and closed bridging loans.
As far as a closed bridging loan is concerned, it can be seen that there is a fixed repayment date, and this loan is mainly applicable in the case where there are exchanged contracts, and the borrower is waiting for the property sale to finalise.
On the other hand, an open bridging loan does not have a fixed repayment date. However, this loan is typically repaid within a time interval of one year. Whichever loan that needs to be withdrawn, it can be seen that repayment strategies are a must-have for the investor, which might either be equity from a property sale, or a mortgage. Furthermore, they also require evidence of the new property that is being purchased, in addition to the expected price that is paid for the property itself. It is also an excellent strategy to have a back-up plan in the case where the repayment strategy fails to meet its desired objectives.

How much does a Bridging Loan Cost?

Bridging loans are prices on a monthly basis, as opposed to on an annual basis. This is mainly because of the fact that bridging loans are obtained for a shorter time period. However, they are quite expensive to purchase, and could possibly have an interest charge or around 0.5% to 1.5% per month. Therefore, this costing structure turns out to be costlier in comparison to a standard residential mortgage. The respective annual percentage rate on a bridging loan is between 6.1 to 19.6 %, which is higher than most mortgages.
Additionally, bridging loans are also subject to an additional fee of 2%, which increases its service cost even more.

What is the amount that can be borrowed with a bridging loan?

In terms of cash, it can be seen that bridging loans can provide lenders with an option to choose a disbursement ranging from £25,000 to over £25 million. However, the general rule of thumb that is followed in this case is mostly the fact that the borrowers can only borrow a maximum loan-to-value ratio (LTV) of 75% of the overall value of the property. Another contingency that impacts the borrowing amount is the fact that a first-charge loan has a more significant disbursement option as compared to a second charge loan.

Reasons to Opt for a Bridging Loan

There are two main reasons that can be used to justify opting for bridging loans. Firstly, it can be seen that there is an element of interest capitalisation. This means that in the case where the borrowers serving capacity is not sufficient enough to cover repayments on both properties, a bridging loan with interest capitalisation might help to provide breathing space that can ease the pressure till the time when the property is sold. Additionally, it is also rudimentary to realise that bridging loans can enable borrowers to borrow up to 100% of the purchase price of the new property, including the associated costs. In the case where the buyer has purchased a property outside of the current borrowing capacity, this can come in really handy.
Other secondary advantages of using a bridging loan are the fact that it makes it possible to save money, because of the reason that the client will then not have to pay for the service fees which must otherwise be reimbursed in the case where the mortgage of the first property is called off, and a new loan is taken off. In the same manner, the existing property can be sold unless the house is sold. In this manner, the rental fee can also be used to cover the part of debt until a potential suitor is found.

Conclusion

Therefore, it can be seen that bridging loans are particularly useful when money needs to be borrowed for a shorter time frame. This can help the buyer to bridge the gap, and enable the transaction, especially in the case where the buyer wants to purchase a property before selling off the old one. Furthermore, they can also be utilized in situations where properties are bought at an auction, and finance needs to be arranged for immediately.
This type of short term financing is beneficial, regardless of the incremental cost that is incurred in comparison to other financing mechanisms. It can also be seen that bridging loans, for a typical period of around 12 months, might be charged with 2-4 points. Loan to Value (LTV) ratios do not generally exceed 65% in case of commercial properties or 80% in case of residential properties in the case where this bridging loan is utilised.

How to Find the Right Bridging Loan Provider

Considering many new houses are being built every year, it only makes sense that some people will want to get their hands on one. Whether it’s through an auction or not, one thing is sure – when you find a good deal for one of these houses, you need cash, before the offer goes away or someone else seizes the opportunity. 

Where can you get this cash, in any case? From the best bridging loans, of course! But even with bridging loans, you need to find the right provider if you don’t want to be worried about your repayments. How can you find the right bridging loan provider? Read on for more details. 

What to Consider When Looking for a Bridging Loan Provider?

So, you might be asking yourself how to get a bridging loan. In this respect, one of the most important aspects is the provider you will choose. Not all lenders will be the same, but it’s essential to shop around and find one that meets your needs. That being said, here are some things to take into account when looking for a bridging loan provider. 

·      Experience

You cannot overlook the experience aspect, especially if you want to make sure you will work with someone who knows what they’re doing. Otherwise, the simplest mistake could ruin everything for you. Not to mention that an inexperienced lender may not only take longer to finish your application process but may also forget many essential details when looking over your documentation. Of course, that doesn’t mean that every newer lender is terrible, but in general, it’s good to look for someone who’s dealt with some bridging loan experience. 

Therefore, when browsing for a bridging loan lender, look for someone who is known to have offered various bridging loans in the past and has enough knowledge on the matter.

·      Fast Service

Let’s be fair, would you like to wait longer than needed to get your bridging loan? The house you’ve set your eyes upon at the auction might be taken from you at any given moment. You cannot afford to waste time, which is why your bridging loan provider needs to be someone who works quickly and efficiently. 

In general, bridging loan providers should give you an initial quote inquiry reply within 24 hours. Other than that, they should be able to look over your documents and go through every step as fast as possible. If you need money for a new house very quickly, the speed of the services is an important aspect to consider.

·      Type of Lender

Bridging loans can be obtained from banks – which used to be a prevalent option when people needed loans for either a refurbishment or a move. So, you can turn to banks in some instances. But not all banks will be willing to give these loans, which is why it’s essential to consider other options, such as commercial bridge loan lenders. They will make sure to provide you with a secure, quick loan handled professionally. 

·      Interest Rates

You have to consider how the lenders rate their bridging loans before settling for them. Since bridging loans are short-term loans, they will have higher rates compared to your typical mortgages. At the same time, it’s vital to find rates as convenient for your situation as possible. 

·      Use a Mortgage Broker’s Help

Considering people usually only take out a bridging loan once in a lifetime, many don’t consider using a mortgage advisor. But you have to use one if you want to make sure you choose the right loan provider. They have much experience when it comes to bridging financing so that they will offer you the necessary advice. 

The cool thing is that you can even find mortgage brokers that specialise in finding property finance for particular borrowers. Therefore, you can find a mortgage broker that will direct you towards the right loan provider.

What Will a Bridging Loan Provider Look at Before Offering You the Loan?

Applying for a bridging loan means that you take the responsibility of making regular payments. At the same time, you agree to take a series of steps that help you obtain the loan. Getting a bridging loan is a whole process, one that you need to know about before you contact the loan provider. The lender must make sure that you are trustworthy before making a decision. So, here are some things a loan provider will take into account during the process:

·      Address and ID Evidence

Of course, you have to bring a proper document that serves as proof of your ID and address. More often than not, this happens by either showing a driving license or a passport. 

·      Credit Profile

If you want to make sure you get an excellent bridging loan rate, then you must have a good credit profile. Meanwhile, if there’s any adverse information in your profile, your loan rate may not be as you want it to be. 

·      Experience with Properties

Just like you want your lender to be someone with experience in the field, you need to be someone who has proper experience in dealing with properties. Still, this doesn’t mean that a lack of experience will stop you from getting a loan. It will just make your chosen provider look at your proposal more carefully – he will also consider other important details when making the decision.

·      Valuation Report

A valuation report is critical because it will offer more information about the asset or property you intend to secure to the bridging loan. Its overall value is what’s important. But since the loan provider would have to take your words with a grain of salt when you tell them the value, they will usually have an experienced valuer analysing the property. A report will be carried out, deciding if the value of the property is a good one. Conversely, in case you have some other assets aside from the property you are buying, you may have to pay for the additional valuation reports. 

·      Your Deposit Size

You need to make sure you have a large deposit. This may convince the lender that maybe you are worth the risk. Besides, this might help you get a better interest rate as well. 

·      Exit Strategy Information

Another thing that will matter to the bridging loan provider is your exit strategy. Depending on what your chosen plan is, you will have to provide proof that your cash will be available within a certain amount of time for repayment. 

·      Income Proof

You have to pay off the loan, after all, and if you don’t have a stable income, you may not be able to obtain the desired bridging loan. This is why you have to provide evidence of income, so you can show that you can deal with any unexpected costs. 

How Much Does a Bridging Loan Cost?

It’s hard to estimate an overall cost for bridging loans because fees and rates depend on the particular lender. Each one of them has different rates – not to mention that your situation will also be decisive when it comes to how much you will be charged. 

Although the amount you can borrow may vary depending on several factors, one thing is sure – you can borrow between £5,000 and £250 million. In general, there is a maximum loan to value too, which is between 65% and 80%. 

In addition, there are several fees charged when you take out a bridging loan. You have the arrangement or facility fees that are about 1-2% of the balance. Next, there are the exit fees that are 1% of the balance if you repay it early enough. However, the latter is not charged by all lenders. Legal fees will be charged too, as well as introducer or broker fees, and valuation fees. Lastly, administration or repayment fees will have to be dealt with as well. So, remember to take all of these into consideration.

If you were wondering “How much is a bridging loan?”, you should also know that this is not an exhaustive list of what fees you will have to deal with. You should talk to the lender first and see if you’ll be able to afford the repayment or not. 

Final Thoughts

So, the answer to the question “How much does a bridging loan cost?” depends on the lender you work with. That’s why you must find the right loan provider for your needs. As you can see, costs vary depending on your lender, as well as your income, credit history, and more. 

If you want to make the best out of your bridging loan, finding the right loan provider is a must. You have to consider the interest rates they charge on average, as well as their experience with bridging loans and how quick their services are. Hopefully, you will now be able to pick a good loan provider – if not by yourself, at least with the help of a mortgage broker. 

How to Qualify for a Bridging Loan

Although bridging loans are borrowed in different amounts and last for varying periods, a bridging loan timescale is meant to be short-term to help real estate purchases securing the funding needed to transition from one property to the next.

The qualifications needed and bridging loan timescale are often much shorter than that of a traditional long-term loan, making them appealing to many borrowers in need of temporary funding for a short period.

Qualifying for a Bridging Loan

When looking to qualify for a bridging loan, you can find them offered through a variety of lenders, and requirements can be similar to that of getting a new home loan. The conditions may vary from lender to lender, but there are standard requirements that all lenders use such as credit, debt to income ratios, and home equity of 20% or more if you are using your current home as collateral towards the bridging loan. 

Another main requirement looked at for a bridging loan is the exit plan in place when the loan term ends. If you do not have enough equity in your collateral property, or if you have poor credit and a weak exit strategy, you may not be able to qualify for a bridging loan. Additionally, if you would be unable to make loan payments on two possible mortgages in the case that your first property used as collateral does not sell before your bridging term ends, you might not get the bridging loan approved.

While the costs of a bridging loan may be more expensive than borrowing against retirement funds for example or taking out a home equity loan, a bridging loan timescale is much more expedited than both, giving them a great advantage. Borrowing from retirement funds may take several weeks to complete, and home equity loans can take months to get final approval and funds released. It may also be challenging to qualify for a home equity loan if the home is listed for sale as well.

Timeline of a Bridging Loan

A bridging loan timescale is very fast. It gives the borrower an edge in the competitive real estate market when time delays on loan approvals can be detrimental to offer acceptance. Often, when sellers do not want to entertain an offer that may be contingent upon another home sale, a bridging loan would allow the buyer to write an offer without requiring the sale of their home immediately before they buy and remove any such contingency.

A typical bridging loan timescale is anywhere from a few days to a few weeks at most for complete loan approval and funds released. The process has been finessed and streamlined over the years to help expedite the process and allow lenders to know the requirements for a bridging loan applicant to be successful in their loan process without risk of default. You can see the ease of calculating total costs with the bridging loan example listed below.

To begin processing of a bridging loan, you will need a valuation completed on the collateral property as well as the property to be purchased. It is usually the only upfront fee requiring payment. You will also need to have the details of your property or properties being used as collateral to know the equity available. The lender will need to see if you have any cash or funds available to be used towards down payment or if the bridging loan will need to cover this.

They will also need to know your exit plan for when the bridging loan term ends if you will be selling a property to pay off the loan or obtaining a traditional long-term mortgage that will pay off the bridging loan. A bridging lender will also understand that borrowers only call them when time is of the essence in securing the funds for a quick closing. If a bridging lender is unable to close within two weeks of the application, assuming the borrower is organized and quickly provides them all the information needed for the use, then the purpose of the bridging loan would be lost.

Bridging Loan Examples

A bridging loan provides the short-term funds needed to purchase a new home quickly, so if you currently own a property and want to buy a new home right away, but do not have the immediate funds available, or your current house yet sold, a bridging loan would be an excellent option to use for direct funding in this scenario.

In this bridging loan example, the bridging loan would provide the short-term funding needed to purchase your new property and allow you enough time, depending on the total terms and due date of the loan, to prepare and sell your current home. The sale of your existing home would then be used to pay off the bridging loan. Your current residence would be the collateral used for the loan, and the term could last anywhere up to twelve months. 

For your current home to be eligible to be used as collateral, you would need to ensure you have enough equity available in your home to qualify. Typically, the required capital is at least 20 per cent.

It would help if you also evaluated how the loan would be repaid before application, as some bridging loans require payments right away, while others can wait a few months before fees or have interest-only payments.

Lenders usually approve bridging loans at the value of 80 per cent of both the borrower’s current mortgage and the proposed mortgage they are looking to attain. In another bridging loan example, using the standard LTV of 80 per cent, imagine trying to sell a home worth £500,000 to buy a new property valued at £300,000. In this bridging loan example, you could then only borrow up to 80 per cent of the combined property values, which would be £640,000. However, if you use a lower loan to value level as opposed to the full maximum amount, a lower interest rate may be offered. Better interest rates are provided on loans using only 50% LTV or lower.

To fully understand the total costs of the loan on how to exit the loan, more details of the bridging loan example above are needed. The outstanding amount of your previous loan needs to be included as well as any cash on hand you plan to use towards the new purchase and any fees or interest. 

In this bridging loan example, the amount still owed on the home valued at £500,000 is £100,000. You also have £100,000 cash on hand to go towards the new property down payment. There is a loan arrangement fee of 1 per cent, and interested in at .60% per month with no monthly payments required. The net loan amount needed is £200,000 then, since you have £100,000 cash down. The 1 per cent arrangement fee on a loan of £200,000 would be £2,000. The interest on such a loan monthly would accumulate at a rate of £1,200 per month.

If the collateral property valued at £500,000 gets sold with a bridging loan timescale of six months, you could then use those funds to pay off and exit the bridging loan. 

First, you need to pay off what is left on the original loan of the property of £100,000, leaving you with £400,000 profit from the sale. The net bridging loan to be paid is £200,000, plus 1% arrangement fee of £2,000, plus six months of interest totalling £7,200. All of this equals to a final amount owed of £209,200 to close and exit the bridging loan. Taking that final amount from the £400,000 profit would leave the borrower with £190,800 in final profit.

The bridging loan would get closed as well as the original property mortgage, and the borrower would own their new property outright in the above bridging loan example. 

In other cases where the borrower may not have a final profit, or not using a secondary home sale towards the loan exit, they would be able to secure a long-term traditional mortgage that could be used to pay off and close the bridging loan. In that case, they would then begin payments on their new long-term loan until their property gets sold or the long-term loan gets paid in full. 

The bridging loan example above used a six-month term for the bridging loan. The borrower could use a shorter bridging loan timescale, owing less in monthly interest fees, or a longer-term if needed, owing more in monthly interest fees. It is smart to not underestimate the loan term in case your collateral property on sale does not sell in time or if it sells for less than the expected value. That way, you would not owe costly extension fees.

When considering taking out a bridging loan to bridge the gap toward long-term traditional funding on a property or selling another property while purchasing one, it is imperative to find what is required to qualify for the loan, the bridging loan timescale and the total loan cost.

How to use a Bridging Loan Calculator

When applying or considering applying for a bridging loan, it is essential to be aware of the total cost of the loan beforehand. Without understanding all the costs, you could face higher interest rates, hidden administration fees, or possible loan default. Often a bridging loan calculator can be used easily to find out the total cost of the loan and if it is then a recommended route to take for your funding.

Bridging Loan Costs

Terms of a bridging loan vary from lender to lender. The terms are dependent upon your collateral getting used for the bridging loan, your exit plan and other items that can be factored in such as credit score, income or down payment, though the loan is not usually dependent upon credit history and current income.

Interest rates vary by the lender as does the length of the bridging loan offered and the amount of the credit available. Some lenders offer a higher loan to value amount, depending upon the collateral getting used. It is good to compare different lenders and their rates as some provide lower interest rates but then have a higher exit fee or higher administration fees. Some lenders wrap in the interest rate fees, and some require interest payments during the term. It is recommended to find a bridging loan calculator and compare the total loan costs from each lender before fully committing to a loan.

Finding a Bridging Loan Calculator

Using a bridging loan calculator online helps to estimate the total cost of a bridging loan without having to go through the trouble of applying and pulling your credit history or other items. This way, you can crunch the numbers and see if it would be a reasonable loan and if the costs are affordable for you to take on a bridging loan at this time.

When trying to figure out how to find a bridging loan calculator, you should first understand what fees and terms you need to include when using a bridging loan calculator. You will need to know the bridge period, loan amount, daily cost and total bridge loan cost. Sometimes the closing date of the purchase affects this as does any existing property and their proposed closing dates. Other items that may need to be included in the calculator will be any down payment cash you have on hand to use.

Many lenders have a bridging loan calculator available on their websites that you can plug in your numbers and estimate what your costs will be. How to find a bridging loan calculator online is very simple with a quick google search. There are a few variations of the calculator out there, so be sure to find one that includes all of the fees and costs included in your loan for an accurate calculation. Some lenders call it a swing loan calculator when you search for it; a swing loan is the same as a bridging loan, it is just another term for it that some lenders prefer to use.

Using Bridging Loan Calculator

If you plan on purchasing a property and selling your old property to fund the new purchase, but your old property has not sold yet, a bridging loan would be an excellent option to help support the new purchase in the meantime until your old property sells. While a bridging loan can be risky, it allows you to secure a new property when you do not have time to wait for your old property to sell.

To calculate a bridging loan, you will need to know if a down payment is required on the new property, if so, what amount is needed. You will also need to know the outstanding balance of your secondary property getting used as collateral that you plan to sell to pay off and exit the bridging loan. 

Finally, you will need to know the fees and points the lender will charge. Let us create an example of using a bridging loan calculator, taking all of the above into account. Suppose your existing property valued at £250,000 and the lender will allow 80% of the value to pay off your old property mortgage, which would then be £200,000. In this case, the lender will charge 2% (2 points) of the bridging loan, and 1% in interest and fees, so your points and fees would then come to a total of £6,000. If the old property’s current mortgage balance is £150,000, you then take the total points and fees of £6,000 and also the mortgage balance of £150,000 from the loan amount of £200,000. At the end of this calculation, you would have £44,000 available to use from the bridging loan towards the down payment on the new property.

Bridging Loan Risk

In the example above, using a bridging loan calculator, the cost of the bridging loan is £6,000 plus the interest that accrues until the loan is paid off. The length and term of the loan would need to be added using a bridging loan calculator to figure out the full amount of interest to include in the total cost of the loan. 

A bridging loan could be a great way to raise the cash needed to purchase a property before another buyer gets there first, but it can also be very risky. Your existing property would be the collateral used towards the bridging loan and would be at risk of foreclosure if the loan does not get paid in full at the end of its term.

Property repossession or additional high loan fees can happen if your property does not sell before the end of the bridging loan term, or if you are unable to sell your property for enough to cover the full amount of the bridging loan due at the end of its term. Knowing and understanding all the costs of a bridging loan are of the utmost importance when taking on such a high risk and short-term loan. Using a bridging loan calculator to estimate the costs upfront before applying is highly recommended.

The complete guide to bridging Loans for Auction Properties

When purchasing a property at auction, one of the top ways to buy is through a bridging loan if you do not have the cash immediately available for the purchase. Auction purchases require funding fast, typically within 28 days of offer acceptance. 

Bridging finance for auctions helps bridge the gap until a long-term traditional mortgage can be secured or the sale of the auction property or another property used for collateral is completed to exit the bridging loan.

Purchasing Auction Properties with Bridging Finance

Bridging finance for auctions can be arranged before an auction, at the sale itself, or shortly after a successful bid gets accepted. 

Due to the stringent qualifications of a traditional loan, long-term financing can take a long time to complete. In contrast, bridging loans can be completed within a few days to a few weeks at most. 

When purchasing auction properties, time is of the essence, and if you do not have the cash on hand for purchase, a bridging loan is the best route for financing the purchase.

If you’re considering purchasing a property up for auction and using a bridging loan for auction purchase, it is a good idea to have the property valuation completed and loan approval before attending the auction. This way, if your bid does not get approved at auction, you would only lose the cost of the valuation fee. 

Alternatively, if your submission does get accepted, but you did not secure financing approval beforehand, there is the possibility that you may be unable to obtain financing and then you would lose your down payment that is required upon bid acceptance.

A typical down payment after acceptance is 10% of the purchase price, with the rest of the debt in full required to get paid within 28 days.

If you already have your approval on your bridging financing for auction before bidding, it allows you to move quickly to the next stage of purchasing if your bid is accepted. 

Auctions can be completed in person at an auction house, at the property, or bids can be submitted online.

Real estate auctions begin with a set minimum sales price and can only go up from that point depending upon how many bidders want the property and the amount they are willing to pay or drive up the bid.

 It is good to get your loan amount approved beforehand if you plan to use a bridging loan for auction so you know the limit of how high you can bid for the property, and take into account any repairs and renovations that may be needed on the property to ensure the loan will also cover those costs unless you are paying for refurbishments out of your pocket.

Bridging financing for auctions can also cover commercial properties and multi-family units which could be renovated (if needed) and rented out for an income or sold for a profit. While most auctions are foreclosed properties and short-sales, there can be auctions on non-distressed properties as well.

Auction Property Due Diligence

Properties purchased at auction typically need work done on them, so it is worthwhile to view the property with a builder, architect, surveyor, and other construction workers (if required) to gauge the work needing to be done and estimate the full costs involved to ensure your loan will cover these costs and they will not need to get paid out of pocket. 

It will also help to establish a time frame of when the work will get completed so that you can secure a reasonable loan term. If for any reason you need an extension of the loan term, or you cannot exit the loan in the established time frame, you could face hefty fees or possible repossession of the property.

Getting the property reviewed by construction and rehabilitating persons before loan application when using bridging finance for auctions is also an excellent way to ensure the cost would remain within the scope and the project would be viable and profitable in the long term.

Other essential items to check before bidding at the auction are for title deeds, local authority searches, and any vital property information you can obtain from the auctioneer or auction catalog. You should also complete a legal search to see if there are any restrictive covenants as those could impede on any renovations, conversions, or building you want to do at the property.

Auction Property Development and Renovations

Bridging loans for auctions can also be used to purchase land at auction for a new property build. Bridging lenders will accept a loan with or without approved building plans, while most traditional lenders require the building plan to be approved before the loan application. 

Besides being used for property building and development for properties purchased at auction, bridging loans for auction purchases are also typically used for the renovations needed on a derelict property purchased at auction. 

Properties sold at auction are often in considerable disrepair and require a fast sale with their defects needing repair immediately to make them mortgageable and habitable.

It is advisable to have your investment objective and timeline in place before you bid on a property when using bridging finance for auctions. 

Your intention, such as selling the property for a profit or converting to apartments for rent, will affect the size, location, price, and condition of the properties you are able and wanting to bid on.

Because a bridging loan is based on the value of the asset, the Loan to Valuation amount can be found on the property’s value after renovations, and refurbishments get completed. It is what makes auction properties and bridging finance for auctions appealing to borrowers. 

The property can be financed with a bridging loan at auction for a low price, funds from the loan can also be used for renovations and repairs to raise the value of the property, and then the property can either be refinanced into a long-term traditional mortgage or sold for a profit while paying off the bridging loan.

While rare, sometimes a property is not suitable for using a bridging loan for auctions purchase. In this case, any other properties that you own, personal or commercial, would be eligible to be used as security and collateral for a bridging loan.

If your goal is to refurbish and sell the auction property purchased for a profit, then you would need to look for properties that would have a high after repair value. ARV is the value and price of the home after renovations get completed. 

The goal for investors who purchase auction properties, renovate and sell them, is to have an ARV around 30% higher than their purchase price and also to have as short of a timeline for renovations to be completed as fast as possible. The longer the timeframe, the higher the carrying costs, so it is crucial to complete any renovations quickly.

While you would be looking more at the LTV on a long-term loan, the same goes for long-term auction purchases as well in needing a short timeline. If a property takes too long to renovate, and renovations are required, then it will remain unrented if it is a multi-family property or unmortgageable, potentially delaying your exit plan on the bridging loan for auction used.

Benefits of Purchasing Auction Properties with Bridging Finance

Bridging loans for auctions are not usually based on income or credit like a typical traditional mortgage. It means that a bridging lender will not require employment history and grueling credit checks which can be time-consuming and delay the loan.

Many auction properties are also deemed not suitable for mortgages. When a property is subject to auction, it typically is in dire shape or may have significant defects. It may also be without a kitchen, bathroom, or both. A traditional mortgage lender will not accept such property for a mortgage loan, but a bridging loan company will.

Because of this acceptance of reconstructive properties, a bridging lender will accept and consider properties that require substantial refurbishment or even conversion by the purchaser for selling or refinancing.

You can also borrow 70-75% of the Loan to Value (LTV) of the property, and sometimes depending upon the lender, up to eighty percent of LTV. However, higher LTV or a riskier loan might have a higher interest rate. Based on the lower price of auction properties, and ultimately lower value, it might be worthwhile to use another property you own as collateral or additional security against a bridging loan for auctions. In doing so, you would be able to borrow more on credit or secure a lower interest rate on loan.

A bridging loan is a short-term loan, and the term is generally twelve to eighteen months. The exit of the bridging loan is usually either by selling the property at a profit and paying off the loan at that time or by refinancing the property loan into a long-term traditional mortgage which would pay off and end the bridging loan.

Getting to grips with the fees and costs of a bridging loan

Fast bridging loans are becoming quite popular now and can be extremely useful for consumers, making buying a home or property investment much more accessible and forgoing the usual delays of traditional loan processing. 

With that said, it is essential to know all of the fees and costs involved when obtaining a bridging loan before the loan application. Not knowing the full costs involved is what keeps many people from getting a bridge loan or from becoming approved. Just as in a business, it is vital for one to digest the fees in order to make sure it is a viable option.

To begin, you must know what precisely a bridge loan is. A bridging loan is a temporary, short-term loan usually secured by another asset (property) as collateral towards the loan. It bridges the gap between one loan and another when you do not have the capital immediately available for the purchase.

Bridging loans help consumers purchasing a new home without waiting to sell their current home or to purchase cheaper properties fast at auctions where time is of the essence.

It also helps businesses obtain financing needed for purchases, cash-flow, or renovations.

Speed of a Bridging Loan

There are several reasons why you might need to complete a property purchase as quickly as possible. One of the main reasons for utilizing a bridging loan is the quickness with which it gets completed. Fast bridging loans can close in a few days to a few weeks, making them a great option when you need to purchase a property fast and do not have the cash or traditional financing readily available.

Bridging loans do not typically have stringent qualification requirements, so credit reports and income qualification checks typically do not delay them. They are mainly contingent upon the exit plan in place, property value and collateral or security used towards the loan. 

Fast bridging loans get arranged much quicker than a regular bank loan which can take a few weeks to a few months to process. Such time delays could cause you to lose out on bidding on your dream property.

Bridging Loan Finance Fees

When looking at obtaining a bridging finance, you’ll need to consider all of the costs involved. Getting a bridging loan is not the same as getting other types of traditional loans. While some bridging lenders require a high credit score, tax returns, and low debt-to-income ratios, majority of bridging lenders do not require this. The rates for a bridge loan vary depending on the lender, location, and risk involved with the loan. Generally, the bridging loan finance fees are more than that of a standard loan. 

Fees required by the loan are title fees, administration fees, legal fees, and appraisal fees. There is also interest in the loan necessary as well. On top of that, there are additional fees if you cannot exit the bridging loan at the agreed-upon termination date.

One of the benefits of a bridge loan is that it allows you to purchase a home without restrictions and usually does not require monthly payments for the first few months. It gives the consumer time to sell the property purchased for a profit or any other properties if needed to exit the loan, or to secure long-term traditional funding to exit the loan. Please note that interest does accrue on the loan even if there are no monthly payments required.

Bridging loans can be quite costly and are more expensive than other types of traditional loans. It is due to the risk involved, the term length, and because of the high amount of bridging loan fees. Traditional loans can be cheaper, but they take much longer to obtain and have more stringent requirements for loan approval.

When taking on a bridging loan and using a secondary property that you are selling or if you plan to renovate and sell the property you are purchasing with the bridging loan, you need to ensure that you are able to take on two mortgages. If the property does not sell in time to exit the bridging loan, you could incur large bridging loan fees for extending the credit or possible repossession.

Bridging Loan Costs

Borrowers often pay a higher price for bridging loans due to the higher risk of the loan and shorter-term in comparison to a traditional long-term mortgage. 

Bridging loan costs usually include arrangement fees of one percent of the sum advanced, plus interest of about one percent per month of the loan term. So, if for example, you took a bridging loan for £500,000 to purchase a house, you would owe £10,000 in fees and interest in just the first month of the loan. On top of that, there is sometimes an exit fee of one percent. If you took on a bridging loan for just two months, it could end up costing £20,000.

While using bridging finance at 1% per month might sound low for a rate, it translates to an annual percentage rate (APR) of 12% which is quite high in comparison to a traditional, long-term loan which usually has an annual percentage rate of around 3.75%-5% total.

It would be best if you always established how much the total overall bridging loan cost is with the additional costs of administration fees, arrangement charges, legal fees, valuation fees, and exit fees before completing any loan application.

Similar to a conventional mortgage, bridging loan rates can be fixed or variable. Variable rates can fluctuate so the amount you have to pay could go up or down.

There are many bridging loan calculators available online to determine the costs involved on your credit.

Bridging Loan Interest Rates

One advantage of a bridging loan is that you can roll up interest payments and fees and add them to a new mortgage. If you have another home you are selling to help you exit the bridging loan, lets say it is valued at £540,000 if you were able to sell it with a profit of £150,000 and roll in the £20,000 costs for the two months of the bridging loan, you would have a debt left of £370,000, which would be more reasonable to obtain a standard long-term loan for with more generous terms and rates. 

Once you obtain the longer-term loan for the remaining £370,000, you would be able to exit the bridging loan and no longer owe fees on it.

The way the interest gets charged for bridging finance can also vary. It can be monthly, deferred (rolled up), or retained at a monthly rate, and the borrower settles the interest at the end of the term. At a deferred rate, all of the loan interest and total loan balance is due at the end of the term in a lump sum. Interest compounds during the loan term if deferred until the end of the term. Finally, at a retained rate, the interest is only borrowed for a specific period, and amount due calculated at the beginning based on the length of the term, and then payment gets settled at a later date.

Cheap Bridging Loans

While it is usually less expensive to take out a high loan-to-value mortgage rather than a bridging loan, often a bridging loan may be the only option available in the short term and for immediate property purchase. Cheap bridging loans are available. You need to research and shop lenders for reasonable and competitive fees on loan.

With bridging finance becoming more and more popular, bridging lenders have expanded their offerings. The bridging market is very competitive, and if you shop around, you could find lower interest rates and better offerings. Interest rates can sometimes be found for as little as 0.37% per month, making a bridging loan affordable. However, while rates are dropping, traditional long-term mortgages still offer the most economical option for most property transactions.

To find the best deal and a cheap bridging loan, it is recommended to go directly through a broker as opposed to applying directly through a company. Every deal is different and approved by the broker on a case-by-case basis for bridging finance, so ultimately your circumstances and collateral or security for the loan will be what determines your rates and bridging loan finance fees.

Total Cost of a Bridging Loan

While finding a cheap bridging loan is essential, you should always consider the total bridging loan cost, not just the interest rate alone. Most gravitate towards the lowest interest rate, but many lenders additionally charge large exit fees, fund management fees, and other hidden costs. The costs of different providers can be high. It is vital to get a breakdown of the total costs of the loan before proceeding so you can compare multiple lenders and expenses of the loan.

Do not forget always to ensure you can exit the loan on time without needing extensions at the end of the term and to consider how the loan will be repaid to know that the proposed exit plan is viable.

Bridging Loans for Auction, House Purchase and Renovations

When you are short on funds but want, or need, to purchase a home right away, or need to complete property renovations, a bridging loan might be an excellent option for you instead of trying to get a conventional mortgage or another type of loan immediately for the home purchase or home renovations desired. 

A bridging loan is a short term loan used to secure funding for your project until you can obtain a more permanent, long term traditional loan. Bridging loans are best used when you cannot get a conventional loan due to credit history, timing, and financial capabilities. Traditional loans take much longer to complete in comparison to bridging loans, so if time is of the essence, a bridging loan is the best option. Bridging loans often provide the cheapest route for securing immediate financing, are fast to arrange, have flexible lending criteria, and can be obtained on any real estate.

Landlords, homeowners and property developers most commonly use bridging loans as finance for auction purchases and house renovations. 

Bridging Loans for Auction Purchases

One of the most popular uses of a bridging loan is for auction purchases. The quickness of obtaining financing for an auction purchase is of the utmost importance to outbid or bid first on an auction property. Typically, auction purchases need to be completed within 28 days. Because a bridging loan can be fully financed within a few days or up to a few weeks at most, they are the best option if a loan is needed to fund an auction purchase. Bridging loans for auction purchases are available for land, commercial and residential real estate.

A bridging loan for auction purchase can help you purchase a property and then also will allow you the time and finances to carry out any renovations and rehabilitations needed to the home before exiting the loan by refinancing into a long term traditional loan or selling the property for profit.

If you plan on using a bridging loan for auction purchase, it is advised to get the property valued and financing amount agreed upon before attending the auction. That way, if your bid is unsuccessful for the property, you only lose the cost of a valuation fee. If your bid is accepted and you are unable to obtain financing, you risk losing any deposit put down towards securing your winning bid. Some lenders do offer “no valuation bridging loans” for auction purchases, which would accelerate bidding on auction properties. However, these lenders may have higher rates as the risk would be higher on the loan.

Unmortgageable Properties

Many auction properties are also unmortgageable properties, so a traditional or conventional mortgage for financing would not work for them. Using funding from a bridging loan for an auction purchase is an excellent idea because you can use the funds to complete the renovations needed to arrange for traditional financing or to sell the property to exit the bridging loan.

Examples of unmortgageable properties that traditional lenders will not finance are properties with structural issues, properties without functioning bathrooms or kitchens, properties valued under £50,000, or properties that are considered derelict. Bridging lenders are much more flexible in the criteria used for lending in comparison to traditional lenders, so if there is sufficient security or collateral available from the purchaser, a bridging loan might be a great option to secure the funding needed to purchase an unmortgageable property. 

More often than not, when you are purchasing a home at an auction, it will either be unmortgageable at the time of purchase or in need of severe renovations. It is where the need for a bridging loan for house renovations comes in.

Bridging Loans for House Renovations

Getting a bridging loan for house renovations is a great way to get the funds needed for renovations quickly without having to worry about making payments on the loan while completing the renovations. It allows you to entirely focus on getting the renovations done and then will enable you to repay the loan once the renovations are completed. 

Renovating a house is always a significant investment, but funding house renovations with traditional funding may not be an option if you have a poor credit history, not enough income, or cash on hand to help fund the renovations or payments on a traditional loan while working on the renovations.

Bridging loans allow you to start work immediately and help facilitate the work needed to convert a property to a mortgageable state where you can exit the bridging loan into a full-term traditional mortgage.

The types of renovations typically using a bridging loan can range from light refurbishments to heavy. These include everything from basement digs, barn conversions and also necessary renovations like kitchens and bathroom completions and additions.

If you’re considering a bridging loan for house renovations or a bridging loan for auction purchase, it’s essential first to have a builder, architect or contractor review the property to ensure the time frame the work can be completed in and the bridging loan amount needed to cover the cost.

Terms of a Bridging Loan

Bridging loans for house renovations also come with the option to “roll-up” the interest, so the final payment is made at the end of the loan term. It is also advantageous if you’re buying a new home because it enables you to use the loan entirely for the purchase of the new property. If you do roll-up the interest on the loan, it does mean that your total loan amount must then include the cost of interest, so you will have fewer funds available for the purchase of a house or house renovations that you’re using the loan to finance.

Bridging loans are secured primarily against the value of the property and allow you to borrow up to 70-75% Loan to Value of the property, sometimes 80% depending upon the lender. If you have multiple properties and can use them as collateral, you may be able to borrow more or at the very least, receive a lower interest rate on the loan.

Bridging loans also take into account the value of renovations and will base the amount approved upon the final cost of the home once renovations are completed. This is a great advantage to help finance renovations on a primary residence or auction purchase.

The Length of a Bridging Loan

As noted above, bridging loans are short-term loans. So that probably leaves you wondering, how long can you have a bridging loan for? The answer is dependent upon your exit plan. To get accepted for a bridging loan, you will need to have a clear exit plan laid out for the lender to review. The exit plan is the strategy you intend to use to repay the bridging loan at the end of its term and may either be the sale of a home or by securing long term traditional financing.

As a short-term loan, most bridging loan terms are about three months, with extensions being available if needed to achieve realistic property sales pricing or financing. The maximum duration for a bridging loan used to purchase residential property is twelve months, with the minimum term usually set at once month. 

Most lenders also usually only charge interest for the actual duration of the loan, so that would mean no early repayment fees, which is another added benefit to a bridging loan.

Types of Bridging Loans

It is important to note on how long you can have a bridging loan for also depends on the type of bridge loan you obtain. There are closed bridge loans which are the most popular bridge loan and even open bridge loans. A closed bridge loan will have a predetermined ending date to the loan where the loan must be paid in full. A closed bridge loan will have a lower interested rate than an open bridge loan, but the financial penalties of breaking the terms of a closed bridge loan are much more severe than that of an open bridge loan. 

An open bridge loan is one that has no fixed pay-off date and often comes with a much higher interest rate than a closed bridge loan. Sometimes a lender will also deduct the loan interest from the loan advance to ensure the security of the loan. An open bridge loan is a good option if you are uncertain about securing long term financing when the loan ends if you how credit repairs needed, or if you are unsure about a sales date or price of a home you’re selling as your exit strategy. Because they are riskier than a closed bridge loan, open bridge loans are less commonly sought out.

In summary, a bridging loan is the most popular form of loan chosen for auction purchases and renovations when the funds are not immediately available on hand. They are the most desired due to the quickness with which it can be secured and the ease with which it can be obtained.

Utilising Bridging Loans for Property Development

Real Estate Developers often need help funding their residential or commercial property development projects. Getting the right financing could expedite the purchase process and decrease the overall cost of borrowing if done correctly. 

There are various short-term property development options on the market, but the best option available may be a bridging loan. Quite often a Bridging loan is obtained for property development and investment. 

A bridging loan is a short-term loan that helps “bridge the gap” between one property transaction and another or until long-term, permanent financing gets secured for the property. 

Residential Property Development with Bridging Loans

A bridging loan may be used to finance the entire development project from the very beginning, or also for simple renovation and refurbishment projects at the property. This type of loan is also useful for purchasing land for development if there is a solid plan for the development of the land. When a borrower has an immediate need for funding, bridging loans are ideal.

The average term of the loan is approximately eleven months, but can sometimes be as short as two weeks or extend to as long as three years. The loan will provide the funds needed for the renovation or residential property development until you can either sell the property for a profit or arrange for a permanent, conventional mortgage for the property. 

The application process is also usually a lot simpler than the method used for traditional and conventional lending. Applications can be completed within 5-14 days, which is ideal when funds are needed quickly. 

With typically no monthly payments required, a bridging loan can be used to raise capital when cash flow is tight and then repaid when you are comfortable and have the assets or funds available to repay the loan at the end of its term. 

Loans can also be offered without a deposit required and have flexible lending criteria. Developmental properties are often purchased undervalue so that the lending can be based on the full or future value of the property. Bridging loans can commonly be used to buy properties that are uninhabitable or ineligible for conventional lending before rehabilitation. 

The main advantage of using a bridging loan for residential property development is the speed at which it can be applied for and disbursed. The main disadvantage is that the risk to the financing lender is much higher than with a conventional loan so that the interest rate may be much higher than those used for traditional mortgages and loans. It is because the requirements and securities needed for a bridge loan are much more relaxed than with a conventional loan, so the risk for the lender is much higher.

Bridging Loan Examples for Developers

An excellent bridging loan example is utilizing a bridging loan for a residential build. It is because lenders don’t have specific requirements on the land or work done before they release the funding, so the financing is available immediately for your use on property development. It allows you to have access to a large amount of funding within a short time, and ensure that you can build your home or residential property development without any delays due to funding.

In the example of a land development purchase, if you’ve already purchased the land and now funds are needed to cover the development costs, a bridging loan might be used to finalize the residential property development so that you can then finalize developments and sell the property to pay back the loan. Bridging loans can also availed towards purchasing a development site while still applying for development consent and approvals. 

A real estate developer who is looking to develop a property and then to increase its value before selling the property, but does not have the necessary funds to finance the development, so he finds a lender to give him £250K with a 12-month financing term. However, after some delays and struggles with the builder in charge of the development, the developer then needs to find a new builder to complete the project development. As a result of this delay and changes, the developer is not able to sell the property and repay his original lender within the 12-month financing term.

In order not to default on the loan, the builder then obtains a bridging loan. The loan is secured quickly and financed within two weeks, and the final amount needed to pay the developer’s original lender was paid along with any interest that accrued. The developer was then able to complete the project development with his new builder and raise the property value once completed for a final sale and to pay and exit his bridging loan.

Another bridging loan example is If you’re building your own home, then using a bridging loan can be a low-cost way to finance the build. The security in residential bridging can either be a property you own or property you intend to buy.

Bridging Finance Lenders

Bridging finance lenders usually offer bridging loans for the purpose and renovation of property as a form of property development finance. The loans can be used for both commercial and residential properties and can be used for total property development, or for just adding a bathroom and other simple renovations. 

The market for bridging loans is highly competitive, as their popularity rises. Even with higher interest rates, the lenders are competing with the speed they can consummate the loans in the terms offered. Some bridging finance lenders are also reducing interest rates to provide a competitive edge. To succeed lenders must have an edge from their competition. Most do so by creating loan structures that match their clients’ needs. 

With offering flexible lending criteria, bridge loan lenders don’t need to worry about traditional lending benchmarks such as income, affordability, and credit history. Instead, they mainly look at the value of the collateral uses and the exit plan in place.

Traditional loans can take several weeks or sometimes months to process and finalize. When it comes to property development, timing is of the utmost importance, and bridging finance lenders understand this. They can process and close their loans with days or weeks and without delays.

Bridging finance lenders also are less restrictive on the requirements to obtain the loan. Traditional lenders will review a property developer’s portfolio and analyze their portfolio to assess whether or not they can afford loan repayments. Bridging finance lenders differ in this aspect as a low credit score is not a deterrent, and also the interest can be rolled into the loan so that repayment terms do not immediately begin and there are no monthly payments towards the loan. The borrower can then start property purchase and development immediately without having to worry about repayments until the end of their loan term. 

Some bridging finance lenders may charge a fee for the arrangement of the loan and also miscellaneous administration fees. These charges vary from lender to lender, and most lenders offer a case-by-case basis on what they can provide and deliver for the borrower. Bridging loans can often be tailored to suit any borrowers needs on time and cost, which is why they are often the best available option for residential property development. 

Part of a new, innovative way of lending is peer-to-peer lending. Some peer-to-peer lending companies even offer bridge loans for private, residential, and commercial uses. Peer-to-peer lending are loans that are funded by private investors, and some suggest they can be secured even faster than a typical bridging loan because the loans are approved and underwritten, then made available for investment immediately. 

The total loan costs must always be considered before applying. Sometimes a lower interest rate may come with a more substantial exit fee, fund management fees, or other hidden costs. 

The borrower must be careful that they can repay the loan when it falls due; otherwise, they may risk repossession of the residential development property or high costs that may require a second, additional bridging loan used to repay the first. During the agreed term, the loan is usually secured against the equity in the property purchased. 

Exit Strategies

If you’re planning on selling the purchased property as your exit strategy for the loan, you should ensure that the term of the loan gives you sufficient time to secure a buyer and for sale to be completed properly. Otherwise, you could end up selling the property at a discount and for less profit than expected. 

If you plan to refinance into a long-term loan to exit the bridge loan, you should ensure that you are confident that your application will be approved, to avoid delays or issues with repayment once your bridge loan term is due. 

A valid exit strategy must be in place for any loan obtained. The best exit strategy for residential property development using a bridging loan would be to obtain a long term commercial mortgage which would pay off the bridging loan.

How to Find Low Cost Bridging Loans

Should you happen to find your dream residence, you don’t want to lose that home, but your current property has not sold, and you need the money fast.

When you need that money quickly, what do you do?

Do not worry! You still have an opportunity to reign in that palace. The answer for you is to get a bridging loan. Bridging loan is meant to bridge the monetary gap between the sale of one’s existing property and buying the brand new one in minimal time.

Bridging loan is designed as a short term loan; they are also known as bridging finance.

Bridging finance falls under the category of secured loan, where security is required, typically a property. It implies that a borrower must offer some safety against finance.

To get a minimum price bridging mortgage, the mortgage quantity against your old house that you are preparing to promote within the near long term. The real value (equity) of the current property is taken into account while issuing bridging loans.

Let us discuss how to get bridging loans at low-interest rates.

You’ll find there are things to consider when choosing a low rate bridging loan.

To start searching for low-cost interest bridging loan, you will need to approach several lenders to compare the costs involved and compare and contrast the quotes provided by them.

Approaching different lenders may be somewhat troublesome. You can search using an online search engine such as Google.

There you can quickly find most of the lenders at just one place. You are quickly getting to understand some of their offers on their websites. Bridging loans are generally more expensive than your regular home mortgage due to them being short term and usually riskier.

Do proper research and understand that different lenders have different costs, analyse all the values using a bridging loan calculator. In this way, you can find bridging loans at a competitive price.

If you research each lender properly, you will start to understand the costs involved.

Some factors that can affect the interest rate you receive may include your credit score, so if there are some adverse problems try to resolve them before applying. The great advantage that bridging loans have is the fact that they are swift to avail, so you can get the finances sorted for your new home in a few days in some cases.

The Pitfalls of Bridging Finance: Why You Shouldn’t Always Trust the Headline Rate

Yes, this is a significant concern when assessing the right lender to do business with. There are many factors to take into consideration when choosing a bridging loan company which may ultimately increase the cost of the loan. In reality, frequently, it could be more economical to get a higher interest rate to gain from lower fees elsewhere.

Preventing certain pitfalls such as arrangement fees, penalty fees, legal fees, valuation fees and exit fees, could save unnecessary penalties for those who know where to look.

For many lenders of bridging finance, an integral factor to their financing policy depends ultimately on the real value of the property given as security.

Another factor is the region of the security property and property bought, generally in London and close to London property will get a better rate. Some won’t, for example, lend in Scotland. All mode of exit charges, additional option fees, and some other contingent charges they are appropriate for the danger involved. So the risk is represented by a more significant interest a month, and in some cases bridging loans can reach even as much as 1.75% per month.

You have to understand fully the costs that are involved before making a decision and be cautious with the extra fees — a bridging loan company’s headline interest rate maybe 0.50 per cent. On the flip side, another lender could be 0.80%. Therefore you may pick the initial creditor. On the other hand, the first lender is charging an exit charge of 1.50%. Alternatively, the different lender costs 0.40 % as the exit fee; So even though it may seem cheaper at first to choose the first lender but when you analyse the other costs, it becomes clear they are dearer. It might not seem a massive amount but include another nine weeks to the word and change the proportions, and it becomes a significant difference.

One other important factor is renewal charges. The significance of this will weigh heavily on the assurance of the debtor to repay over the agreed first term. Some lenders charge no commission. While others have low-interest rates will cost a one-off charge — maintaining precisely same interest rate, or a slight increase. So after failing to sell the house in time to repay the loan, the creditor offering 0.50percent might raise the rate to 1.50%. While another may only add a 0.5% renewal charge, which will signify that the 0.80% creditor is more affordable if you run an extra three months. This is why it is so crucial to understanding the costs that are involved in every scenario.

The exit fee is just another fee to be aware of, again making a significant difference in the final costs.

One way to save time and money and endless research are to use a bridging loan broker. The broker will have many lenders they work with and can analyse your requirements and the situation and then approach the right lenders to get you the best deal in the market at the lowest cost. A broker will take a fee, which is usually about 1%.

What type of security can I use

Bridging loans typically secured against a commercial or residential property. The suitable property could be your house, a buy to rent a home or commercial business property. Various lenders have different tastes on the type of security they need, so whom we proceed to will reveal the protection you may provide. Some will even give on a property that requires work carrying on it, or perhaps even bare lands if it has value.

It very much depends upon your circumstances. There are a variety of elements that may come into play, which can influence the quantity that you’re able to increase from the lenders.

The majority of the bridging loan company’s will provide a bridging loan which has interest payments deducted or “rolled up.” Fees will also be generally added into the loan once you go through the application process, so the arrangement costs and interest level need to be payable.

The majority of lenders will generally lend around 60-70% loan to value, which takes into consideration each of the setup costs and interest added. That is a critical issue to take into account as the costs lower the actual value of the property.

Do I need to make monthly payments?

As above, you probably won’t need to, and most individuals don’t wish to. It depends on what you would like and the volume you want. If you’re taking the loan to the maximum that the lender is comfortable. Then they will take a look over your worth and possibly allow you to make payment at the end of the term, including the interest cost.

Should you wish to make monthly payments. Then the lender may want to know where the money is coming from. Lenders know that with large monthly payments, customers will say they could manage it – even if it’s apparent from the due diligence they cannot. So being asked for three months bank statements at least and accountant references are not out of the way or out of the ordinary.

How long can I keep them?

Usually, the maximum term is 6-18 months though you can keep them for several years if required, extensions are possible with costs associated with them. At the rates bridging finance is charged you want to keep them for as little time as possible. That said, make sure the term is long enough for you to sort your exit route. If you go past the agreed term, the rate is likely to jump up significantly, and this is where the loans can cause serious financial problems.

Some lenders will give you the loan for a single day, so if you don’t need it longer, then why make extra payments.

What else should I know?

The headline rates highlighted are just that — headlines to capture your attention. You may see some lenders advertising as low as 0.37%, always be cautious and analyse all the other costs before deciding on the lender if you are in London and want an LTV of 25% to expect to pay the lowest price. If you are outside of London and want an LTV of 70 – 80% then expect to pay high costs.

Understanding Commercial Bridging Loans and it’s Uses

We’ve all been in that position. Driving back from work, after one of those days where you hardly feel the difference between a Tuesday or a Wednesday. However, then suddenly an image pops up in your head.

Yes, you keep on driving, but now your mind is somewhere else, you are now picturing yourself in that very property you’ve always wanted. You know deep down that there’s no need to check

So, you keep on driving, but the image fixed in your mind. After some thought, you decide to use some financial advice.

Just in case there would be a small window of opportunity for you to dream a little longer. However, what if the financial advisor would speak of not a window but a bridge? A bridge that may take you to the property you so eagerly desire. Alternatively, the amount you desperately need. Let us discuss bridging loans and their uses.

What is a Bridging Loan?

A Bridging Loan is a financial loan given in short periods, typically borrowed when there is a gap to fill between selling an existing property and buying another. When you require quick cash flow, to keep a business afloat and several other scenarios.

The way to obtain a bridging loan is when you already have a property to put up as security as the lenders will lend according to the real value of your asset.

Let’s say you still have your current home and you see no progress at all in its selling. You can always acquire the loan to buy the new home, and then pay off the loan once the existing property gets sold.

The property can be of any type, residential, or commercial. The lender will lend according to its market valuation. The value determines the amount you get and the LTV they offer.

If you would apply for a loan on the security of the existing property to buy another property, you will receive the finances swiftly, regardless of your current income or the sale status of your existing property. Moreover, even irrespective of your credit history!

There is some flexibility in how you repay the bridging loan; there are several options typically offered by bridging loan companies. These include:

  • paying the interest monthly until the end of the term when the full loan payment is made, known as monthly payments
  • Paying the loan interest at the end together with the loan amount. Known as deferred or rolled up interest
  • Borrowing the interest amount at the beginning with the loan and then repaying at the term-end

In other words, a Bridging Loan represents one of the best options in the industry for financial emergencies.

Originally it was destined for Landlords and Developers, but hard times and even crisis have made their way through the present economy, people looking to buy their home now use bridging loans.

Its recommended that if you would like to apply for a bridging loan to use a bridging loan broker. The broker will already have established relationships with lenders. You are allowing the broker to choose the right bridging loan company for your particular needs. Ultimately this will save you money and time.

Bridging loans are a quick, and maybe a safe way to get your hands on the money you need. However, they should be used with caution. Not doing proper research on the topic, not having a broker helping you and not having taken the time to verify the lenders. It may cost you more than what you bargained for if you do not understand all the costs and terms. Remember not paying on time puts the security property at risk and maybe taken by the lender.

Commercial Bridging Loans

A Commercial Bridging Loan is an option to fill a gap when fast finance is required. The only variation is that the property dedicated to business must be at least 40% of the total amount the property is worth.

For example: Let us say you would buy a small two-floor building, with retail on the first floor and a small apartment on the second floor, the amount that the retail is worth should cover at least 40% of the total amount of the property. Otherwise, it cannot become a Commercial Bridging Loan.

These loans can be applied for when you are buying a commercial property, like an established business, a retail center, a part residential/part commercial property, or whatever other property dedicated to commerce.

The repayment does not have to happen immediately. The borrower can start paying some months after he or she has received the loan in full. There are no special qualifications required to obtain a Commercial Bridging Loan; you will need a security property.

The lenders will typically work very quickly to complete the loan application process. The speed depends on how fast you get the documentation they require and complete the valuation.

It becomes a great advantage for the individual in terms of buying a property, because time can be of the essence when you have a good deal on the table.

Some good deals may be a property on sale below market value, such as in an auction. In the property market, the advantage is to the person who can get hold of cash quickly when required.

Another advantage is that a Commercial Bridging loan can be requested to cover a mortgage at a later date, that way eliminating the need to go to a bank or a lender to get a mortgage for your new property.

Luckily nowadays there are many short-term lenders, and that number is only increasing, as more and more customers show up. So, there is a constant wave of lenders entering the market, and you, as a customer, have several different options and choice, and the market is lowering the interest rate.

Bridging loans can be arranged within 72 hours in cases where the money is needed fast. Of course, if everything would go as it is expected to and all documents are submitted. Some loans could take even a few weeks to complete but compared to a traditional mortgage which takes months to set up; bridging loans are swift.

Most bridging finance companies and lenders would use a delicate and somewhat conservative lending process. However, it remains the quickest and most effective way to get your hands on the funds you need.

The Bridging loan companies, unlike banks which have much red tape to go through (It is just something that comes incorporated into the banking service) are more flexible. So that’s where once again Bridging loans present the quickest way.

Bridging finance might be the best option, but remember the fact that short-term financing will always be more expensive than long-term lending. So yes, in the end, you are paying for higher interest rates than you would with a conventional mortgage.

The best way to approach a Commercial Bridging Loan is to keep the payback term short. However, a common mistake is counting on your existing property to sell quickly, and in many scenarios, it happens that it doesn’t. So, in other words, you got your loan, but your previous property doesn’t sell or money is not raised to repay the loan, and the agreed time is over. So, you end up paying very high-interest rates, and the situation will remain that way until the old property finally sells. Its advisable to have a sound exit strategy.

A bridging loan represents a great way to go, if used properly. However, it does carry its risks, and they can become considerable risks. That is why the decision of taking out a loan has to be a premeditated and properly investigated one. It is advisable to always use a financial adviser before taking out a bridging loan.

Commercial Bridging Loans and their uses

Commercial Bridging Loans can be used to purchase most available types of properties. They can be instrumental in property auctions, for example. As long as a valid exit strategy is in place, the funds could apply for a variety of business reasons — cashflow limitations, covering tax liabilities, the need for working capital, and industrial equipment.

Usually, the decision to use a Commercial Bridging Loan comes from the speed that the money is needed and the speed it could be acquired. High street banks will always have their dilemmas, however, though it still is a little conservative bridging loan lender can be less concerned by previous credit history, making it a most accessible way for anyone to apply through brokers.

Buying Property in Auction

Commercial Bridging Loans can be used negotiated in a matter of days, that is why they represent a perfect option when buying properties at an auction. Property auctions are very common, and most properties there are bought through Commercial Bridging Loans, where the completion is required within 28 days.

Getting hold of cash quickly for business

Another right way to bridge would be when you need to raise finance quickly; this would provide easy access to cash. Also, when you want to refurbish a property or finish the development of a new one.

Paying off a mortgage

Also let´s say that the property you own, in its existing condition would not cover the mortgage with a lender. You can get the loan and secure the property with its worth.

Buying Below Market Property

If you are in property investment or flipping properties, there will always be a constant buying or selling of properties. At specific points, you may be short of cash, or some delay might show up, and suddenly a bargain shows up and your plan meets a dead-end by the lack of funds. It would be ideal to consider a bridging loan at this point.

Saving a Property from foreclosure

Another of the most common scenarios where an individual would be when they are about to lose their property, unable to pay the mortgage. House repossession is a genuine and widespread existing problem in the financial industry. It is legal, and it is done by mainstream lenders such as banks. Many have lost their properties to a bank simply because they do not have the money to pay. A Commercial Bridging Loan can be almost the only option available in a case like that.

Raising Cashflow for Business

Taxes are something we all have to pay, whether wanted or not; it is merely part of business. However, there might come times in which you are short in cashflow that even a primary obligation like this one might represent an issue. Taking a bridging loan out would be a proper legal way to settle your tax liability.

In Conclusion

Bridging finance is becoming ever more popular; it has much more positive aspects than what it does negative. However, carefulness is recommended. It is essential to have all the documents needed at hand, as well as to establish a clear/sound exit strategy. It is to assure the lender that you can repay the loan with its upcoming fees. Borrowers should always remember that same as with a mortgage, the property may be at risk if it is not paid up to date. So maybe driving home and picturing yourself in the property you want might not be that complicated after all. Getting your hands on immediate cash might not be as difficult as you thought.

Be part of the easiest and most efficient way to borrow money in today’s financial industry. You won’t regret using this source, as long as you keep your numbers sharp and yourself organized.