Featured

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 – FREQUENTLY ASKED QUESTIONS

Bridging Loans have been one of the most popular choices for people who are looking to make property deals but are short on cash because of some reason. 

Bridging loans act as a bridge for the buyers, to ensure that their transactions are not tied up. These short terms loans can be availed for a variety of days, and duration. 

Even though they get used for other purposes, they are mostly used for fulfilling property-related transactions, for facilitating scenarios where the money is an issue when in between property deals. 

However, the overall mechanics of bridging loans is quite complicated because of the underlying variations and options that are readily available to lenders, as well as borrowers. Hence, in this regard, here are some of the most frequently asked questions about Bridging Loans in the UK, that can help develop a better understanding of the instrument, and how it functions. 

How much can be borrowed?

The amount that can be borrowed from bridging loans is contingent on the value and the type of security property that is under question. 

Therefore, it is a mixture of the overall profile and the case that is presented in this regard. However, theoretically speaking, it can be seen that the maximum loan size that is available on a regulated bridging loan is often 70% of the security properties valuation. On the other hand, the maximum amount available for an unregulated bridging loan is 75% to 80% of the security properties value. 

How long can a bridging loan be obtained for?

The standard industry term for a bridging loan is approximately 6-7 months. However, depending from situation to situation, this can change varying from 2 days to 12 months. In certain circumstances, longer-term loans of 18 months are not unusual. 

Are there any early repayment charges?

Most bridging loans do not have an early repayment charge. However, a penalty is mostly applicable in the case where it is explicitly mentioned in the contract. 

What happens in the case where the Bridging Loan is not paid back by the end of the term?

By definition, bridging loans get arranged for short term requirements, and this particular amount needs repayment within a specific time frame. 

The exit strategy or the overall mechanism in which the Bridging Loan is supposed to be repaid is the fundamental and predominant strategy that needs to be adopted in this regard. It is a perspective that brokers and lenders put a significant emphasis on. 

This gives them absolute clarity about how their loan would be repaid without any further delay. If the lender does not get convinced with the exit strategy, likely, the bridging loan is not going to be accepted at all. 

The most commonly applicable exit routes, in this case, are mostly sale of property or refinance. Factually, if the transaction is carried out from the stated exit route, a lender would expect an agreement that the property would be liquidated on the market in the said time frame to ensure that the overall repayment timeline is not disturbed, even in the case of unforeseen circumstances. 

On the other hand, if the exit route is considered as refinance, then lenders are supposed to carry out due diligence to ensure that there is a possibility of the borrower being able to strike a refinancing deal at the end of the term, to pay back the bridging loan lender in due time. 

In cases where both the criterion mentioned above is not met, lenders have to devise a strategy to counter this particular issue. 

It is not unusual for the lender to get in touch with the borrower three months before the term ends to determine the progress of the project and exit route.

In this case, due recommendations are going to be made, which might include a reduction in the price of sale, that might ensure that he gets repaid in due time. 

What are the upfront costs for applying for Bridging Loans?

The charges that are borne when applying for Bridging Loans is mainly for the valuation report. An exception to valuation-related fees, there are no upfront costs and charges that have to be paid. 

What are the other fees and costs related to Bridging Loans?

In the case where the bridging loans are serviced through Property Finance in the UK, there will be arrangement fees typically included at 1% of the loan. However, this will only apply in the case where the application is successful, and the financial facility is in place. However, in the case where the Bridging Loan application is not accepted, then this arrangement fee is going to be waived. 

The interest rate on the bridging loan from 0.40% to 1.5%

Additionally, a valuation report will be required on the property submitted as collateral to secure the loan, the amount depending on the value of the property.

Legal fees are applicable in obtaining bridging finance, includes the borrowers and the lender’s legal fees.

In some instances an exit fee is applicable.

However, the arrangement fees, exit fees and the legal costs are generally clubbed with the borrowing facility, and repaid at the end of the term, along with accrued interest. 

Do Credit Issues deter the processing of Bridging Finance?

Bridging Finance is influenced by the security value in a property offered, in addition to the existing exit route. 

If these issues are favourable from the perspective of the lender, existing credit issues are unlikely to be a problem. 

However, what needs to be pointed out here is the fact that refinancing a client with credit issues from out of a bridging loan is quite rare. Therefore, the existing exit route from a bridging loan is mostly sale. 

Do Income Levels influence the processing of Bridging Loans?

Even though individual lenders do require some income proof, in most cases a bridging loan is available with the required fees and monthly payments added. Hence, there are no monthly payments to settle this particular loan. 

With this perspective, it removes the need for any income proof.

What can a Bridging Loans be used for?

Bridging Loans – Used for numerous reasons. However, the underlying intent behind obtaining a bridging loan is mostly of financing property-related transactions. 

Business-related – Companies obtain short term financing for stock, machinery, expansion, and to finance upcoming projects.

What is a Closed Bridging Loan?

A Closed Bridging Loan can be defined as a short-term borrowing product that includes a feasible and viable exit strategy from the borrower’s application. 

If there is sufficient proof that can be produced to show that a specific transaction will be completed by a specified date (and hence, the loan will be repaid via this payment), then closed bridging loan is the most suitable option. 

Furthermore, closed Bridging Loans are the most common type of bridge finance that is available and has the highest approval rates. 

What is an Open Bridging Loan?

An Open Bridging Loan is different from a closed bridging product because in this particular loan category, the borrower is not supposed to show the likely exit route he will take in order to settle the debt, and any other outstanding fees by the due date. Therefore, because of this feature, they are relatively harder to obtain because there is uncertainty about the repayment strategy. They carry higher interest rates in comparison to closed bridging loans.

Is Bridging Loan same as Property Development Finance?

No, Bridging Loan is not the same as Property Development Finance. 

In order to understand the underlying differences between bridging finance and development finance, their similarities should be analyzed to draw a comparison. 

Firstly, they are both short-term, asset secured borrowing products that mainly intend to bridge several different property standards. 

However, when it comes to Property Development Finance, the money that is lent by the provider is mostly released on an incremental basis after project completion milestones are subsequently met. 

With the progression of the project, the overall value increases, and additional security is utilized as collateral in order to secure other and incremental funds that might be required for the next stages of the project. 

The pros and cons of a Bridge loan

We know “bridge” is known as the pathway to cross someone from one part to another part of a city or village without closing the way underneath.

So the bridge loan is something like that; it is a short form of a loan secured by your home to solve some short term transactions in a shorter period. You can also call it a swing loan.

When you are running a company, and your Quick balance is running out for a long term project, now you want some quick money.
The bridge loan takes place over there and saves your company from bearing the expenses, and makes you survive till you get another source of money from anywhere else.

It can be used in the case of having a new home.

What are the terms and types?

A bridge loan is a short term loan that is used to be temporary financing to invest your money in short term projects by mortgaging your current property.

This type of loan does not exceed 80 percent of residential properties and 65 percent of commercial properties, and they are provided in the shortest period about three weeks to twenty weeks with 1-2% per month.

There are many similarities in a bridge loan and hard money loan. Where the bridge loan reduces, the gap between the more extended term loans and the hard money loan refers to the landing source, investment pool, or private company.

This bridging loan is defined as a closed loan and an open loan.

When the borrower shows a clear and creditable repayment plan, then it is named as a closed loan. This loan is a secured loan for both the borrower and creditor.

And if a borrower doesn’t agree to a secured finance source, then it is termed as an open bridging loan. There are more possibilities of risk in this type of loan, and in most cases, the borrower fails to repay, and it counts as a loss project for both the creditor and the borrower.

 The Uses

 -For the home movers: 

 With this loan, you can buy an inhabitable property.

 You can find property restoration.

 You can buy a property under the value market.

You want to buy a new home whilst selling your current home. But you are not getting any customer for your existing home, and your favourite new apartment is going to be sold in auction in a few weeks, then what would you do?

In that case, you can make a bridging loan to solve the difference.

If you take a bridge loan, then buy your favourite new apartment by sale. After that, sell your current home at a good price and then repay the loan afterwards. With that, this loan gives you purchasing flexibility.

 – It can be used in the IPO:

You can use this sort of loan in IPO (Initial public offerings) related expenses, and when your company has all the shares sold out, then they may repay the bridging loan. These loans are usually supplied by the investment bank for a forwarded payment for future sales.

 – It can be used as an alternative to invoice finance:

When your company is at stake, and you have to make a long term deal, and you could be spending a lot of money for the expenses. You can take a bridging loan in that case.

 -Paying a tax bill:

You can pay your tax bills through having a bridging loan if it is necessary.

-Starting a new business: 

 If you feel that you are having a shortage of your capital, You can take a short bridging loan to make the short term expenses and productive ones.

– Extending a lease:

 If you feel that the machine you took at a rental needs to stay for more time, but your finances almost runs out, you can ask for a bridging loan.

-Refinancing other loans: 

You can refinance other investments with a bridging mortgage.

-Auctions:

Require fast finances for a property seen at an auction, then a bridging loan would be the perfect finance for this.

The Pros and cons of Bridge financing

Everything in this world has a yin side and a yang side. The bridge loan also has some benefits and disadvantages. It is up to you whether it is a blessing or a high risk to you and your company. 

 Let us have a look at the pros and cons of bridging finance.

 Pros:

  • Fast Financing: This financing is fast then the other loans and financing. It takes less time for the application process and ending. The application takes about 14 days to conquer.
  • Purchasing flexibility:  having a bridge loan facility, you can independently buy your favourite products or home without waiting for the current asset to be sold.
  • Used as capital in your business:  You can use the amount of money for the IPO expenses, and after-sales, you can repay.
  • Interest:  This can be both pro and con, the pro being that the market is competitive and bridging loans can be as cheap as 0.33% per month.
  • Removes contingencies:  This type of loan makes you free, and as a Sellers, you may look more favourably on purchase offers. 
  • Buying inhabitable property: Bridging loans can be used to obtain an inhabitable property.

Cons:

  • More expensive: A Bridging loan can be more costly for its high-interest rates than the other mortgaging loans because of the fast action and reliable security.
  • Failure of repayment can be harsh: If your chosen method of refunds fails, then there is a big possibility to lose your mortgaged asset. Because of high interest, at the end of the refunding time, it can turn into a bad experience.
  • Origination Fees:  The lenders typically charge about 2% for the origination fees.
  • Equity Required: When you are mortgaging your present home for your new home purchase, the lenders often require a certain amount of capital, about 20%.

Meta:

Due your due diligence and have an exit strategy before utilising a bridge loan facility by the institutions, brokers and banks. Please do not take the loan without balancing the costs and risks properly. It can cost you your home. This type of loan can help you to get a new property, and it can be beneficial for your business too if utilised correctly.

SHARIAH-COMPLIANT BRIDGING LOANS OFFERED IN THE UK

What are bridging loans?

Bridging loans are mainly used to borrow money for shorter time duration. Primarily used by individuals who want to purchase real estate.

The example in this regard is to ensure that finance is arranged in order to facilitate a purchase in the case where the individual is short of funds. Bridging loans are mainly used in order to ensure that property transactions can be carried out in a smooth manner without any liquidity issues that might exist in this regard.


There are two main types of traditional bridging loans, which can either be closed or open. As far as closed bridging loans are concerned, they have a fixed repayment date. However, open bridging loans are expected to be settled within a time duration of one year.

The Necessity for Shariah Compliant Bridging Loans

Over the course of time, Islamic banking has increased in the UK considerably due to it being a popular choice amongst Muslims since it complies with Islamic ethical principles of interest free and is a viable choice for the growing Muslim population in the United Kingdom, and therefore, this makes it a viable option for those who want to avoid interest on religious grounds or otherwise.

How are Shariah-compliant bridging loans different?

As far as Shariah-compliant bridging loans are concerned, it can be seen that they are mainly offered by banks that operate under Islamic finance principles.

Under these principles, banks are not allowed to charge interest against the Islamic bridging loan. In the same manner, they are not permitted to deal with businesses that are involved in activities prohibited in Islam. They include alcohol, gambling, and addiction causing products. Hence, they operate under the Islamic Shariah concept and do not take any interest. However, they are available to Muslims and non-Muslims equally.

Shariah-Based Loan Provider: The Pioneer

Despite the fact that there are a couple of institutions that offer Islamic bridging loans today, yet UK’s first Shariah-compliant bridging lender was Offa. They initially provided Shariah-compliant residential and commercial bridging facilities with a maximum finance-to-value (FTV) of around 75% and 65% respectively.

Over the course of time, they have a further plan on introducing refurbishment, stretched development, planning and a shared risk ethical finance facility. This can be referred to as a Shariah-compliant equivalent of a joint venture. The horizon of shariah based bridging loan providers is further expected to spread their services to UK residents, expats, and international clients who are interested in these services. 

Most service providers in this case offer services to individuals, sole traders, partnerships, limited companies, LLPs and offshore SPVs. However, it should be noted that they charge procuration fees of up to 2%, which is mainly payable to introducers.

 Clifton Private Finance

Clifton Private Finance is another Islamic bridging finance provider in the UK. They offer bridging finance from £100,000 to £10m. Furthermore, Finance to Value (FTV) is up to 75%. In the same manner, Net finance to cost (FTC) is also offered up to 75% in this regard. The profit rate is 1%, and the term that is offered 1 to 12 months. Further, it also facilities the customers by declaring that there will be no early repayment charges in this regard. The finance is offered individuals, Limited Companies, LLP’s and Partnerships. It is also available to properties in England & Wales. This is also in compliance with universal Islamic Finance Principles. 

Gatehouse Bank 

Gatehouse Bank is another provider for Shariah Complaint Bridging. Given the fact that Offa has continued to be an essential industry leader in Shariah Loans, they have established collaborations with to facilitate Shariah Based Bridging loans for UK residents, at large. 

FORMS OF SHARIAH LOANS OFFERED BY ISLAMIC BANK

There are a number of different types of Shariah-compliant loans that are mainly offered by Islamic banks and institutions. Banks, in this case, may also provide financing options to their customers to purchase through, which further enables them to have access to funds, without having to bear interest cost on the purchase. However, there is a vast majority of Shariah-Compliant Bridging Loans that are offered. These products are described below:

Home Financing

In Shariah-compliant bridging loan options, there are individual banks that provide a lease-to-purchase concept to facilitate home financing. This is highly important to assist customers in enabling them to get good deals for the real estate that they might be interested in purchasing. Therefore, it includes elements of systems of Murabaha (cost + financing), Ijara (finance institute leases the asset at an agreed rental fee for a specific period), as well as Musharaka (joint enterprise). Using these elements, they might additionally be able to avail their bank’s services, which can facilitate them to make house-related purchases. 

Shariah Related Loans for Construction

Loans and finances for construction is another highly important aspect which is vital to ensure that there is Islamic compliance with the said loan acquisitions. As far as construction-related industries are concerned, it can be seen that compliance with Islamic principles has now been embedded into this particular stream, predominantly owing to the reason that the basis of financial costs is mainly reliant on profit-and-loss sharing. 

CONCLUSION

Therefore, it can be seen that Shariah-based Bridging Loans have been increasing on a continual basis in the UK. With a number of service providers in this regard, there is still room for plenty of innovation in the industry. This can significantly be helpful for banks and financial institutes to meet their targets and increase the overall market for Shariah Related Financing.

As a matter of fact, the existing providers do not have a lot of product differentiation to offer, and therefore, this creates a gap in the market for someone to create an impact, and introduce products that can benefit the growing Islamic population, and fuel the industry to promote a higher number of property-related transactions.

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.