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.