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.