There are many finance facilities available on the market when it comes to property finance. One of the most well known of these is bridging loans. Even though most people have heard of bridging loans, the majority of people don’t understand how they work and if they are a good idea to take out.
Bridging loans are a good idea when capital is needed fast and are used for the right purpose on a property deal such as buying a new house while the current property sells, as long as one understands that these loans can be expensive and it is not a debt to be taken without getting advice from a professional.
Hanan Shapira, Director of Property Finance Partners, says “bridging loans are quite flexible and can be used for a wide variety of different property and business projects.”
Understanding Bridging Loans
A Bridging loan is short term finance obtained against collateral such as a property. The loan is obtained no longer than 12 months in length in most cases until the property is sold or refinanced with a long term loan. The application process for a bridging loan is fast, and one can get access to capital in 2 to 4 weeks. You can borrow up to 80% LTV on the perceived equity.
Uses of Bridging Loans
Bridging loans can be used for many different purposes, and are mainly for property transactions, but they can also be used for business purposes. Below, we highlight a few ways in which bridging loans are used:
- To buy a new home
- Buying property at an auction
- Buying uninhabitable or derelict properties
- Property developments
- Refurbishments or renovation properties
- Buy to Let properties
- Paying VAT bills
- Buying Stock
To Buy a Home:
If you have found your dream home you want to buy, and need to get access to capital quickly, then a bridging loan would be an ideal solution. You can repay the loan on the sale of your current property.
Buying a Property at an Auction:
You can pick up some real bargains at an auction, but you need to have a deposit of 10% on the day and then pay in full within 28 days. Bridging loan application process is swift and getting the money in time for an auction is a viable option.
Buying Uninhabitable or Derelict Property:
Mainstream lenders will not lend on properties that do not have a functioning bathroom or kitchen. Bridging loan lenders don’t have an issue with this as their main determining factor is the security against the loan.
Whether you are a large property developer looking to purchase land for developments or buying a property to refurbish or renovate and sell for a profit, a bridging loan is a viable option for this. Many lenders will have good experience in these types of projects.
Buy to Let Properties:
You can get a bridging loan to buy Buy-to-Let properties and later repay the loan once you have long term finance in place such as a buy-to-let mortgage.
Paying off VAT:
Businesses can get a bridging loan to pay off VAT bills. The company can use a property or industrial equipment as security against the loan.
Businesses Buying Stock:
Companies can utilise a bridging loan to get access to money fast to buy stock. For example, Christmas is a very profitable time for businesses and can sometimes make a substantial chunk of their profits during this period. A bridging loan can be used to buy the stock and repaid after the sales.
Remember bridging loans are short term and whatever reason you take out a bridging loan, you must have a viable exit strategy.
For example, if you get the loan to buy a home, then the sale of your current home can repay the loan. If you buy a buy-to-let property, you can get long term finance sorted to repay the bridge. The lender will expect to see your plans on how you intend to repay the loan.
Bridging loans interest rates range from 0.30% to 1.5% monthly. There are several ways in paying the interest, you can:
Pay month by month – You pay the interest month on month during the loan term.
Rolled – The interest is added and repaid at the end of the loan term, so there are no monthly payments to make.
Retained – Here you borrow the interest payments from the bridging lender at the outset of the loan to repay monthly.
Besides interest rates, there are other costs to consider, such as arrangement fees, valuation fees, legal expenses, admin fees and exit fees. It is important to get to grips with all the costs beforehand.
Closed and Open Bridging Loans:
- A Closed Bridging Loan – has a definite time period of the exit strategy, for example, if you bought a house, you would get long term finance to repay the loan. Lenders prefer a closed bridging loan and are typically cheaper.
- An Open Bridging Loan – Here the exit strategy is not so clear cut, for example, if you are in business and got a bridging loan for the stock, you will repay once all the stock is sold, this may take longer then anticipated. Open bridging loans are generally more expensive and can be extended to 18 months in some cases. Although that means more interest to pay.
If you are taking a bridging loan, it is advisable to seek advice from a professional to find out if it is a good option for you.