While they may appear to be a complicated form of alternative finance, this quick guide to short term bridging loans will prove they are not.
Bridging finance has grown quickly in popularity in recent years as most mainstream banks and lenders have tightened their lending criteria so it is more difficult to access loans.
However, the process for applying for bridging finance is not only straightforward but it’s also a quick completion process with applicants able to get the money within a few days or a week or two.
One reason for this, and it’s the big difference between bridging loans and mainstream loans, is that the applicant will need to have some security for the loan being forwarded which tends to be a property.
Essentially, the loan being offered will depend on the value of the property which will be independently surveyed to ensure its market value is used.
What is a bridging loan?
So, what is a bridging loan? A bridging loan should be seen as a short-term loan and these are usually for one year or less but there are lenders willing to offer two-year bridging loans.
Most people will hear of bridging loans when they come to sell their property and want to buy another one while their current home is in the process of being sold; this loan then effectively bridges the gap between buying a property and having the money to pay for it.
However, bridging loans are not just for buying property – they can be used by investors wanting to buy property at auction, develop or refurbished property and lots of other uses.
For example, a business could use bridging finance to buy stock for a promotion or refurbish their premises or someone may have a large tax demand that they need to settle quickly.
This means that the purposes of a bridging loan are wide and varied with no restrictions on what the money can be used for since the loan is secured against the security property.
Two types to consider
For anybody interested in bridging loans, there are two types to consider.
The first type of bridging loan is known as a closed loan, so the borrower will have a date in mind when the loan will be repaid. For example, when someone has sold their home and knows when the proceeds will be available to repay the bridging loan.
The alternative is an open bridging loan where the borrower does not have a set date in mind, but there is a clear point for the bridging loan to be repaid by. Failure to repay the loan in time may see it being renegotiated and possibly at a higher rate of interest.
How does a bridging loan work?
How does a bridging loan work? As mentioned earlier, the big difference for a bridging loan is that it is much quicker to organise. If you have a relationship with a lender already this can be done in as little as 24 or 48 hours.
Generally, it may take a week or two for the paperwork to be processed and a surveyor to carry out an assessment of the security property. This still compares well to several months that a high street lender may take.
How much can you borrow with a bridging loan? When it comes to the amount that you can borrow, a lot depends on the lender’s criteria and some may not even carry out credit checks and will rely simply on the security property.
The minimum loan size can be from as little as several thousand pounds, while some lenders will offer £1 million or more.
Knowing how much you need to borrow brings us to the question of interest rates.
Bridging loan rates of interest
The bridging loan rates of interest tend to be much higher than for a traditional lender because they are easier to apply for and the money can be accessed in days or a couple weeks.
Also, bridging loans are for the short-term, mainly because of the interest rates, which is charged on a monthly basis so it’s in the borrower’s interest to repay the loan as quickly as possible.
The issues affecting the amount of interest being charged will depend on the lender’s criteria, whether the applicant wants a closed or open bridging loan and also the loan-to-value – that’s the loan size compared with the property’s value.
Most bridging finance firms will offer an LTV of between 70% and 75% and there may be an arrangement fee and a broker’s fee on the amount being borrowed. There may also be some legal fees with lenders to pay as well.
These fees plus the surveyor’s costs will need to be paid when the loan is agreed.
Bridging loan borrowers
Finally, potential bridging loan borrowers also need to appreciate that they don’t have to repay the interest every month but instead this interest can be rolled-up so they pay it when the loan term ends.
Essentially, short term bridging loans have grown in popularity because they offer flexibility and access to short-term, quick funding solutions that meet a wide range of needs and the helpful team at the BridgeCrowd can explain more.