Despite bridge financing growing quickly in popularity, this article will outline what those interested in the UK bridging loans needs to know.
One reason for the loan’s fast rise in popularity is they can be utilised for a variety of functions and not only for refurbishing and purchasing a property; there’s also been a huge jump in the amount of bridging loan suppliers in the marketplace.
This growing offering is also seeing the broadening of loans being available for purposes that weren’t considered a few years ago; essentially, should a borrower meet the lender’s criteria and security to cover their loan then the bridging finance can be used for just about any need.
Indeed, this is one reason why bridging has taken off in the UK – that and the banks have tightened their lending criteria since the financial crisis.
The first issue that anybody thinking of this short-term financing must understand is the bridging loan interest rates; there’s no set rate as such and they will differ from lender-to-lender as well as for the loan’s purposes.
Also, the loans are available for up to two years and, in some instances, from just a few days – should the need for such a bridging purpose arise. For those who have a relationship with a bridging finance broker or lender then they can access money in hours which, for many borrowers, especially property developers, this process to react quickly to a lucrative opportunity is a sound business decision.
In addition, bridging loan lenders also have many different loan-to-value (LTV) standards so some will give proportionally more than others while some may limit how much they’re ready to give to an applicant.
The UK bridging loans
This means a lot depends on the security being offered for the loan by the borrower for the UK bridging loan.
It is important that a borrower understands that a bridging loan is simply meant to be a short-term finance vehicle which also helps explain why the rates of interest can look somewhat higher than from high street banks, for example.
Another big difference is for the fees and admin charges that the lender may impose – these are higher than from a high street bank but they are all carefully explained beforehand.
However, they can add substantially to the borrowing which is why these loans are aimed at a short-term need and it’s advisable to seek advice before committing to such a loan; most bridging finance brokers will have the expertise to help explain what the loan will deliver and its costs.
Also, while most lenders will not impose an exit fee, some do and others may levy a charge for early repayment too.
Important issue to appreciate with a bridging loan UK
Another important issue to appreciate with a bridging loan UK is that there’s the possibility of not paying interest on the loan until it falls due.
For many potential borrowers, this is an attractive proposition and for those who are interested then they need a bridging loan that has the interest ‘rolled up’.
The other big difference between bridging lenders and high street banks is that the application process is much simpler and easier – depending on need an application can be processed within a few days.
This means the borrower could have access to a large sum of money in just a few days. More complicated applications, for instance, those with an unusual security will take longer.
On top of this, the range of loan purposes is also broader than those offered by mainstream lenders.
While many borrowers will be wanting to purchase property, for instance, home buyers, developers, and landlords, there’s also the opportunity for companies to access money for a shortfall in cash flow or to buy stock or even to refurbish their premises.
The opportunities for property development are impressive – the quick application process appeals to developers wanting to buy property at auction means they can do so confident they can have the bridging finance in place within a few days.
An exit strategy in place when applying for bridging finance
However, having an exit strategy in place when applying for bridging finance will also help – and offer the chance for lower rates of interest.
That’s because the lender will find someone who knows how and when they will repay a loan more attractive as a business proposition than someone who does not.
These are known as ‘closed’ and ‘open’ bridging loans.
The difference between the two is that someone with a closed loan knows how and when they can repay the money while someone with an open loan may not and will pay slightly more for this.
This is reflected in the rates of interest being charged and also with the administration charges with some lenders too.
Indeed, when shopping around for bridging finance the different rates of interest being charged may confuse some since lenders offer differing rates depending on the amount being borrowed – unlike a high street bank that will charge a flat rate.
Loan depends on the value of the security put forward
It’s also worth bearing in mind that most lenders will only approve a loan that depends on the value of the security being put forward. These are known as the loan to value (LTV) and again these vary depending on the size of the loan and its purpose.
As explained at the beginning of this article, the process for applying for a bridging loan may appear to be complicated but it really isn’t; it helps that lenders have bridging calculators on their websites to help.
Indeed, this will also clearly spell out the interest rate, the LTV and the administration charges that the borrower will have to face. There are no hidden costs and the calculator will clearly show how much is to be repaid.
Also, the expertise of a bridging loan broker may prove to be helpful and help find a lender who will best meet the borrower’s needs and circumstances.
For more help and advice about UK bridging loans, then contact the helpful team at The Bridging Crowd.