The growing popularity of the UK bridging loan market means there’s a demand for advice and tips about what this type of financial product is.
Essentially, a bridging loan is a short-term loan that is generally used for buying property – particularly when a home seller needs to buy a new home.
This means that the loan provides a ‘bridge’ that the home seller needs between selling their property and receiving the cash for buying another home.
However, bridging finance has become so popular that these loans are being used for other purposes, such as paying a tax bill or for firms to invest in promotional stock or refurbish their premises.
There are fewer restrictions when accessing a bridging loan, and it’s possible to organise them quickly – certainly more so than from traditional high street banks.
Buy a property at auction
As an example, if you are looking to buy a property at auction, then you could bid on a property you like and have the money available before the auctioneer’s deadline falls due. If you meet the lender’s criteria.
Also, bridging loans can be used for renovating a dilapidated property that a traditional mortgage lender will not approve a mortgage for.
It’s important to appreciate that there are two types of bridging loans available:
- The first type is a closed bridging loan, so the borrower knows when they will have the money available to exit the loan. Usually, this will be when their property sale comes through.
- The second type is an ‘open’ bridging loan with the borrower who does not know when their exit date will be and these tend to attract a higher rate of interest as a result.
Bridging loan UK lenders
Along with lower criteria for acceptance, bridging loan UK lenders can arrange the finance within a few days, and in some circumstances, even quicker than that.
Normally, a loan applicant can borrow up to 75% of a property’s value and all bridging loans will need a security property to access the cash.
Some lenders will also look at the borrower’s affordability and some will not.
Along with being quick to arrange, bridging loans also offer the opportunity of not having to be paid until the agreed exit date falls due.
Otherwise, bridging loans tend to be flexible so the borrower can repay them whenever they are able to do so. Some lenders will have a redemption or exit fee, but most do not.
Also, borrowers have the option of not paying interest on the loan until it falls due but they can pay interest if they wish.
Bridging loan rates UK
It’s also important to appreciate that bridging loan rates UK tends to be higher as the loans tend to be a short-term undertaking; usually for 12 months but some lenders offer terms of up to two years whereas traditional lenders will offer a mortgage for up to 25 years.
This type of alternative finance also tends to be more expensive than traditional finance, though the money is easier and quicker to access and the cash can be used for just about any purpose.
There are a number of fees attached to the application process, but the most important will be the cost of an RICS-qualified surveyor who will inspect the security property and offer an independent valuation.
It’s this valuation that will dictate how much a bridging loan lender is willing to lend and the surveyor’s fees will be paid by the applicant.
Fees for bridging loans
The fees for bridging loans include an administration charge, sometimes known as the facility or arrangement fee, and can be up to 2% of the loan’s value.
In addition, the lender’s legal fees and the borrower’s legal fees will need to be paid – both by the applicant.
As mentioned, some bridging finance firms may impose an exit fee which could be up to 1% of the loan’s value.
Also, for those who use a bridging loan broker, then they will also have a fee and this too could be up to 1% of the loan’s amount.
Another attractive aspect of bridging loans is that they offer three ways of paying interest. They include:
- A bridging loan lender can withhold the interest so it is deducted, along with fees, from the gross advance at the loan’s beginning
- You can also ‘roll-up’ the loan’s interest so it’s repaid as a lump sum at the end
- Applicants can also service the interest and pay every month, as they would do with a mortgage.
Calculating your potential bridging loan
The best way of calculating how much your potential bridging loan application may cost, including the fees and charges, is to use a bridging loan calculator and most firms will have one on their website.
This will spell out clearly how much you could borrow and what the overall costs will be.
Essentially, for those who want UK bridging loan advice and tips, it’s worth spending the time speaking with the experts at The Bridge Crowd.