A Comprehensive Guide To Bridge Loans
A bridge loan or bridging loan is essentially a short-term loan provided to ‘bridge the gap’ between purchasing a new property and selling a previous one. During the period of transition, you will be the owner two properties. As a result, there is a big chance that you will be deeply in debt. However, a bridge loan is often the only way for property owners to borrow enough money to tide them over.
In addition, bridge loans can be used as short-term loans to assist you in buying a property being auctioned, where the money will be needed immediately but your current property is yet to be sold. In essence, this type of loan can be useful if there is a need to access funds for a short period of time.
How it Works?
Open bridging loan and closed bridging loan are the two types that can be accessed by property owners. Those who access an open bridge loan will have no fixed date for repayment. However, they are usually expected to pay off the loan within a one-year period. Those who enter into a contract for a closed loan will be provided with a fixed date to repay the loan. This type of loan is typically extended to property owners who have already exchanged contracts but are awaiting the completion of the sale.
Irrespective of the type of bridge loan that is taken out, the lender will ask to see proof of a clear strategy for repayment. This could include taking out a mortgage or using equity from the sale of a property.
In addition, the lender will want to see proof of the new property being purchased and the cost you are planning to pay for it. If relevant, the lender will also want evidence of what is being done to sell the current property. Additionally, a backup plan should be in place if the repayment plan fails; for instance, if the expected sale should fall through. Bridge loans are quite costly and there is typically a set-up fee required. Therefore, it is wise to only take out this type of loan if you are sure it will not be needed for an extended period of time.
How Much Can Be Borrowed?
The value of the land or property being used for security will determine the amount you will be able to borrow. Currently, lenders offer loans ranging between £5,000 and over £250 million. Bridging finance institutions will give you a quotation of a maximum LTV (loan to value), which is typically between 65 percent and 80 percent.
Normally, first charge loans offer higher LTVs when compared to second charge loans as no other claim is on the property. The LTV on second charge loans are based on the amount of equity available after other mortgages and loans are deducted.
What is the Cost of These Loans?
Bridge loans can be quite costly as a range of fees and interest are charged.
Lenders charge interest on your bridge loan; however, they usually last only a few weeks or months. Instead of an APR (annual percentage rate), a monthly interest is charged, typically in one of these three ways:
- Monthly Interest
Interest is paid each month and is not added to the loan balance.
- Retained Interest
The interest is borrowed from the bridging finance institution to cover the payment of monthly interest; this is typically done for a set period. Everything is then repaid when the term ends.
- Deferred or Rolled Up Interest
This provides the option of paying all the interest after the term ends and the original loan is repaid as well. There is no monthly payment and each month, the interest is added.
These options may be combined by some lenders. For example, the interest may be retained for an initial six-month period, after which monthly payments would be made.
When you access a bridging finance, you will be required to pay a different set of fees in addition to the interest. The following are included among those fees:
- Facility or Arrangement Fee
These represent roughly 1 to 2 percent of the loan and cover the cost of setting it up.
- Repayment or Administration Fees
They cover the cost of paperwork when the loan term ends.
- Exit Fees
These represent approximately 1 percent of the loan if repayment is done early; this is not charged by all lenders.
- Legal Fees
These pay the solicitor and legal fees of the lender; a set rate is usually charged.
- Broker or Introducer Fees
If a broker was used, these cover the cost for their work.
- Valuation Fees
These fees cover the costs of surveyors valuating the property.
It should be noted that this list is not exhaustive; payment of other fees may be required.
What is the Length of the Process Take?
You will know whether your loan is approved rather quickly; typically, within a 24-hour period. After the approval, you normally must wait approximately two weeks for:
- Checks to be completed by your lender
- Valuation of your property
- Transference of the money
Where Can a Bridge Loan Be Accessed?
There is a range of companies that offer bridging loans; from small specialist lenders to major international banks. To simplify things, you could get the assistance of a broker with finding the right bridge loan for your situation; however, a fee is typically charged for that service.
Repaying Your Loan
When your funds become available, bridge loans are repaid in one instalment. If interest charges were deferred, they will also be due when the term ends. When it comes to closed bridging loans, a set repayment date will be established during the application process. If an open bridging loan was chosen, repayment should be arranged when the funds become available.
The loan can be repaid early; however, there could be an additional fee if this is done. Before deciding on early repayment, you should check with your lender.