A Beginner’s Guide to Bridging Loans
Over the last few years, bridging loans have become increasingly popular amongst property investors and developers looking to grow their property businesses. They are a vital tool for many investors and often the key to getting deals done quickly.
In this guide, we take a look at how bridging loans work and how you can use them in your property business.
What is a Bridging Loan?
A bridging loan is a type of finance product often used by property investors, developers, business owners and individuals requiring short-term cash to bridge a funding gap until other funds are available or until a long-term finance solution, such as a BTL mortgage, is in place.
This type of finance is often used by shrewd investors to start or scale their property portfolios as it allows them to make fast decisions and purchase property quickly.
What can a Bridging Loan be used for?
As bridging loans are a form of fast and flexible finance, they can be used for various situations. Here are some of the most common uses:
Meeting deadlines fast
Bridging loans are commonly used to purchase a property, access funds to carry out renovations, or apply for planning permission – quickly!
In most cases, the funds can be available in as little as one week.
This means investors can seize opportunities and act on deals before they’re gone.
- Breaking the property chain
If you have found a property you would like to purchase but are waiting for another property to sell, a bridging loan can be used against the property you wish to sell. Once the property has sold, the loan is then redeemed.
This means investors can purchase their new investment, find a tenant and continue to earn an income off the property while waiting for the sale of the previous property to complete.
- Property refurbishment
If a property needs significant refurbishment or deemed inhabitable, many high street lenders will be reluctant to help out.
A bridging loan can cover the costs associated with renovation work and can then be paid back by selling the property or taking out long-term finance such as a mortgage.
- Auction purchases
Bridging loans make it easy for investors to say yes to properties in a spontaneous auction environment before the bank has approved the mortgage.
Auction properties are often inhabitable and require significant renovation.
A bridging loan can provide the funds the investor needs to buy the property and then carry out the work.
- Expansion plans
Many landlords rely upon rental income to purchase further properties, which can make building a portfolio a slow process.
A bridging loan can help investors continue to purchase a property which can later be repaid by refinancing onto a long-term solution, such as a buy-to-let mortgage.
This allows shrewd investors to continue growing their portfolio, without waiting for cash flow to increase.
- Quick cash
If funds are unavailable during the sale or refinancing of a property, a bridging loan can be used for commercial means.
This includes paying for essential payments such as tax, and VAT, or supporting the business by covering vital costs.
There are also some other common and creative ways you can use bridging finance – read this blog to find out more.
Who is eligible for a Bridging Loan?
A bridging loan can be provided to individuals or companies.
To secure a bridging loan, a lender will require a strong exit strategy and security for the loan, such as another property. As security is required, credit history and proof of income is generally unimportant to lenders, and most will accept:
Employed, self-employed or retired.
- Private individuals, partnerships or limited companies.
- Borrowers over the age of 18 years old.
- Borrowers that live or have a registered address in the United Kingdom.
- Borrowers with a form of security – usually one or more properties.
- Borrowers with a defined exit route to repay the loan.
How much can I borrow with a Bridging Loan?
Generally, lenders will offer a minimum of £50,000, and there is no maximum amount that can be lent.
Each lender has its own limit; however, most go to a maximum of 75% LTV (loan to value) of the gross loan amount. This includes any retained interest for the term of the loan and any arrangement or broker fees.
For example, on a property valued at £100,000, the maximum gross loan available will be £75,000. Therefore, the net loan amount (the amount you will receive) will be £75,000 minus the retained interest and fees.
Some lenders will offer more than 75% LTV, and Ramsay & White can offer up to 100% of the purchase price where additional security is added.
How is a Bridging Loan repaid?
When taking out a bridging loan, it is important to consider how you will make the repayments. These are always made clear in the loan agreement.
Lenders will require details regarding your exit strategy. This is usually the sale of the property or refinancing onto a long-term deal such as a commercial, residential or BTL mortgage.
A solid exit strategy can be the difference in the bridging loan being approved or denied.
What security is needed for a Bridging Loan?
Most bridging loan providers require property as security. This could be just one property or several.
They will secure their loan by taking a charge over the property. If the payments for the loan are not made, you could lose your property.
How long can I get a Bridging Loan for?
A bridging loan is a short-term solution while long-term finance is put in place.
At this point, the development is usually sold on, producing an income, or long-term finance is put in place so the loan can be repaid.
In general, most lenders offer terms from 1 month up to 1 year. However, each individual lender’s terms will vary.
In special cases where the borrower can offer a low LTV, bridging finance may be available for up to 18 months.
The average bridging loan now lasts 12 months. If finance is needed for longer than this, development finance is often a better solution.
Ramsay & White offers bridging loans from 1 month with market-leading rates.
How much does a Bridging Loan cost?
Like any finance solution, it’s vital you understand the costs associated with a bridging loan.
While the fees will vary slightly from lender to lender, below is a breakdown of what you can typically expect to pay.
The main cost associated with a bridging loan is the interest and there are three ways a lender can charge this:
- Monthly interest: the interest is paid off each month, and it is not added to the loan.
- Deferred or rolled up: the interest is added to the final amount which is paid at the end of the loan term. For example, if you borrowed £100,000 and £1,000 interest was added at the end of the first month, the total owed would be £101,000. In month two, £1,100 in interest will be added, taking the total to £102,100, and so on.
- Retained: the total interest is calculated at the beginning of the term, based on how long you’re borrowing for, and is paid at the end of the loan term. For example, if you borrow £100,000 at 1% interest for 12 months, the total amount owed at the end of the 12 months would be £112,000. If you pay off the loan early after just 6 months, the amount due would reduce to £106,000.
Because a bridging loan is short-term finance, the interest rates are calculated on a monthly basis.
Commercial property rates are higher than those secured against a residential property, and loans against land generally have the highest rates. The higher the level of risk, the higher the interest rate will be.
Lender Arrangement Fee
A 1-2% lender arrangement fee is typical for most bridging loans. This is calculated using the net or gross loan amount and is often rolled up into the loan. Some providers will also charge an admin fee for arranging the loan.
Before a bridging loan application can be processed, a professional valuation must be carried out on the property that is being used as security for the loan.
The cost will vary depending on the surveyor, the asset value, location and type of valuation needed. However, you can expect to pay £500-£2000 for commercial properties.
Fees for higher value propositions (usually over £1.5 million) may be subject to negotiation.
Because valuations need to be carried out before a loan is completed, the fee is not added to the loan itself and is instead paid directly to the surveyor. It is usually the only upfront fee you can expect to pay.
If you’re using a broker to secure your bridging loan, you can typically expect to pay an upfront fee or 1% of the loan value. This is either added or deducted from the gross loan.
The broker fee can vary based on the complexity of work required; however, a broker will work tirelessly to get the best deal for you and aim to save you money overall.
The amount you can borrow will vary from lender to lender, which will determine how much deposit is required.
Most bridging finance is offered at 70-75% LTV (loan to value), which means for many lenders, you will need a deposit of at least 30-35%.
At Ramsay & White, we can offer our clients bridging loans of up to 100% of the purchase price subject to a full application meeting the lenders’ criteria and where additional security is added.
The legal fees associated with bridging loans are the redemption
fee and solicitor fee. The lender will use a solicitor to carry out the legal due diligence and some will expect the borrower to pay the fee.
Additionally, you will have your own legal fees to consider, which can vary across the board.
Some lenders will charge an exit fee at the end of the bridging loan. This is typically 1-2% of the loan or equal to one month’s interest. This is added to the loan when it is redeemed.
If you decide to pay off the loan early, most lenders will not charge an early repayment fee, which means you can save on the interest payments.
If your exit strategy does not go to plan and you are unable to settle up the bridging loan at the end of the term, some lenders will consider extending the agreement slightly, but in most cases, you will be liable for extra charges.
Extending the bridging loan is at the lender’s discretion, and some will activate repossession proceedings if the exit strategy has not been met.
Consider all Costs
Due to the different factors that determine the cost of a bridging loan, lenders will often use a blanket marketing approach and advertise them as ‘rates from’.
While a low-interest loan is desirable, to find the best solution for your project, you need to consider all of the costs mentioned above and not just the interest rates.
The difference in fees charged by each lender can be vast, so if you’re determined to save money, a comparison of all costs is vital.
Contacting every lender individually would be time-consuming, and comparison sites don’t always include the whole of the market. A broker can guide you in the right direction and source the most appropriate loan for your project.
What do you need to get a Bridging Loan?
Every lender will assess each application on a case-by-case basis. However, most lenders will require the following information:
- Full name
- Date of birth
- Current address
- Residential status
- Employment status and details
- Borrowing entity (Ltd company/LLP/personal)
- Other owned properties
Lenders will require a brief summary of your background and experience, if any, in commercial property. They’ll also need to know why you need a bridging loan and how you plan to use it.
A lender will require any information on the property or land you intend to purchase or refinance using the bridging loan:
- Type of property
- Use of property
- Condition of property
- Location of the property
- Security address
- Purchase price and property value
- Tenure (freehold/leasehold)
If you are purchasing a property to refurbish, either to sell on or keep as an investment, you may also be asked to detail:
- The proposed refurbishments you will be carrying out
- The cost of the work involved
- The property value once the work has been completed
You will need to clearly establish how and when you plan on paying back the loan (selling or refinancing, etc) and this is crucial for the bridging loan to be approved.
Loan Amount and Terms
The lender will require details about the amount you wish to borrow, how long you want to borrow for and if you are able to provide a sufficient upfront cash contribution.
Bridging lenders will need to assess the level of risk involved with lending to you and typically require collateral in the form of property.
Loans can be secured on the value of one or several combined properties. The agreement may state that if the loan is not repaid, the lender will take over ownership of the property.
The lender may also require the following documentation:
- Proof of ID and address
- An asset and liabilities statement
- An AIP for the follow-on mortgage
- A property portfolio schedule
- A detailed schedule of works: costings, timeframes, plans and planning permissions (if refurbishing the property)
- Your bank statements from the last three months
How do lenders assess a Bridging Loan application?
The lender will consider all of the above details before approving or denying the loan. Providing as much information as possible will increase the chances of a bridging loan being approved.
It is beneficial to outline any adverse credit or concerns from the get-go as the lender will learn this further down the line, and it may cause complications and delays.
The key is to be open and transparent in your application and with your broker. This way, they can tailor the application accordingly so that there’s a better chance of it being approved.
Why use a Bridging Loan broker?
The property industry can be fast-moving, and when a bridging loan is needed, it’s often needed fast.
Some investors have long-standing relationships with their lenders and go directly to them. However, this is not always the best route to go down as there are always other options worth knowing about. And if you’re a first-time investor, you simply might not know where to start.
A bridging broker has access to the whole of the market, will have experience in sourcing bridging loans and will have built up a strong relationship with lenders.
This means they can prevent issues in the application that can cause delays, secure the best deal for your project and even save you money.
Getting a bridging loan with the best terms is crucial for the success of your project, and an experienced broker can make all the difference.
- Save time
- Save money
- Access the whole of the market
- Strong relationships with lenders
- Experienced at submitting applications
Ramsay & White is a specialist mortgage brokerage serving the specific finance needs of property investors across the UK.
We can offer bridging loans up to 100% of the purchase price (subject to additional security) with terms from one month and market-leading rates.
If you’re an investor looking to start or scale your portfolio, get in touch today to see how we can help.