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FREQUENTLY ASKED QUESTIONS

WHAT IS A BRIDGING LOAN?

A bridging loan (or bridging finance) is a popular form of short term finance typically used to ‘bridge’ the gap between the purchase of one property and sale of another.

WHAT CAN I USE A BRIDGING LOAN FOR?

Popular uses include:

  • To fund a property purchase or refinance quickly
  • To purchase a property at auction
  • To purchase an otherwise unmortgageable property
  • To buy a property before your existing property has sold
  • To buy an undervalue property without putting down a deposit
  • To fund a property refurbishment project
  • To finance property or land while undertaking an application for planning permission

How Long Do Applications Take?

Lenders work to varying timescales, our commercial partner firm can complete applications within 5-14 days. Once your application has been received, our commercial partners can usually provide an agreement in principle for you within 4 working hours.

What Are The Reasons to Get a Bridging Loan?

Although they come with a cost, they can be a benefit to you overall. When used to buy property undervalue or refurbish, your profits can far exceed the cost of taking out the loan.

When using bridging finance to keep your place in a chain or purchase a property quickly, they can be used to avoid losing out on a property that you’re keen to secure. The cost of the loan may then pale into insignificance if you then go on to enjoy many years in the home.

Would a Bridging Loan be Right for Me?

There are four major reasons why these loans may be right for you:

  • The property that you wish to raise money against is not mortgageable in its current condition
  • Refurbishment is required on the property and traditional lenders will not accept it
  • The funds are needed quicker than a traditional lender can provide them
  • You are unable to raise money using a traditional mortgage

How Much Can I Borrow?

Our partner firm can fund up to 80% of the property value and up to 100% of the purchase price. Lenders take a different approach, and terms can vary. Your borrowing power can increase if you are able to offer additional security e.g. another property.

The figure of 80% is based on the gross loan. If you wish to deduct the interest from this amount, the amount you will receive will be 80% minus the interest and fees you have chosen to deduct.

How Can I Mitigate the Risks?

The biggest risk you face is your exit route – this is how you intend to repay the loan. As the interest payments are usually rolled into the loan, even if the interest is high, this often doesn’t cause an immediate problem.

Ensuring you are able to repay at the end of the term is vital – if you hope to repay the loan through refinancing, it is important to ensure that you are able to secure a mortgage in principle on the property. It is good practice to have multiple exit routes.

Where you wish to sell property at the end of the term, ensure you have asked local estate agents the demand in the area and how quickly they believe they could sell the property. This is crucial, as any delays will be costly.

By taking these additional steps, you will remove a large amount of the risk.

How Can the Loan Be Repaid at the End of the Term?

Bridging loans are issued on an interest-only basis. They work in much the same way as an interest-only mortgage, in that they must be repaid in a lump sum at the end of the term.

As the term ends, the lender will contact you to ensure your repayment method is on track and the loan will be repaid.

What are the Alternatives to Bridging Finance?

Generally, these loans are used for a reason, but there are alternatives. They won’t always be suitable, but in some cases may be and could save you money.

  • Mortgages – Can be used to raise funds, however they are generally not permitted to be use for a property where you intend to pull your cash out after a heavy refurbishment. In addition, mortgages take a lot longer to complete.
  • Secured loans – This is a longer form of borrowing and generally works out cheaper. This type of loan can be used to pay a bill or fund your property investment projects.
  • Unsecured loans – These types of loans can be fast to arrange, but generally only lend up to a maximum of £25,000. Unsecured loans are typically reserved for those with clean credit records, those with poor credit are likely to struggle to secure this form of finance.

I have bad credit, will I be able to secure a bridging loan?

Yes. There are many lenders who would provide a bridging loan to borrowers who have a history of adverse credit; this includes CCJs, defaults and even current mortgage arrears.

How Do I Use the Bridging Loan Calculator?

Our free bridging loan calculator is designed to make the process of finding out the likely costs of taking out the loan. There are countless lenders out there, all of whom will charge different interest rates and arrangement fees. Simply enter the details of the loan in the highlighted fields, the “net lender contribution” is the total loan you will receive after fees and interest has been deducted.

HOW DOES A BRIDGING LOAN WORK?

This type of financing allows you to borrow money, usually for a term of 1-18 months from either a bank or other financial services company. The interest is usually charged by the month and can be a much more flexible alternative to mortgages.

HOW MUCH DOES BRIDGING FINANCE COST?

The costs are primarily made up of the interest charges and arrangement fees. The best rates start at 0.45% per month but some lenders can charge as high as 1.5% per month. The rate charged will depend on an analysis of your circumstances and what you’re looking to do.

Lenders tend to charge a facility fee, usually 2% of the loan. For some larger loans, the facility fee may be reduced and can come in as low as 1% in some cases.

On top of the interest and fees, there may be other charges, such as an asset management fee, exit fee, legal fee and valuation fee. Some brokers will also charge broker fees, although our partner firm do not.

THE PROS AND CONS OF BRIDGING LOANS

They are a borrowing tool that is growing in popularity. Before taking out bridging finance, you should always be aware of both the pros and cons.

Pros

  • Speed – They can be arranged very quickly, with applications usually completing in 5-14 days. Some even complete on the day of application.
  • Rates are falling – The bridging finance market is currently in a rate war. Rates now start from 0.44%, with a rate of 0.37% available for select applications. The main drawback has historically been cost, although this is now becoming an advantage
  • Flexibility – Bridging finance can be repaid early without penalty. When the loans are repaid early, any unused interest is usually rebated, saving you money.
  • No monthly payments – Where interest is rolled up or deducted, there are no monthly payments to make. This can be a major help to cashflow during a refurbishment or marketing period.
  • They allow lending against unmortgageable properties – Loans can be used to purchase properties that you would otherwise be unable to borrow against.

Cons

  • They add cost to a property transaction – No matter how cheap your loan option is, it will still cost something. This will add a cost to your property transaction that must be considered.
  • Hidden charges – Comparing quotes from bridging loan lenders or brokers can be difficult. On top of the lender arrangement fee and interest rate, many lenders will charge additional ‘fund management’, ‘application’, ‘inspection’ or other fees. These can add up and mean that the lowest rate isn’t always the best option. You must consider the total cost rather than just the headline figures when comparing products.
  • Problems with exit route – If you have problems with your method of repaying, this can cause major issues as the end of the loan approaches. If you are unable to repay the loan at the end of the term, you will have to refinance or service the loan. Although there is no guarantee your lender would allow you to do either. This can put your property and credit profile at serious risk.

HOW CAN I SAVE MONEY ON MY LOAN?

  • Increase the deposit you’re paying to reduce the loan to value.
  • Offer additional security to the lender.
  • Consider the property that you’re borrowing against, rates for residential property tend to be lower than those for commercial property.
  • The term chosen may influence the rate charged, many lenders offer terms up to 12 months.

WHAT ARE 100% BRIDGING LOANS?

100% bridging finance is short-term finance against a property with no cash deposit used towards the purchase. There are two main types of funding: using another property or asset as extra security or buying undervalue, at say, 70%, of the open market value.

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