When it comes to the cost of a bridging loan, you will likely pay a higher interest rate for the borrowing, yet that doesn’t mean you should discount the idea of using bridging finance in some instances.
Bridging loans enable you to borrow large, often significant sums of money over a short period compared to standard mortgage terms. They are generally used for specific purposes and in cases where borrowing in other ways is not possible. There will be a premium to pay for bridging loan finance, as the risk to the lender may be higher. The premium enables the lender to process and onboard lending to you faster than most other high-finance or mortgage borrowing. Bridging loans enable you to borrow large, often significant sums of money over a short period compared to standard mortgage terms. They are generally used for specific purposes and in cases where borrowing in other ways is not possible. There will be a premium to pay for bridging loan finance, as the risk to the lender may be higher. The premium enables the lender to process and onboard lending to you faster than most other high-finance or mortgage borrowing. If you have questions about how bridging loans work and whether they’re the right option for you, consider reviewing the 1% down mortgage faq to gain a better understanding of your financing choices.
Whilst we say that a bridging loan is more ‘expensive’, this should be taken in context to the reason for borrowing in this way. A bridging loan can help move a property chain, create liquidity or buy a new property. It may be the only option to meet short timeframes or enable a purchase requiring a fast payment, such as auction properties, meaning the premium payable is worth it.
You will also be expected to pay legal and lender fees, valuation arrangement fees, and other costs that conventional lending may not incur. A lender will look closely at the risk your borrowing poses to them. They will want to understand your repayment plans and disclose your income revenue, such as a salary or other income you receive. A lender will want to know how and for a closed bridging loan when you will receive funds to settle the loan. Open bridging loans offer more flexibility on the settlement timeframe. The more certainty your case presents, the quicker you can secure finance. Specialist brokers that are experts in bridging loans can help you present your case in the best light to lenders and negotiate rates best suited to your circumstances. A secure repayment plan is imperative to your chances of being approved for a bridging loan.
Advantages of bridging loan finance
Bridging finance is a popular solution to bridge the liquidity gap when considering buying a property at auction or wanting to be a cash buyer. As mentioned, bridging loan finance is more speedily arranged than mortgages and other lending types. A mortgage or property finance can take a few weeks to several months to arrange, especially in complicated cases that can leave you missing out on opportunities. Also, where you need to renovate a property before the sale, bridging finance can be the ideal answer to release the funds required to carry out the work. You can repay the bridging loan more simply than a mortgage once the sale proceeds or your traditional mortgage application is processed.
Bridging lenders will require you to meet the same regulatory requirements, such as AML, credit and compliance checks. However, the process is carried out more quickly.
It is also possible to borrow from the many nimble non-regulated finance arena, which will speed up the process of securing the loan and offer a greater degree of privacy. The lender will focus more on the deal, emphasising your exit strategy and security than your financial background.
Open vs closed bridging loans
Suppose you have a solid exit plan but are unsure of the exact timing. A close bridging loan is suitable if you have a clear date on when you will pay back the loan and know exactly when the capital to do so will be received. However, lenders also use open bridging loans for cases such as when you are waiting on the sale proceeds on the completion of a property you are selling.
Regulated and unregulated bridging finance
A regulated bridging loan will be secured against a property you have lived in, or you or a family member currently reside in or will be living in. A regulated bridging loan comes under the remit of the FCA, whereby rules around affordability will be enforced.
For other property types, property for other use, such as buy-to-let, commercial property or property for development, come under the unregulated bridging loan lending market.
Most bridging finance is provided by non-bank lending institutions, with the freedom and responsibility to set their fees and interest rates independently. The benefit for borrowers is that lenders pay less attention to base rate increases.
Variable rate borrowing, such as many conventional mortgages, leave you at risk of increasing payments as bank base rates increase. However, a bridging loan is offered at a fixed rate. You have the security of knowing the exact cost of borrowing from the start, which can be extremely valuable at a time of rising interest rates.
Bridging loan repayments are set at the outset, generally using an interest rate that is a percentage of the loan amount calculated and repayable monthly. There are three ways that interest on the loan can be paid.
Rolled-up interest – Interest is added to the outstanding capital and rolled up to be paid back at the end when the loan is repaid.
Serviced interest – The interest cost is met monthly, as with an interest-only traditional mortgage.
Retained interest – the lender will retain the total interest payable from the gross loan amount before payment to you. The deduction is then used to meet the interest as it accrues. You then simply repay the loan amount, having pre-paid the interest.
The maximum borrowing period for a bridging loan can be from a few days up to a maximum of around three years, much shorter than standard mortgage terms. The capital is repaid as a lump sum and thus requires a solid, feasible exit plan to ensure the lender is confident that you have the ability to repay.
Repayment exit plans can be through refinancing with another loan from a new lender, typically through a longer-term product such as a mortgage or longer-term loan, or through capital raised by other means or liquidity events.
So, whilst the cost of a bridging loan may appear more, the borrowing term is far shorter., Overall any costs will be incurred for a shorter period. When there is a need for speed, the overall cost may be less relevant than the ease at which borrowing can be arranged.