A BEGINNER'S GUIDE TO BRIDGING FINANCE
Here at the property finance collective, we know that for many of our clients, accessing finance is one of the most critical elements of the process, as well as the potential to be a cause for concern. Our experts can assist you with a variety of finance options and support you throughout your project. We hope this guide provides you with an insight into bridging finance options for your consideration. INTRODUCTION
A Bridging Loan is a short term finance option for an individual or a Limited company until the next stage of the project is ready. Normally, this a refinance to a buy to let mortgage once the property is mortgageable or development finance once planning is gained or sale of the asset following Bridgingworks is asset based lending, with lenders tending to look at the type of security they are lending on rather than the Borrowers income, credit profile and experience. The underwriting tends to be less intense than a mortgage, and the process can be completed much quicker.
WHAT IS A BRIDGING LOAN
A Bridging loan has a lot of other uses, such as: - Purchasing Auction properties, where the 28 deadline for completion is often too short for a conventional mortgage - Investors buying a property to renovate and then sell on (these are known as flips) - Purchase a property or land before obtaining planning permission and then moving to Development Finance or a sale - Purchase a property below market value, or as part of a creative strategy to reduce the deposit required WHEN TO USE A BRIDGING LOAN
LEVERAGE
Lenders will then deduct the arrangement fees, broker fees and interest for the term from this facility to leave a net facility, which is the amount that will be sent to your Solicitor on completion.
Each Bridging Lender has a different ceiling in terms of their leverage, but typically let you borrow up to 75 percent of the purchase price as a gross facility.
Lenders may offer to lend against the Open Market Value. If you are purchasing Below Market Value then you may be able to raise a higher percentage of the purchase price, as the Lender can leverage on the market value rather than the purchase price
can complete in as little as a few days, but often they will take between 2 and 8 weeks to complete. This is fully dependent on how quickly the valuers, solicitors, and surveyors are working, and how quickly they turn reports and enquiries around. It also relies on the Client to respond quickly to enquiries
You can take a bridging loan for up to 24 months. However, as this is a more expensive route of finance, it is advisable to try and take a bridging loan for a maximum of 9-12 months. This helps to keep the costs down, and avoids all of the equity in the deal being eaten up by fees and Bridginginterestloans
TIMINGS
It can be drawn down very quickly, due to the reduced underwriting requirements Some estate agents view bridging finance as good as cash due to the speed involved Can be used on unmortgageable properties - You could potentially reduce the deposit required if purchasing below market value PROS CONS It can be expensive if not used correctly - It can be aggressive if you run over term. Make sure that if the facility is coming to an end, and you feel like you may run over that you discuss this with the Broker/Lender to ensure you get the right solution in place. Don’t bury your head in the sand
This can vary from each lender, some require 1 months interest, others may be a percentage of the gross loan typically 1 % however, the majority of bridging lenders do not charge an exit fee.
If you work on the basis of an interest rate of 1 percent per month over 12 months, this leaves you with a net facility of approximately 63,750, which is the amount that will be sent to the Solicitor on completion. Other fees that you will have to take into account which will not be covered by the bridging loan are: Exit fee:
Purchasing a property for 100,000, 75% of that is 75,000 which is the gross loan. From that, the Lender will deduct a 2% Arrangement fee, Broker fee, and the interest if it has been retained as part of the facility
EXAMPLE
Some lenders will also charge an application fee upfront. You should bear in mind that generally this is non refundable if the deal falls through.
Extension fees: If you need to extend the term of the loan, then the Lender may charge an extension fee. They may also increase the rate of interest
Legal fees: As well as your own solicitor fees you will also need to cover the cost of the lenders solicitors fees. Again, this is something you will have to factor into your cashflow as it will not be covered as part of your loan.
Valuation fee: Lenders will require you to have a valuer visit the property. This is a cost that you will need to cover. The cost will vary and most lenders will get you a couple of quotes to allow you to decide yourself which one you would like to go with.
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