More and more people are investigating the bridging loan market. To help those new to the bridging loan market we have compiled a simple guide to help you on your way to understanding bridging finance.
Guidance to the UK Bridging Loans Market
Bridging Loans are short term loans usually between 1 and 6 months that are secured against property on a first or second charge basis. The bridging loans are secured against the property; they are generally non status with no credit checks or proof of income required.
The amount of the loan can be 100% of the purchase price of the property or more normally around 70% of the value of the property. The property can be residential, an investment property, commercial property or land.
If there is sufficient equity in the property the interest for the loan and other fees can be rolled up and settled at the end of the term of the loan. Interest rates for bridging loans reflect the risk to the lender and the Loan to Value (LTV) of the loan against the property. The higher the LTV the higher the interest rate.
Bridging loans can be arranged through some high street banks, private finance companies or through specialist UK Bridging Loan Brokers. High street banks tend to be more conservative in their lending where as private finance houses are quick and less concerned about previous credit problems and proof of earnings. However private finance houses are not generally accessible by members of the public who have to apply to them through brokers.
Reasons to set up bridging loans are normally to do with the speed that the money is needed by. They can be arranged in a matter of days. Here are some of the reasons that bridging loans are used:
1. Buying property at auction where completion is required within 28 days.
2. Buying property undervalue were the vendor is looking for a quick sale.
3. Short term cash flow problems.
4. Complete house purchase when current property remains unsold
5. Stop house repossession.
6. Settle tax or VAT liabilities.
7. Raise money for divorce settlements.
8. Raise money for any legal purpose.
The costs involved in setting up a bridging loan are relatively expensive and can include some or all of the following.
· The borrower will have to pay for the cost of a RICS survey of the property. The price will depend on the value of the property, the higher the value of the property the higher the valuation fee. A commercial valuation will tend to be more expensive than a residential valuation.
· The borrower will have to pay for their legal costs as well as the lenders legal costs.
· To set up the loan there is normally an arrangement fee between 1% & 2% of the loan amount. This cannot be added above the maximum LTV of the product. There may also be an exit fee payable when the loan is redeemed. Exit fees generally start at one months interest.
· There may be a minimum term for the loan; this is generally three months for some loans down to one day for others. This is not a problem if the loan will be for 3 months or more.
A lot of these costs can be avoided or reduced by choosing the right loan for your circumstances.
Applying for Bridging Loans
Bridging loans can be arranged through traditional banks or through Specialist Bridging Finance Lenders. Most Specialist Bridging Finance Lenders do not accept applications directly from the public and will only accept applications via brokers. Although traditional banks rates are lower than the Specialist Lenders they are not fast and can take 6 weeks or more for an application to progress to completion. Specialist Bridging Finance Lenders on the other hand can have funds drawn down within 10 working days or within days if an acceptable valuation is available.
If traditional banks are your chosen route for bridging loans most high street lenders will provide some form of bridging finance. Applications can be made directly to them or by using a Bridging Loan Broker.
The other avenue is to use a Bridging Loan Broker to make your application for you. By using a broker they will apply to the most suitable lender for your circumstances.The choice of lender to approach is dependent on your specific circumstances , this means that the lowest interest rate may not be the cheapest overall for the term of your loan. Factors that can affect this are maximum loan size, whether there is a minimum term and if there are exit fees at the end of the loan. What at first glance appears cheap may not be when all the costs are calculated. This is why it pays to engage the services of a Specialist Bridging Loan Broker, who even if they charge broker fees will save you money overall.