Bridging loans are becoming an increasingly important part of the UK real estate landscape with hundreds of new lenders entering the market over the last few years. While the number of active bridging lenders is beneficial to borrowers, it can also be overwhelming and difficult to navigate, especially for first time borrowers. In this way it is vital to understand what a bridging loan is, how to use them and why they are favored for quick property purchases.
What is a Bridging Loan?
A bridging loan is a short-term loan used to take advantage of a limited time opportunity by providing the borrower with immediate access to funds based on a future expected cashflow. While bridging loans UK can be used for a number of different reasons, they are most commonly used for real estate transactions. Bridging loans offer borrowers access to fast and flexible finance, making them a popular choice. Before applying for a bridging loan there are a few important factors to consider:
Interest Rate: Bridging loans have much higher interest rates than traditional mortgages. Where traditional mortgages are one of the most cost effective forms of finance, the same cannot be said for bridging loans. Bridging loans have less stringent underwriting criteria, shorter terms and quicker arrangement times all of which contribute to the fact that bridging loan lenders are exposed to more risk. In order to compensate them for this risk they are required to charge a higher interest rate, usually between 0.65% and 1.25% per month.
Terms: Where traditional mortgages regularly have terms of +20 years, bridging loans have much shorter horizons. Generally bridging loan terms will be between 6 and 36 months, although some lenders offer shorter/longer terms. For clients seeking longer term finance, bridging loans are not advisable as they are very expensive.
Fees and Charges: The fees associated with bridging loans are also an important consideration, as they can accumulate quickly. Where traditional mortgages have a predictable, regulated fee structure, bridging loan fees are often complex and unpredictable. In most cases the fees will be split between the arrangement fees, legal fees, valuation fees, exit fees and the application fees. The arrangement fees will likely be between 1.00% and 2.00% of the total loan amount, although some lenders charge as much as 5.00%. The legal and valuation fees will differ depending on the nature of the property and the complexity of the transaction, but quotes can be generated for these upfront. Exit and application fees are not charged universally, but they are important to keep an eye out for as they will usually be between 0.50% and 1.50% in total. When it comes to understanding and negotiating fees, a skilled bridging finance broker can be a valuable asset.
Repayment Strategy: The repayment of a bridging loan is often based upon the occurrence of a single event, usually the sale of an asset. As a result of this, lenders will heavily scrutinize the borrower’s repayment strategy to ensure that it is certain and sufficient. It is therefore crucial that borrowers have a satisfactory repayment strategy in place prior to applying for a bridging loan.
When to Use a Bridging Loan?
Quick Purchases: Bridging loans in London can be secured in a matter of weeks, sometimes days, when required. This means that they are popular options for property investors looking to take advantage of opportunities and move quickly.
Property Sales: When selling a property, investors may require their funds prior to completion, especially in a slow market. In these cases it is common for borrowers to use bridging loans to release equity from their property. These loans are then repaid when the property sells.
Development Exits: Developers who have completed their projects and are looking to repay their development facilities often make use of bridging loans to repay them. Bridging loans give developers the freedom they need to repay their development facilities and potentially release additional capital while they wait for their development to sell or reach full tenancy.
Urgent Cashflow: Bridging loans are also used for general cashflow requirements, either business or personal. Borrowers looking to release equity from their property, without time to apply for a traditional mortgage, often make use of bridging loans to quickly free up equity.
As you can see there are a number of diƯerent uses of bridging loans, from property purchases to property sales. While they are regarded as one of the most flexible forms of property finance, it is important to understand that this flexibility comes at the cost of higher interest rates. Bridging loans UK are not a long term solution and should only be used for short term, urgent cash flow requirements. For borrowers looking to understand more about bridging loans in London and how they work, be sure to contact your bridging loan broker.
