Bridging loans are an increasingly popular form of finance in the UK, in real estate and business finance.
What is a Bridging Loan?
A bridging loan is essentially a short-term loan used to provide short-term liquidity based on future income. While there are a number of common uses of bridging loans, perhaps the most widely understood is for the purchase and sale of property. Property bridging loans are used by investors and developers to bridge the gap between the purchase of a new property and the sale of an existing property. In the UK, there are hundreds of bridging lenders, each offering its own products and services.
Important Factors to Consider:
Types of Bridging Loans: There are a number of different ways to classify bridging loans, but perhaps the most commonly accepted is the division between open and closed bridging loans. Open bridging loans, on the one hand, are bridging loans that rely on an undefined payback event. Closed bridging loans, on the other hand, rely on a certain and predetermined event for their repayment.
An example of a closed bridging loan is where a property sale has been agreed, and the completion date is approaching. An open bridging loan, on the other hand, would be where the property is yet to be put on the market, but the facility will be repaid once it is sold.
Interest Charges on Bridging Loans: Perhaps one of the most important aspects to consider when analysing a bridging loan is its interest rate. Bridging loans generally have interest rates that are higher than those of traditional mortgages, an important consideration for those looking for the cheapest form of finance.
Fees on Bridging Loans: While fees may differ from lender to lender, fees will generally be arranged in the following manner: an arrangement fee upon drawdown, an exit fee upon loan repayment, and an application fee in order to start the loan application. While these are the bulk of the fees, there are also other costs to consider, such as valuation and legal fees.
When to Use a Bridging Loan: Using a bridging loan at the wrong time can be a costly mistake, as they are one of the more expensive forms of secured lending. In fact, bridging loans are designed to cater to borrowers who are looking for fast access to finance in order to fund a limited-time opportunity. This makes them perfect for property investors and developers looking for a fast acquisition or quick access to cash.
Exit Strategies: Before applying for a bridging loan, it is important to ensure that you have a defined, clear exit strategy to ensure that you are able to repay the bridging loan once its period comes to an end. Lenders will also heavily scrutinise your exit strategy in order to make sure that they will get their money back.
Bridging Loans and Income Requirements
As previously mentioned, bridging loans can have their interest serviced or retained. In the case of retained interest, the borrower does not need to make regular interest payments to the lender in compensation for the fund’s borrower. With this in mind, lenders are less focused on the borrower’s income, as it will not need to be used to regularly service the loan’s interest. Moreover, bridging loan lenders place a great deal of importance on the exit strategy of the borrower, often a singular event resulting in a large income for the borrower.
The importance placed on this exit strategy means that lenders are not relying on regular income to repay the bridging loan. As a result of these two reasons, bridging loans generally do not have strict income requirements, meaning that borrowers with low or no income can still access bridging loans, as long as their exit strategy is certain and produces sufficient income to repay the bridging loan.
In conclusion, there are a number of important factors to understand when considering a bridging loans UK, from your planned exit strategy to the various fees levied by the lender. Navigating these factors can be tricky, making the services of a skilled bridging finance broker invaluable. Bridging finance brokers are able to leverage their years of industry experience, giving them the ability to skilfully navigate the bridging loan landscape.