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Amit Nater talks all about bridging loans.
What is a bridging loan?
You’re bridging the loan, which could be useful when you need to borrow the money for a short period, to bridge the gap. A very common example is if you want to purchase a home before selling your current home. Bridging loans tend to be faster, and therefore, more expensive than usual mortgages.
What’s the difference between residential and commercial bridging loans?
With the commercial bridging loan, it’s used if there’s any commercial aspect to the property, for instance, a shop with a flat. The lender tends to class it as a commercial asset. Then you also have the purely commercial deals, for instance, a restaurant with no residential aspect.
Residential bridging loans are basically where the property is used to live in. There are two different types, Regulated and Unregulated. With the regulated bridging loan, the property is owner occupied, and the unregulated bridging loan is for investment properties.
Who is a bridging loan for and what can they be used for?
One prime example is where you’re looking to purchase a property before selling your own property. They can also be used for auction properties, as they are very quick to arrange, and you need the money immediately to complete on that property.
Another very common use of the bridging loan is for property investors, where the property can’t be mortgaged, for instance, if it’s not habitable. The bridging loan is used to purchase the property and a small refurbishment loan is arranged to do up the property. Or it could be that the investor would like to spend their own money for the refurbishment.
How does the bridging loan process work?
The Exit Strategy is a very important part of the process, and I always work in reverse, looking at the exit strategy with clients before we look into the bridging needs. This is how you are going to actually pay the loan back. The bridging term could be anything from six months to twelve months. Some lenders even have longer terms.
The Exit Strategy could be selling the property, either the one you bought with the Bridging Loan, or any portfolio property. If you want to keep the property as part of your portfolio, you will refinance the property. Finally, not very commonly used, is a windfall. So if you’re expecting some money, for instance, a share of an estate that’s coming through to you, that’s another exit strategy that could be used.
Whichever kind of bridging loan you take out, the lender will want to see evidence of a clear repayment strategy. Sometimes they can even ask for an agreement principle in place, if you’re looking to refinance onto a mortgage, and the price that you plan to pay for it, as well proof of what you’re doing to sell your current property, if relevant. You should also have a backup plan. In case your repayment strategy fails.
What sort of costs are involved with a bridging loan?
Bridging loans tend to have an arrangement fee from the lender of between 1-2%, depending on the lender and the loan to value. You’ll also have an exit fee which tends to be 1% on top.
You will have to pay the monthly interest on residential properties, which tend to be cheaper, but when it comes to the Semi-Commercial or Commercial properties that tends to be more expensive. Some lenders also charge an initial commitment fee as well. There is also the valuation fee, you’ll have to pay the valuation fee, and lastly, your legal costs, which also includes the legal costs of the lender as well, which is very common in the specialist bridging market.
Some of the lenders have actually started offering dual representation, so they will actually give you a solicitor and it could be a list of solicitors to choose from, and you can take the quotation from the one that you like. They tend to be cheaper than having your own representation and you’re paying for lenders listed as well. So these are the costs involved talking about cost here.
Things like the commitment fee, the valuation fee, and the legal cost you’ll have to pay on top of the bridging loans. The lender fees, arrangement fee, exit fee and your monthly interest, tend to be calculated and most commonly it’s taken from the advance. There’s a very hard and fast rule in the industry. If you’re looking to take a bridging loan of 75%, then you will end up with a net of 67-68% and the rest will go towards fees. It’s a good idea to increase your deposit above 25% when you’re looking to purchase the property, because the net that you’re going to get from a 75% bridge will not actually be 75%.
How long does it take to arrange a bridging loan?
The process needs to be very slick, and we’ve seen bridging loans arranged in between seven days to fourteen days. It could take up to three weeks with solicitors involved, but they tend to be very quick.It all depends on the lender you choose and also how clued up your legal team is. The speed is why you’re paying the premium.
What are first charge and second charge bridging loans?
The first charge bridges are where the lender is taking the first charge on the property. The lender will take the first charge on the asset, usually when it’s a first purchase and there’s no other charges at all.
Second charge bridges are where the lender will take a second charge on the property. So the property is already mortgaged or someone else has got the first charge on the property. So you already owe money to someone else on the property, or it could be your mortgage, and then the Bridging Lender will take a second charge, to release some more equity from the properties. The second charge is usually where the clients are raising funds on the property to renovate if they couldn’t get a mortgage but have got an exit strategy in place.
What if I have bad credit?
We do have access to special lenders, but there are some key points here. Lenders will take a view of what it’s impacting your credit and how bad the situation is. A small parking ticket for instance, or a small CCJ, will have less impact compared to a few thousand pounds CCJ which has not been paid. If it’s a missed mortgage payment, that’s going to have a slightly bigger impact than a missed payment while you’re a student on a phone bill.
There are lenders who will take into account bad credit, and you can still get bridging loans in place. But you need to make sure your exit strategy is tight. Also make sure you have aggregate strategies in place. We have access to the lenders who should be able to help, but it’s on a case by case basis, of course.
What are the alternatives to a bridging loan?
You could Remortgage the property. A cash purchase is also used as an alternative as well, where you could actually purchase the asset in cash and release the funds later, once the asset is up to scratch. It could be remorgated for a term loan, and we’ve also got a refurbishment mortgage available.
Some lenders can arrange bridge term loans, so they will actually bridge for you to do up the property, and then they will convert that into the term loan later on. None of these will be as quick to arrange as a Bridging Loan.
The whole idea of a bridging loan is to access quick finance. There is also another product called Short Term Finance, which typically works out cheaper. But all the alternatives that we just mentioned could be cheaper than the bridging loan, but the lenders take the same underwriting approach as they would do with the term loan, which means it’s going to take time, and is not suitable for time-bound deals such as auction purchases.
How do you apply for a bridging loan?
We’ve got a process in place where we’ll do an initial fact-finding with the client. We assess the client and the asset itself. We look into what you already have in place, and what paperwork you have.
There are some fantastic lenders that we’ve been working for over the last six years, and we will make sure that your deal goes to those lenders. We’ll help you choose the most suitable deal that’s available for your particular circumstances.
Most clients look at bridging loans as a last resort or think they are too expensive. Yes, indeed, they’re expensive, but there is a place for bridging loans in the market, and people are taking advantage of this facility, but the deal can’t be placed anywhere else. We can help you through the budget finance, so come and talk to us. We’ll work the numbers for you, and if the numbers suit you, then obviously we can help you.
Think carefully before securing other debts against your home. Your property may be repossessed if you do not keep up with your mortgage repayments.
Approved by the Openwork Partnership on 12/12/2023