How To Organise A Bridging Loan
If you’re having a tough time buying property, a bridging loan might be the perfect solution to meet your needs. Many, though, are unfamiliar with this concept. Bridging loans, though, are incredibly popular, particularly with those who are buying an investment property that they either intend to buy-to-let or that they intend to refurbish and let. Overall, the value of this market has risen more than 23%, which is quite a large amount given the fact that the pandemic absolutely impacted the market as a whole. The leading loan purpose for those looking for bridging loans is to purchase an investment property, as 25% of all individuals who receive one report that to be the purpose. If you believe a bridging loan might be the right way to organise financing to meet your needs, though, there are several things you need to understand first.
How Does A Bridge Loan Work?
These are short-term finance products made by traditional and nontraditional mortgage lenders. The name comes from the fact that they were designed to bridge the funding gaps that are so likely to occur during the buying and selling of property. Bridging loans, as with many other mortgage loan-type products, can be taken out for a variety of different terms to help better meet your needs. Typically, you won’t be able to find one that has a term of greater than a year, but that’s not always true. If you secure it against other investments, you may find terms as long as two years. In most cases, however, they are taken out against a buyer’s primary residence, which can make them a little risky in investment situations, as if the investment goes bad, there is the chance that you could lose your residence, so you might actually end up wanting a shorter term on your loan.
Are Bridging Loans Regulated?
How do bridging loans work in terms of regulations? A mortgage bridge loan, as with many other similar kinds of loans, can be regulated by the Financial Conduct Authority, or FCA for short. That’s not always the case, though, and many people choose to take out unregulated bridging loans to give them access to the capital they need. While you can certainly take out either kind of loan, if you’re taking it out for your own home, the home of someone close to you, or to finance a property in which you plan to live, you’ll want to make certain you’re taking out a regulated bridging loan. That offers you consumer protections from the FCA you cannot get with an unregulated product. In order to even be able to offer the loan, the lender has to meet a number of different standards and regulations. Before you even take the property bridging loan out, they’ll highlight both the costs and the risks with you in a clear method that’s easy to understand. They’ll also conduct thorough checks to be sure that you don’t take a loan that is either unaffordable or unsuitable in terms of your needs. Seeking a regulated bridging loan means you have some protection if you are mis-sold this type of loan or given bad advice during the process, and that may make you eligible for compensation from the Property Ombudsman scheme.
Despite the many benefits of working with a regulated bridging mortgage, there are many unregulated bridging loans available as well, and if you’re taking out a loan on an investment home, this might be the better choice as you may not need the FCA regulations a more traditional consumer needs. They have fewer restrictions and checks than regulated bridging loans do, and you can typically get a much longer term on a loan like this one – up to two years in many cases. Despite the fact that they’re not regulated by the FCA, they’re not wholly unregulated either. There are a number of industry regulation groups including the Association of Short-Term Lenders, or ASTL, the Financial Intermediary and Broker Association, or FIB, and the National Association of Commercial Finance Brokers (or NACFB) that help to regulate this type of lending. Unregulated lenders will often join these groups to help signal to investors that they’re a safe bet when it comes to this kind of loan. Members in these organizations have to act according to specific conduct codes laid out by the organization itself. Often those codes include taking simple steps like displaying any fees associated with the loan up front or the cost of the loan to the borrower as soon as possible. Moreover, they’re required to respond to customer complaints as soon as they happen.
Association, or FIB, and the National Association of Commercial Finance Brokers (or NACFB) that help to regulate this type of lending. Unregulated lenders will often join these groups to help signal to investors that they’re a safe bet when it comes to this kind of loan. Members in these organizations have to act according to specific conduct codes laid out by the organization itself. Often those codes include taking simple steps like displaying any fees associated with the loan upfront or the cost of the loan to the borrower as soon as possible. Moreover, they’re required to respond to customer complaints as soon as they happen.
As a consumer, the biggest difference between both regulated and unregulated products is the level of protection to which you’re entitled and the number of checks you must undergo. If you are to be approved for a regulated bridging loan, you will undergo far more checks than you will if you are to be approved for an unregulated loans. As a result of that fact, working with an unregulated bridging loan tends to be a far faster process than working with a regulated bridging loan. In both situations, though, you can be certain that a lender will still conduct checks on your finances as a whole, and they will want to better understand what you plan to do when the term of the bridging loan is up. In other words, they’ll want to know how you intend to repay the bridging loan whether it’s from the sale of the property or from the sale of another investment. Keep in mind that these kinds of loans can be incredibly expensive, so you should carefully plan your exit strategy before you ever even apply for the loan.
Why Use A Bridging Loan At All?
There are many different circumstances in which a bridging loan might be the right way forward. They tend to be most popular with landlords and property developers. In some cases, they’re good for individuals who are changing houses as well. Sometimes businesses use bridging loans to buy property, too.
How does a bridging loan work? The purpose of a bridging loan is literally to act like a bridge before you move on to something a bit more long term. Imagine, for example, that you want to buy an investment property at auction, renovate it, then sell for a profit. You could buy the house with cash from a bridging loan, then get a mortgage, then sell it when you’re done. There are other good reasons to use a bridging loan, though, too. If you found your dream home, and you agree on a day of completion, but the sale of your current property becomes an issue, a bridging loan can help make the purchase of your dream home a reality. They can literally serve as loans for moving house in the traditional sense. Bridging loans work in other settings, too. If you’re renovating a property that you intend to live in, but you can’t get a mortgage until the work is complete, a bridging loan can be a good solution. If you’re buying a property at auction to live in, and the mortgage paperwork takes longer than expected, that’s a good reason to consider a bridging loan as well. Paying out the other half of a joint mortgage may make a bridging loan a good choice as well.
The Advantages Of A Bridging Loans For Houses
If you’re not sure whether mortgage bridging loans might be the right choice for you, it’s important to think about the advantages of this kind of financing. One of the most important advantages is the fact that they’re incredibly flexible loans. Lenders have far more flexibility when it comes to these loans as compared to more traditional mortgage products, and that may improve your chance of being approved significantly.
Another strong advantage is that they’re fast when it comes to arrangement times. Often you can get a bridging loan within a week of application. A more traditional mortgage loan can sometimes take a month to get organised.
Bridging loans also allow you to borrow a fairly large some of money, too, which may help alleviate the financial frustration that is involved in buying property. They’re also available for non-standard properties as well, which means that if you can’t get a loan on a property because it has a special feature like thatching or something similar, you may be able to arrange for financing with a bridging loan.
They’re Not Always The Right Choice For A Loan To Buy A House
For the number of advantages bridging loans for house purchases have, there are a few disadvantages. One of the biggest is the fees you can expect with this kind of loan. Lenders often charge extensive fees with bridging loans, which can make borrowing with this kind of vehicle more expensive. The other real drawback, though, is that bridging loans are a secured loan, so if you become unable to repay it, you may find yourself losing assets. Additionally, you can expect higher interest rates with bridging loans, so these will absolutely cost more over the long term than a traditional loan might.
Understanding Your Eligibility
Knowing whether you’re eligible for a bridging finance deal is essential if you’re considering this type of loan. What is bridge financing criteria you must consider? While every lender has different criteria you must meet for a bridging loan, in most cases, they’ll assess your risk based on a number of key factors including the amount of the deposit you’re placing against the loan, the location of the property, the overall size of the loan, your exit strategy to repay the loan, and your credit history.
Remember that bridging loans are considered secured loans, so you’ll need to put down both a deposit and some kind of an asset when you apply for the loan itself. Often you’ll need to use another property as collateral for this kind of loan, so if you’re unable to repay it, the lender will be able to repossess that.
Before you approach the lender, be sure you have a strong exit strategy in place for your loan. There are several different exit strategies you can consider. One of the most common is selling the property itself. Once it’s sold, you can use the proceeds to pay off the loan. Another possible exit strategy, though, is simply refinancing the loan. You have the ability to switch to a traditional mortgage or even a specialised property loan and use some of the cash to pay off your bridging loan. You could also let the lender know that your entire intent is to flip the property, and that’s a good way to repay the loan. You may also have future funds from an investment as your exit strategy that will help pay off your bridging loan. For example, if you intend to cash in another investment to pay this one off. If you’re buying the property to let it, that may also be your exit strategy with this kind of loan.
It’s important to note that deposit size truly matters when it comes to property bridging loans. Most lenders will require a deposit of at least 25% for this kind of loan. The larger deposit amount you can provide, though, the more likely you are to get the loan amount you need. You’ll uncover the best interest rates and terms with a deposit of around 40%.
You will need proof of income to obtain a bridging loan for house purpose, too, so if you’re self-employed, you may need to talk to your accountant to gather the information you need. Additionally, you can expect a credit check when you apply for a bridging loan for a house, and the better your overall credit history, the more likely you are to get the loan you want. If you have a bad credit score, though, don’t worry. Many lenders think about the security you offer and the exit plan itself, too. If you have a county court judgement against you, a default, a repossession, or a declared bankruptcy on your record, you may still be able to obtain this type of loan.
Know The Available Bridging Loan Types
If you do plan to apply for a bridging loan, it may be helpful to learn more about the various types of bridging loans available. In most cases, you’ll need to choose between an open and closed bridging loan. A closed bridging loan usually has a date set in stone for when it needs to be repaid. You can pay it off early, but there are typically early repayment fees involved if you do so. These are most often used by those who have a clear exit strategy, and they know when that will take place. As a result, interest rates can be quite a bit lower with this type of loan. This works well if you simply need a gap loan between properties.
Open bridging loans usually have a maximum term of six to twelve months, but you have the ability to pay it back at any point in time within that time frame. These are useful if you’re not quite sure when your exit strategy might take place. For example, imagine you’ve bought a property you intend to renovate with a bridging loan, but you’re not quite sure how long those renovations will take or how quickly you’ll locate a buyer for that property. They tend to come with higher interest rates, but you get the flexibility you need when it comes to paying them off.
Understanding First and Second Charge Bridging Loans
Bridging loans are considered to be secured loans, and as such, a charge is usually placed against your property when you take this type of financing out. The charge is a legal agreement that helps set out the order in which lenders must be repaid if you find yourself unable to repay the loan itself. If you won the property you’re taking out the bridging loan against, that is considered to be a first charge bridging loan because the lender will be first in line to receive any repayments from the sale of that property. If, on the other hand, you still have a mortgage on the property (if you’re in a property chain situation and you take out a bridging loan to make things run a bit smoother), you’ll be taking out a second charge bridging loan because the original mortgage lender would be repaid first. Second charge bridging loans come with slightly less favourable terms than first charge loans.
The Amount you can Borrow
Wondering exactly how much you can borrow with a bridging loan? It depends a bit on the lender and the property you’re purchasing. You could borrow as little as £10,000, but if you’re borrowing quite a bit for a large development, you could obtain a lot more. In most cases, you can only borrow 75% of the value of the property you’re purchasing. Here’s a bridging loan example that might help – you could borrow £75,000 on a £100,000 property. If you’re using an unregulated bridging loan, though, you may find higher values available, even some that require lower deposit amounts.
The Cost of Bridging Loans
Exactly what is a bridging loan going to cost you? It depends a bit on how much you borrow, but you need to understand that these loans come with relatively high interest rates, so they can be quite expensive. As with any property loan, you’ll need to pay arrangement fees, valuation fees, and a host of other fees, too. Depending on the loan, you may also be on the hook for exit fees if you decide to pay it off early.
Remember, though, that most bridging loans are interest-only loans, so you’ll only repay the interest on the loan itself each month. You won’t pay any of the principal until you’ve reached the end of the loan term. That interest you’ll pay could be charged in one of three different ways. The first way is with monthly interest. This is where you make a monthly payment toward the interest charged on the loan. It works a bit like a traditional interest-only mortgage loan. You may also pay deferred interest. This type is sometimes called “rolled up” interest because the payments are deferred until the end of the loan, so essentially, you won’t make any monthly payments until the end of the loan term. Retained interest is the final type. In this situation, the lender apprises you of the total interest charges on the life of the loan, then adds it to the loan amount. Imagine, for example, you need £100,000. The lender calculates that you’ll pay £10,000 in interest, so you actually borrow £110,000 and repay all of it at the end of the loan.
How Do I Actually Get a Bridging Loan?
If this sounds like the right financial product to meet your needs, you can apply with a bridging lender directly or you can work through a broker. A broker may be able to offer you more support from start to finish, and they can help you decide on the product to best meet your needs when you apply. They may also help guide you toward the right lender.
Still not sure a bridging loan is right for you? It may help to work with a financial professional to better understand the situations in which a bridging loan might be the right idea and those where choosing an alternate mortgage product is a better choice. Bridging loans aren’t right in every situation, and they may not be the best choice to meet your needs. The reality, though, is that they can be the perfect financial vehicle in some situations, and if you think they may be ideal for you, your best bet is to actually chat with a lender to better understand whether they can meet your needs. Organising a bridging loan is often no more or less difficult than organising loans of other types, and that means that with a simple conversation, you could have a loan for a house you’d really like to purchase at an auction or in a more traditional sale, and you could have it far sooner than you’d be able to arrange other, more traditional financing.
Actually getting a bridging loan simply means sitting down with a lender who can help you make the right decision to meet your needs. If you’re not sure that traditional financing is the right vehicle for your next home or investment home purchase, it’s absolutely worth it to look into the possibility of obtaining a bridging loan to better meet your needs. Many people have relied on this type of loan for years, and it could be the perfect product for you.