Bridging loans, as the term suggests, offer a wide range of financial solutions to meet personal and business financing needs. A bridging loan is best described as a loan used as a stop gap measure to generate capital for a particular purpose. For example, the current condition of the UK property market is at the buy-in stage. But, the home the borrower lives in has not yet been sold. A bridging loan can be availed to cover the interim period until the deal on the old home is closed and payment for the new one can be made from the sale proceeds.
Bridging loans are not limited solely to property deals. It is possible to make use of bridging loans for a number of purposes such as generating business capital to acquire stocks or funds. One way of describing a bridging loan is a short term mortgage. Similar to mortgages, bridging loans are secured against property; the lender can reclaim the money by using the mortgaged property in the event of a default.
Uses for Bridging Loans
- Capital generation: Short term working capital can be generated by taking a bridging loan
- Tax liabilities: Making payment on unexpected tax dues
- Property Auctions: Buying a property that is being auctioned off or property that needs to be developed and sold within a short time span
- Cash flow problems: Resolving temporary cash flow problems by raising capital quickly to fund business requirements
- Property purchases: Buying property for investment when the market conditions are ideal
- Property development: Developing residential, commercial or industrial property
- Property refurbishment: Upgrading residential, commercial or industrial property
- Credit resolution: Bridging loans make funds available to liberate individuals from bankruptcy or prevent repossession of property
Anyone looking for fast, flexible funding over £100,000 pounds for the short-term will benefit from a bridging loan. Traditionally, bridging loans have always been associated with the purchases or development of residential or commercial property. As the economic climate continues to change, the need for fast money while long term financing is being arranged has propelled bridging loans into filling the need of the hour.
Types of Bridging Loans
Commercial Bridging Loans: When companies run into cash flow problems, as that can sometimes happen, bridging loans can be availed to carry the company until more permanent arrangements are made. For example, a business is in negotiations for an investor take-over and needs money quickly to carry on the business. A bridging loan provides the financing needed in the short term. Once the take-over is completed the bridging loan can be paid off. Commercial bridging loans are not only limited to takeovers, they can be used to expand the business, acquire land, develop property, refinance business property and provide short-term funding. Bridging loans can be a boon to self-employed individuals who are looking for cash infusion into the business. Anyone, who needs money but does not fit the eligibility criteria of traditional lenders, can apply for bridging loans. Commercial bridging loans are available for different types of property including shops, land, warehouses and offices.
Residential Bridging Loans: This type of loan is typically used to cover the shortfall in financing that happens in the time between purchasing a new property and selling the old property. This can happen, for example, when the ideal property comes along through auction that won’t wait until the old property is sold. When the property market is booming, homes generally sell quickly, but in the present economic recession, the market is slack leading to an increase in demand for bridging loan financing.
Bridging Loans for Refurbishing: Let us assume the borrower has a property that does not meet buy-to-let criteria and requires refurbishment. The property may have been purchased at a very cheap rate or at an auction. A bridging loan can help in providing the refurbishment financing needed to bring the property to a rentable standard.
Bridging Loans for Property Development: Financing through bridging loans for property development provides short-term funding for the construction of property. From new construction to conversions, bridging loans are available for residential and commercial property construction. An initial amount of the loan will be released to purchase the land or property. The rest of the loan gets released in stages (pre-agreed) to match the progress of the construction work.
Bridging Loan Benefits
There are a number of benefits to using bridging loans, but we need to realise that there are also disadvantages that go with it.
The advantages include:
- Bridging loans offer flexibility that allows borrowers to customise the loan, structuring it around personal requirements.
- Repayment of the bridging loan also offers flexibility. Early repayment without pre-closure penalty can be negotiated. This point needs to be settled before actually signing on the dotted line because pre-closure penalties are common.
- Bridging loans are considered one of the fastest ways to raise short-term funding. Loans are generally arranged with 7-10 days. If speed is the main criteria, the loan can be arranged within 24-48 hours. It will depend on the bridging loan specialist selected.
- Traditional commercial lenders have a lengthy application process and several eligibility criteria to be fulfilled.
- Traditional lenders do not provide the same amount as bridging loan lenders do – it is possible to borrow a higher amount because lenders use the 100 per cent funding rule basing loan to value criteria on the open market value and not on the purchase price. By offering additional security, it is possible to get a higher value bridging loan.
- Credit terms offered on bridging loans are flexible and any prior credit problems are generally not considered in the decision process to grant the bridging loan. All relevant details have to be cleared up satisfactorily and the paperwork should be in order.
The disadvantages include:
- Taking out a bridging loan involves two sets of closings and two sets of fees.
- As bridging loans deduct the existing mortgage amount, after paying two sets of fees and paying interest on the bridge loan for six months upfront, there may not be much money left from the loan.
- Interest is paid upfront on the bridging loan, but unused interest gets refunded, which makes it a plus point.
Finding Bridging Loans
In the UK, banks and specialist bridging loan lenders offer bridging loans based on specific eligibility criteria. Banks generally take a longer time than specialist lenders to process bridging loan applications. The average turnaround time for a bridging loan is generally one week. The duration of loan processing depends on the speed with which the conveyancing (legal transfer of title) of the property is completed by the solicitor or conveyancing representative. Specialist lenders have been known to provide bridging loans within 48 hours when all the documentation is in order.
Bridging Loan Costs
The interest rate for a bridging loan is a pre-arranged percentage and is calculated as a monthly percentage. For example, a bridging loan of £200,000 pounds at 1.30 percent interest per month amounts to £2,600 per month. Most people generally use the lender who can provide the loan the fastest because time is the most important criteria rather than interest rate. No matter how great the urgency for the loan, make sure to check that the interest charged is not an exorbitant amount according to market standards. People who are self-employed or have a poor credit history are generally charged a higher rate of interest.
Workings of Bridging Loans
Consider a bridging loan as a short-term mortgage and everything becomes clear. Like the mortgage on the property, the bridging loan is secured against the property. Defaulting on the loan means the lender can dispose of the property to recover the loan amount. Bridging loans are generally secured on the existing property, the new property or both properties depending on the loan amount and other factors. Lenders use professional property valuation agents to confirm the current market value of the property. Bridging loans are generally in the region of 65 per cent of the property value. Existing mortgage amounts are first deducted. Bridging loan amounts range between £25,000 and £500,000 pounds.
Bridging Loan Process
Anyone looking for a bridging loan has to first make an enquiry to a specialist lender company. The details will be checked and the person contacted for an initial discussion. When the best quote is presented to the client and the client tentatively agrees to the figure, the lender arranges for an evaluation of the property that will provide security for the loan.
The client has to pay for the valuation and this can cost approximately £200 pounds for a property valued at £100,000 pounds. The property valuation process generally takes three days, but can be speeded up if there is urgency. There are setup costs that vary between lending agencies. These costs may include: lender’s legal fees, completion fee and other fees. Make sure to agree to all additional costs before the costs are charged.
While the valuation process is ongoing, the borrower needs to arrange for the conveyancing to be completed quickly through a solicitor or conveyancing agent.
The entire process typically takes 7-10 days from the date of receipt of the initial application. The process can be speed up provided there are no problems with the property and conveyancing is completed in record time.
Bridging loans are fast becoming the ideal solution for temporary cash problems. Any individual or business can avail a loan to fund a number of financing requirements from purchasing property to taking a holiday.