Bridging finance isn’t always well understood by homeowners and businesses who could take advantage of this type of lending. Essentially, bridging finance, which is also known as a bridging loan, is a temporary solution which provides you with the necessary funds for a specific short-term purpose. The loan is usually secured against your property or other valuable asset and is a useful way to enter and profit from a deal that you wouldn’t otherwise have access to. Bridging finance has become more mainstream in recent years and there are excellent opportunities available from reputable short-term lenders.
Bridging Finance Basics
Used as a temporary loan, bridging finance can be available to you quickly, usually in a matter of just a few weeks. The idea of such a loan is that it acts as a bridge to get you from situation A where you borrow the money as an investment, to situation B where you’re able to clear the loan. Bridging loans are offered with higher interest rates than other financing such as mortgage products or high street loans, so it’s important that you have a clear exit strategy in place.
Why Use Bridging Finance?
Bridging loans are often used for the purchase of a property in either the residential or commercial sectors. Typically, they’re used to ‘bridge the gap’ between you selling one property and purchasing another. They’re also popular when buying a property at auction, where you only have 28 days to secure finance following your winning bid. You could also take out a bridging loan for refurbishment to increase your property yield, or when expanding your property portfolio.
However, this type of finance can be used in various other scenarios where your business may perhaps require a short-term working capital injection, for example if you have a VAT or tax liability due and need a strategy to repay your debt, or to finance your expansion plans.
How Much Can You Borrow?
The amount that you’re able to borrow depends on the value of the asset that you’re securing the loan to. In many cases this will be the value of your property, but it’s worth understanding that its worth won’t be decided by how much you paid for it, or what you perceive the market value to be. The lender will assess the LTV (Loan to Value), which is the equity that is available within the property. A RICS-qualified surveyor will need to make their own formal valuation to present to the lender and this will determine how much they’re willing to lend you as a bridge.
One of the reasons that bridging loans are quicker to arrange than a long-term mortgage for example, is that lenders do skip out various criteria when they’re assessing your application. Bridging lenders are NOT interested in:
- Your personal income
- The rental income potential of your property
- The existing condition of your property
Loan Structure and Fees
Bridging fees are known to include certain fees. Typically, these might include:
- Initial valuation fee
- Arrangement fee (Starting From 1% of the loan)
- Your legal fees
- Your lender’s legal fees
- Exit fee (with some lenders 1% of the loan)
- Possible loan broker fee
You’ll also have some options regarding the way you pay back the interest with a bridging loan product. The options to pay are:
- Withheld interest – the interest is deducted from the gross advance at the start of the loan
- Rolled up interest – where you pay it as a lump sum at the end of the term
- Serviced interest – much like a mortgage payment, you pay the interest each month
What to Consider When Taking Out Bridging
The most important consideration for both the lender and for somebody looking at taking a bridging loan is that you have a solid exit strategy in place. In many cases this should already be known to you and you will have a plan of how you intend to service and repay the finance, bridging loans are a great solution that allows you access to funds quickly as well as making a profitable deal that you wouldn’t otherwise have access to.
If you’re ready to take out a bridging loan for whatever purpose, we’ll turn around your application quickly to get your funding in place asap. Get in touch today!