Bridging Loan Advice
So: you’re poised to get your family a new home, but you have yet to get the funds to pay for it from the impending sale of another property such as your old house.
Perhaps you’re eyeing a lot to turn into lucrative commercial enclave, but there isn’t a viable investor in sight. Or you want to expand a factory or a similar industrial facility but are short on the cash you need for refurbishment.
We offer some sensible bridging loan advice to keep in mind before you make the decision to apply for one.
In such cases, bridging loans are your best bet. These are short term loans that bridge the gap until you get the money to pay it off. As a result, you get ready to cash for immediate purposes. These loans particularly come in handy for rush property sales or purchasing land – developed or otherwise – at an auction. But, as with any financial instrument, not all bridging loans are made equal.
Bridging Loan Advice: What do you need to know about bridging loans?
Bridging loans, also known as bridging finance, are short term financial instruments used to get immediate funds for a variety of purposes. However, they are commonly used for the purchase of property for residential, commercial, industrial, and even agricultural construction or development.
It would be easy to compare bridging loans to normal property mortgages. But the nifty thing about this short term financing solution is that it is available even to those who would normally be turned down for a mortgage. This includes those with a low credit score and those whose financial situation is less than ideal.
Another thing that differentiates bridging loans from other financing types is the need to present an exit strategy. An exit strategy is a plan which delineates how – and when – a borrower intends to repay the loan within a set period. Exit strategies may include the following:
- Cashing in dividends or interest from previous investments
- Funding the repayment with the proceeds from the sale of one’s old house, commercial or industrial property, or any other material asset of substantial worth.
- Money received from a grant or inheritance
- Money earned from a business transaction
- Loan refinancing; or
- Other expected cash flow from legal sources.
Bridging Loan Advice on Exit Strategies
Many bridging finance lenders will only consider viable exit strategies when a potential borrower applies for a loan. Viability demands that the strategy should be set on sound financial grounds.
Indeed, lenders tend not to push through with financing if they discover serious concerns or issues regarding the current state of the borrower’s finances or if the strategy itself seems to have no merit. For example, a borrower with existing credit issues and is heavily in arrears could not possibly be able to refinance a loan within six months.
However, if the strategy calls for selling a different property within the same time frame, a lender can look upon the application more favourably. Be sure, nevertheless, to pay the loan as soon as the funds to do so become available.
Keep in mind that availing of a bridging loan may entail offering security to your lender in the form of another property in your possession or other assets such as shares in a business, jewellery, vehicles, or watches.
Types of Bridging Finance
To date, there are two types of bridging loans commonly available in the UK: open bridging loans and closed bridging loans.
Open-ended or just open bridging loan usually involves a loan without a specific repayment date. Nevertheless, lenders will still demand a fairly solid exit strategy. This option is usually taken by those who are not sure when the funds for paying up the loan balance will be available. Note that this type of bridging loan has higher interest rates than closed bridging finance.
This high interest rate is due mostly to the fact that open-ended bridge loans pose a greater risk for a bridging lender.
Closed bridging loans, on the other hand, are availed of by those with a solid exit strategy that follows a schedule for repayment. A bridging lender usually offers a lower interest rate for bridging loans. This is so they feel more secure knowing that the loan will be repaid in full on time. There are plus points for this type of loan.
Some borrowers also add provisions to ensure the repayment of the loan just in case their primary strategy falls through or they fail to get the funds within the stipulated period.
Transactions where bridging loans can come in handy
Most people who avail of bridging finance use them for the following purposes:
- Purchasing property at an auction or require funds for an immediate transaction;
- Downsizing or expanding a built property;
- Breaking a sales chain;
- Investment purchases or a buy to let scenario;
- Funds to purchase before or without an official sale;
- Self-build or conversion projects;
- Development loans on agricultural land;
- Refurbishment loans or repurposing of agricultural structures;
- Transactions below the stated market value;
- Any form of structural refurbishment or redevelopment;
- Funds to facilitate a change in a property’s use or zoning from residential to commercial/industrial or vice versa;
- Purchase of commercial or industrial property;
- Repayment of another bridge loan;
- Payment for inheritance taxes;
- Lease extensions;
- Multi-asset lending; and
- Purchase of raw land with or without planning permission.
A Caveat on Using Bridging Finance for an Auction Purchase
Most of the time, bridging finance enables property buyers to put down the initial deposit demanded upon a successful bid. Afterwards, however, the rest of the balance must be paid within a period of no more than 28 days.
This is one of the reasons why bridging finance appeals to any buyer who purchases their land at auctions: any other form of finance such as regular mortgages and similar property loans do take time before any funds are released.
Bridging Loan Advice: Key Benefits of Bridging Finance
- Payout comes fast – What’s particularly notable is that you get the money you need faster – almost immediately in some cases. This comes handy when you win an auction bid. Or, you can put a 10 per cent down payment or respond to emergency transactions that call for ready cash.
- You can get one for anything – Most people use bridging loans for matters involving property or development financing. Yet there are numerous legal uses for such financing. You can refinance another loan or pay for different transactions of an urgent nature. Bridging finance ensures that you have money in your pocket for it.
- Applying for one is quick and easy – It is much simpler to apply for a bridging loan than any other loan. Applications are judged simply on their own merits. Even people who wouldn’t normally qualify for mortgages and other loans can apply. Most lenders don’t bother looking at credit scores or even proof of income.
- Rates are reasonable and interest rates are significantly lower – These loans were specifically designed to be accessible. It caters to those who need a large sum of money in a short period of time. Given that there are now over 200 lending agencies offering bridging loans, rates are competitive. Be sure, however, to check with lenders before signing off on anything;
- You can use different forms of security – Lenders aren’t picky when it comes to assets you use for security. Some even allow houses in a certain state of disrepair or structures that aren’t in the most ideal physical state as security.
Bridging Loan Advice: Possible Alternatives to Bridging Loans
While we have established that bridging loans can be availed of by anyone, this doesn’t mean that it’s a solution for everyone.
Indeed, many people who consider bridging loans also have a roster of potential alternatives when it comes to financing. It should be noted at this point that the alternative financing instrument a borrower eventually opts for is entirely dependent on their specific requirements.
For the most part, banks, brokerages, and other lending agencies may offer you conventional mortgages for both residential and commercial properties; secured loans; commercial loans specific to business growth and expansion; development finance for industrial and agricultural purposes; as well as equity release.
However, the key disadvantage of all these options is that it does take time before funds are released. This could pose a problem in instances where one needs a large sum of ready monies in hand, so bridging loans would still be the best possible option.
In any case, don’t be afraid to ask questions prior to making decisions on such financial products. Do so well ahead of any planned purchase so that you can properly scrutinise any and all loans and mortgages available to you.
That said, you would do well to work with a reputable lending broker with access to some of the UK’s best possible independent lenders and financial institutions. This gives you the ability to shop around for the most appropriate products and services for your needs.
Tips Before Applying for Bridging Loans
You know the old saw about prior preparation prevents poor performance? It certainly applies to applying for bridging loans or for any other financial instruments for that matter. As such, we offer the following practical pointers:
Look over your finances
Bridging loans are the most democratic of financial instruments. Lenders don’t usually check credit scores or ask for proof of income. However, they will expect you to be able to pay back the loan within the agreed-upon time period.
In which case, be sure to look over your financial records and see what needs work. Why is this important? When lenders know your finances are in good shape, they can release funds faster and, knowing that you don’t pose much of a risk, they may charge lower fees and interest rates.
Also, if your exit strategy is dependent on the sale of another asset within the stated amount of time, be sure to follow up on – and follow through with – your buyer.
As bridging loan advice, go over your budget seriously. What can you afford when it comes to property and/or the cost of either construction or refurbishment.
Again, even with more relaxed guidelines, lenders will determine how much to loan you based on your capacity to pay and the security you are prepared to line up for your loan.
Just because a lender is within close physical proximity to you doesn’t mean that you need to stick to them. Go online, make calls, and go over listings to see which lenders or lending agencies offer the most reasonable rates and who are best qualified for the services you need.
Compare bridging loans among multiple lenders
In relation to the previous item, different bridging lenders offer different rates. For example, institutional lenders like banks and credit unions may offer a cheaper repayment package than the more bespoke loan packages offered by independents and online lenders. Still, you need to see the tale of the tape when it comes to fees, interest and service rates, and repayment terms.
Always read the fine print
We cannot emphasise this enough: be sure to read any and all paperwork before you sign off on anything. Be sure to comb through the documents to see if there are any hidden charges or penalties that may come back to haunt you in the long run.
Before anything else, go over the criteria before filing your application for a bridge loan
Again, different lenders and lending agencies may have different requirements for those applying for a bridge loan. However, in the UK, any company offering a short term bridge loan will ask you for or about any of the following:
- The size of the loan, and this can run between £100,000 to £1 billion depending on the lender;
- The loan duration or term which, in most cases, can be as short as a day to twelve months, though some lenders can stretch the term up to eighteen months;
- Primary and secondary security against the bridge loan in the form of alternative property or material assets of comparable value;
- Property type, location, and ability;
- Borrower’s financial status and credit scores (often optional); and
- Exit strategy.