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A short summary of Bridging Loans and what they are used for
What is short term property lending?
The UK is home to a number of Property professionals who either invest their money into building portfolios of buy to let properties, those who buy run down properties and refurbish them and of course those who take advantage of accessing capital for any type of purpose by using a property as security.
In each case, there is a requirement for short term funding where the owner might take a short-term loan to purchase a property at auction, refurbish it and put it on the market all within a 12-month period. Bridging loans are used specifically for short term borrowing requirements where there is a clear exit strategy of either a sale or refinance and the plausibility of a refinance is strong.
What are the terms of short term property lending?
Bridging loans are usually funded to a maximum of 75% of the property value and in some cases maybe even more. The bridging loan lender takes a 1st charge or a 2nd charge over the property where the borrower has to put down a large cash deposit, usually in the region of 30% of the property value. The term of the loan can vary from as little as 3 months to 24 months and with even longer terms available for second charge loans. What are bridging Loans and how are they used?
Bridging loans provide short term mortgages for property transactions where there may be a purchase at an auction, a timing gap between moving homes, buy to let refurbishment projects or raising capital for business purposes. Who uses Bridging Loans
The short term mortgage market is popular with property professionals and is not designed to replace a traditional mortgage, instead to provide a short term replacement for a mortgage where a Bank’s underwriting might take a little longer than expected or you are waiting for the sale of a property. We have all been there!
Table of Contents
How a Bridging Loan works with an example transaction.
What can I use a Bridging Loan for?
What type of Security do Lenders require for a bridging Loan?
Bridging Loan Rates and the costs involved.
Guide to get the best bridging loan rates
How a Bridging Loan works with an example transaction. What is a Bridging Loan?
Bridging Loans are short term mortgages associated with property to cover a funding gap where a traditional mortgage does not take into consideration any potential works or planning gain that may enhance the value of the property. The property being funded is taken as security by way of a 1st charge and a lender will in some instances advance up to 80% of the value to the borrower with a contribution of 20% from the borrower.Who uses Bridging Loans and is it the right type of product for me?
Property professionals and business owners are heavily dependent on the Bridging Loan market and lenders have taken advantage of the gap in the market where the high street lenders have retracted. The 2008 Financial crisis and heavy regulation around the larger Financial Instructions has meant that they are not nimble enough to act in the timelines required for Property Professionals.
You may use a bridging loan if you are moving home and you have found the property you wish to purchase but still must sell your existing property. Known as “being in a chain”, this is a popular scenario where bridging loans are used to either refinance the existing property on a bridging loan or purchase the new one on a bridging loan. The key being that a longer-term mortgage is in place once the existing property is sold paying off the bridging loan. How quickly can I get a Bridging Loan?
Providing all the information on the property, the loan required and the borrower’s details, an approval in principal can be delivered in 48 hours. A formal offer is generally subject to the legal process of conveyancing and valuations, however with an offer from a lender subject to these two factors, a borrower should be able to satisfy any vendor that funding is in place to see through the purchase.
What can I use a Bridging Loan for? Refurbishment Finance and Auction Purchase
Whether you are refurbing an investment property, buying at auction or developing a block of flats, we have the type of loan to suit your needs. Our platform provides you with access to the best lenders in the market and to find the right lender to suit your needs without having to spend hours trawling the net trying to find one. Ever spent 6 weeks speaking to a lender only to get a No and loose the deal? Find the right lender to suit your needs with just a few clicks and you can be rest assured the lenders on our platform have met the strict criteria to be placed so you can access them. Business Purposes
Business owners often use Bridging Loans to raise capital to inject into their business on a short-term basis for either working capital or to expand the business. The property may be a buy to let that has no mortgage and the funds must be raised quickly by allowing a 1st Charge or it may be that there is already a mortgage in place with equity and therefore allowing a 2nd Charge. Restructuring and Refinance
Sometimes things do not go to plan and projects over run or life events occur where there are delays in paying back an existing bridging loan lender. In these cases, there is a possibility to refinance an existing bridging loan with a new provider providing that there is still a clear exit strategy.Before Planning Applications Granted or Planning Permission Pending
Land opportunities where planning has a good chance of being obtained cannot be financed through traditional High Street Banks. Bridging Loan providers will be able to support a planning gain for a set period in order to allow the purchase and planning process to take place which can be up to 12 months or more. There must be good evidence of previous success in terms of gaining planning and the bridging loan lender will conduct their own due diligence around the same.
What type of Security do Lenders require for a bridging Loan?
Security is generally accepted as a charge over the property that the loan is being advanced towards however some bridging loan lenders will advance further funds with other assets in the background that are pledged as security. It is important that the borrowers understand their commitments when it comes to pledging their own assets and the risks involved in the event of default. Where the LTVs are higher than usual or if there are CCJ’s involved, the lenders may request a Personal Guarantee. Levels of Personal Guarantee’s differ from lender to lender and are based on the deal as a whole.
Bridging Loan Rates and the costs involved.
Bridging loan pricing, also known as the rate of interest, applied, vary from lender to lender and on the type of deal. The higher the loan to value, the higher the risk, the higher the rates of interest. Other factors that influence the rate of interest is the deal itself which take into consideration the type of asset, the credit profile of the borrower and the exit that is in mind. Not all lenders like the same deal so that’s why we have made it easier for you to enter in your loan requirements and have the right type of lender shown to you in your results. Bridging Loan Rates Example
A lender may have an internal rate of return, as an example of 14%. That would mean on a £100,000 loan, the lender could apply the 14% as follows;
Rate of interest 1% per month for 12 months totally £12,000
Arrangement Fee of 2% totalling £2,000
The total cost for the loan over a 12-month period being £14,000, which as a percentage of the loan equates to an APR of 14%.
All legal and valuation costs are separate to that of the interest cost and arrangement fees and will in most instances also be paid for by the borrower.
When you are dealing with a Bridging Loan provider, generally all costs are borne by you the borrower which include but are not limited to, arrangement fees, interest costs associated with the loan as you would expect as well as a Professional Valuation and all aspects of the Legal’s involved. The valuations costs and legal work involved is always dependent on how urgent the loan requirement is and the deal the lender has struck with each of the providers in terms of fees.How does Interest element of the loan work, my offer letter is not as straight forward as I thought?
Being able to show a degree of flexibility is one of the Bridging Finance market sectors benefits. Most Bridging Loans are advanced with a view that the full amount is redeemed on exit of the loan which differs from the capital & interest loan profile borrowers are used to with traditional mortgages. The interest portion of the loan can be serviced monthly, be rolled up or the total amount retained by the lender i.e. deducted from the loan before it is advanced.
The number one factor to determine profitability in a property transaction is being able to calculate your margin after paying finance costs. This quite naturally leads borrowers to their first question when speaking to a bridging loan lender in determining pricing. Pricing or the rate of the loan has several factors to consider;
The type of project
Loan to Value
Credit Profile of the Borrower
Understanding your market is key. A 3 Bed semi-detached house in Scunthorpe will ultimately be viewed as a different market to a 3 Bed semi in Brighton. Your price per square foot, sale value and compatible’s in the market are pivotal to understanding the market both for you to calculate profitability and the lender to evidence you are well versed in your market.
When conducting a refurbishment project there is generally a view to add value to a property which may be in the form of obtaining planning permission for extended square footage or redesign of the layout of the property plus modernisation. These types of projects are idea for a Bridging Loan, where the property is obtained, worked on in a short period of time and once finished will have an uplift in value. Once the uplift in value has been obtained a Buy to Let mortgage can be obtained to pay off the Bridging Loan and generally release some of the investment made too. What is the role of a Bridging Loan Broker?
The majority of the Bridging Finance industry operates through a vast broker network. There are a number of reasons for this but the main one is that lenders in this market do not have the high street footprint that the banks have. Specialist lenders are reliant upon brokers first understanding the borrower’s requirements and then putting the borrower in touch with the lender that fits their criteria. Broker fees always vary and the best thing is to always ask a broker what their charges are before entering into an agreement with them. Will my high street bank HSBC provide a bridging loan?
In short, no. High street banks no longer offer short term property finance as a product as they may have 20 years ago. The cost of capital and resources to put out loans not on a large scale are too expensive for the bank to be in the market anymore. Therefore, there are now over 120 alternative lenders in the market that cover bridging loans funded by either High Net Worth Individuals or Institutions on a wholesale basis.
The number of lenders servicing the short term property lending market have since grown since 2008 and it is unlikely that the mainstream lenders will be back at the gearing levels they were supporting in 2007 at the height of the UK Property boom. Generally the more successful Bridging Finance Companies are backed by investors looking for a secured return on their funds in a low interest rate environment.
Challenger banks have also made an impact in the short term lending market more recently with the Prudential Regulatory Authorities desire to create more competition in on the high street for consumers to bank with. Lenders such as Aldermore, Shawbrook and Masthaven all have banking licenses and started out in one shape or form as short term bridging lenders.
There are also private individuals that operate Bridging Loan facilities given the attraction in the secured element of the investment and the rates of return that can be obtained. Some individuals deal directly with borrowers with the large majority offering a funding line to Bridging Companies to take away the administration side of the business.
Sometimes lenders shy away from specific deals that perhaps another lender may have an appetite for so don’t be disheartened if your usual lender is not keen on the deal you are working on. Of course, you would not be taking on the risk if you did not think it was profitable, however there are many reasons why a lender may not feel comfortable so it is more important to spend your time finding a lender who will. Recently a borrower was turned down on for a Bridging Loan as the lender had already taken on a large bridging loan in the same area and believed their exposure to that market was at full capacity. How does Development Finance differ from Bridging Loans?
A development can take up to 24 months and is carried out in phases with each phase being monitored by an appointed Quantative Surveyor on behalf of the lender. There reports lets the lender know that you are on track to complete your development or not and this is not to penalise you but to draw attention to where your build may need more time. Bridging Loans are a straight forward loan awarded based on a loan to value and with an exit event planned for no longer than 12 months ahead of time.
Development Loans are a bridging loan and a further advancement to the build cost of a development which is paid in arrears against invoices. This is usually once planning permission had been granted on a piece of land or existing building and there is a residual value and cost to building out the site.
Guide to get the best bridging loan rates Plan your exit
Bridging Loans are designed with the exit in mind. Is this going to be a sale of the property or a placing it with a traditional high street lender for a longer term mortgage? Either way, plan ahead as the idea of short term lending is exactly that, it is designed for it to be short term. Do your numbers
Know how much you can afford to give away on the financing. If the profit in the end value or sale of the project is not able to carry the financing cost then you will need to think carefully on how you raise the capital you need and if indeed the project is worth pursuing. Engage a lender as early as possible
Bridging Loan lenders build their reputation on being able to perform and getting access to the best deals means committing to your timelines which becomes easier with a longer runway. Engaging us early means we can get the time line expectations in line with the vendor and leaves us plenty of time to get you the right deal. Know you exit values
Understanding your local market is key and knowing where you are able to pitch the end value of the project is critical to getting the buy in of the lender. Too high a valuation and you ruin the chances of the lender can trust your numbers. Remember, be realistic and the lender will know you are leaving a little upside in the deal. House keeping
Getting the best deal does not always mean going back to the same lender. If you are approaching a new lender, be prepared to have to submit a few documents such as your Assets & Liabilities, CV and Bank statements. These are the standard documents a lender requires in order to assess the borrower and more often than not take the longest time to submit.
Rates are representative as of September 2019
Interest rates displayed should be used as an indication only and is based on the lowest advertised rate by the lender. All applications are subject to individual circumstances, valuation and underwriting and the total representative cost is excluding and lender arrangement fees, valuation fees or legal costs.
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