Bridging Loan Explained
You’ve heard of bridging loans and you think you might need one. In the last few years, the alternative finance market, including bridging loans, has grown significantly. Part of this reason is from the banks pulling away from the property market since the crash and part is that more and more investors are making use of the flexibility bridging loans offer.
But what actually are they? Here is your potential bridging loan explained:
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As the name suggests, bridging loans were generally used to bridge a purchase and sale of a property. If you wanted to buy a new property but needed to sell before you could make it happen you would turn to bridging.
While being a way of saving a purchase they have often been seen as something of a last resort, due to the higher rates and fees. There is also the risk factor to take into account – if the sale falls through then you might find yourself with a high interest loan that you can’t pay off.
For many, though, (my parents for example ) it did mean that a move up on the property ladder or a purchase that pushed forward business was able to happen.
Since the crash of the last decade, banks have been far more difficult to deal with when it comes to property. Whether you are a business that invests or a developer that builds, getting money from the high street has become a more tedious and often fruitless exercise.
The bridging market, off the high street, has boomed and in many ways filled the void left. This has seen borrowers flock to the market, as well as a tsunami of money coming in from investors looking to lend it out.
New lenders appear quite regularly, ranging from family businesses to peer to peer lenders, all vying for your business. Some have a lot of experience in commercial lending and others seem to be less so.
The immense supply of money has brought rates down, across the board, and with some careful shopping around, the cost doesn’t have to be as eye watering as some might think.
Many lenders are now aiming their loans at professional property investors; those that are looking to buy to sell on or developers that are looking to improve the building they buy, either full blown developments or just a quick refurbishment.
There are still loans aimed at private borrowers that are moving home, though it is important to note that we don’t work in that market – we specialise in dealing with limited companies, or b2b as marketers like to call it.
For those that are experience in property buying and selling, bridging can be a great way to build business. There are risks, of course, as with any form of borrowing but in the right hands a bridge can be a valuable product to take advantage of.
As well as businesses that invest in property the nature of bridging; it’s quick and simple, for example, means that companies of all kinds use them for a variety of uses. From paying off unexpected bills to buying stock to fulfil an order, as long as the use is lawful and the security is there you will find a lender willing to help.
Bridging is designed to be a short term loan. Although you can get loan terms of 24 months or so, most are looking to take them out over nearer 6 months.
The cost is undeniably higher than longer term finance, for a few reasons, so no matter how good the deal is you strike with the lender, you don’t want to keep them for longer than is necessary.
Indeed, if you go past term, there are can be additional costs that you incur that will increase the overall cost significantly.
All borrowing comes with costs and fees, bridging is no exception. Typically, you will have to cover lender costs that will include their solicitor fees and the cost of any professional reports, such as valuation.
For property that is perhaps in bad condition other reports might be needed, a structural survey for example. Again, although it will be requested by the lender, the borrower will be responsible for the cost.
Arrangement fees can vary and when dealing with a broker you might find you are paying an additional fee. Here at Volo FS we look at the case and make a judgment based on the detail, so you don’t always have to pay us anything extra.
Lenders will tend to charge around 2% of the loan amount for their arrangement fee but that does vary.
ii. Interest Rate
The interest attached to loans can vary widely, depending on who is lending and the circumstance of the borrower and deal as a whole.
For the lowest loan to values and right locations rates can be as low as 0.58% a month (at the time of writing) and can go as high as 2% or more a month.
Some of this is based not the loan to value and risk the loan represents and some is just a representation of the cost of the money to that lender. Most lenders borrow to lend, from one source or another. The rate you pay includes their margin ( they are in business too and have overheads ) and is not just a figure plucked out of the air.
Rates are higher than standard mortgages but to compare the two is not really fair. Bridging is quicker, easier and only kept for a short period of time and that kind of convenience comes at a cost.
Even if rates and fees may be higher than a standard loan, the advantages will outweigh the cost, when used right.
For the most part security for the bridging loan will be a property. The particular building you use could be residential or commercial, though some lenders have a preference for one over the other.
Factors that will taken into account are the value, location, condition and amount of any current borrowings. These all affect how much you would be able to borrow and also have an impact on how long will be able to keep the loan.
One of the main advantages of bridging loans is that they are fast. A good time to use one is when you need to get money quickly and with as little fuss as possible.
From a property investor perspective bargains can be had at auction or when someone is selling on the open market but needs to complete quickly. That speed can be the difference to getting a great deal or missing out.
Speed is key in securing the best deals, so knowing you have quick access to money can be a real comfort.
Although it is not always the case, it is not unknown for bridging loan applications to be done and dusted within days. Most do take longer, often a couple of weeks but even so that is quick enough to satisfy the most demanding circumstance.
It might be that you want to buy a property that is not in mortgageable condition. To get a buy to let mortgage the property has to be lettable right away. This isn’t the case with bridging; lenders are used to clients borrowing with the intention of refurbishing or converting a building to improve the value and then remortgaging after work has finished.
Bridging is also a good option if an injection of capital is needed that was not expected. If a bill lands or perhaps your business needs to fulfil an order and you need a swift, short term loan while you sort a longer term strategy a bridge might be just what you need.
Before taking one out, however, you need to be sure that you have your exit route sorted – ie. you need to know how and when you will be paying it back. Most lenders want to see you have planned that before they lend, if you don’t the cost could spiral and the benefit of having one is lost.
Lenders are all over the country and they cater for those looking to borrow relatively small amounts up to the tens of millions.
It’s fair to say that most borrowers that come to us want the cheapest loan possible, no one likes to pay over the odds.
That’s fine and an understandable goal. It’s also worth bearing in mind that service should also be taken into account when deciding who to use.
You should be taking into account the ease of application, the speed of response and the experience of the lender.
A quote is not an offer, so while headline quotes will look to be very attractive, the reality may not be as great as it initially seems.
Using a broker can be a very cost effective way to get you to the loan you want quickly. While you can shop around yourself do you really know who is experienced and can actually do what they say?
Volo FS is a great option. Not only will we work hard to get you the best rates and terms, you will also find that we give industry leading service.
You are important to us, you are not just an enquiry or account number.
When time is of the essence you need to work with someone that is reliable and hard working, trustworthy and experienced.
Volo FS ticks all the boxes.
To discuss how we might be able to work together, get in touch through the site, by email ( firstname.lastname@example.org ) or even better, just pick up the phone – 01492 862870.