Bridging Loans – What are they?
Bridging loans are short term loans which are there to provide short term shortfall before longer-term lending is in place. Originally they were used in the commercial property sector, but now they are used widely across the property sector globally. The loan allows investor, property developers, businesses and residential homeowners the flexibility to take advantage of various types of property opportunities and short term funding goals.
To bridge or not to bridge?
So what is a bridging loan – what are they? They are designed to bridge the gap between finances. They are typically used in property transactions for a variety of reasons but primarily to either take advantage of a short term opportunity or allow a purchaser of property to freedom to buy a new property should their property be caught in a chain. Alternatively, to provide short term refinancing.
The advantage of a bridging loan is that it puts you in the position of a cash buyer allowing you to extract the full value of the opportunity presented.
- The term of a loan can be from 1 week to 36 months.
- The lending amounts can vary from £20,000 to £50m+
Closed or Open?
Three are two key types of bridging loan. These are known as closed or open. The differences are:
Closed
This loan has a fixed repayment date which is agreed once the loan is agreed and executed.
Open
You have no repayment date, however, there will be a clear exit strategy from the loan, which is agreed when the loan agreement is signed.
Both types of bridging loan cater to the needs of different borrowers. A homeowner would be more interested in securing a closed bridge so she may know what the terms of the financing would be and also be certain of her budgeting needs. Whereas an open bridging loan would be more interesting to a property developer who had secured the property with a view of flipping it on soon.
The loan allows investor, property developers, businesses and residential homeowners the flexibility to take advantage of various types of property opportunities and short term funding goals.
What about interest rates?
Interest rates for bridging loans vary greatly and can be affected by many different factors including the general health of the economy, the lenders’ appetite for the type of property and your creditworthiness. As a rule, a lender will look at rates between 0.4% per month to 2% per month for residential properties and commercial rates are slightly higher. You should always speak with an expert as rates can change daily.
Is it right for me?
There are several reasons to choose a bridging loan. Including;
- Downsizing your family home.
- You found your dream home.
- You found a property deal at auction.
- Looking to move into property development.
- Need to release equity from an existing property.
Strong Exit Strategy?
All lenders want to know, how are you going to pay back the loan. It is in no one’s interest for you to be overstretched and unable to repay the loan. So having a plan in place before you take out the loan is always looked on favourably.
If you are bridging to buy your dream home. The exit could be the sale of your existing home. A lender would need to know that the property was on the market and was priced at an agreeable market price to ensure funds could be used to pay back the bridging finance.
Maybe you are a property investor who has bought a property at auction and only has 28 days to complete the sale. Your exit could be securing a buy-to-let mortgage. A lender would like to know that an agreement in principle had been awarded.
There are multiple ways to prove a strong exit, but if you are unsure, speak with an expert as to what would be acceptable.
How can we help you?
Bridging loans are taken out when there isn’t a lot of time and you need to be in touch with the right people. In the vast majority of cases, these loans are unregulated and high street banks, merchant banks and alternative finance lenders rely on commercial finance brokers to introduce clients to them. That’s how we can help.
Azurian Capital is a leading alternative finance advisor and commercial finance broker. Our relationships with leading private funders, merchant banks, investment banks and hedge funds help our clients get the funds they need in the time they need it.
You should always speak with an expert as rates can change daily.
The process
Get in Touch
Give us a call. Have a conversation with one of the team and explain your situation and what you are looking to achieve. We will discuss in detail what your options are and how likely it would be that you could arrange a bridging loan. Once we have all the information we will contact our lending panel and discuss your case with them and begin to tailor a solution.
Research
Once we have approached the lending panel and we have the foundations of a solution we will come back to you to discuss it further and outline all the information a lender is looking for to make a positive decision. We will be working with you so you are comfortable and involved with the process.
Decision in Principle
The lender has agreed that you are a good prospect for a bridging loan and they will provide you with a decision in principle. The lender will now begin the process of underwriting your loan and checking your details and the information you have supplied.
Completion
Once the decision in principle has been provided, the property will need to be valued. You will be responsible for the cost of the valuation and you will also be responsible for the legal fees of the lender as well as your legal fees. We will work with you so you can get the best value legal and valuation fees.
All the check have been carried out and the lender and you are ready to complete on the transaction. We continue to work with you to ensure all the funds are drawn-down and the monies are paid to the seller’s solicitors.
We will work with you to ensure the transaction happens smoothly and with as little stress as possible. Get in touch with one of the property team and see how they can help you or try our bridging finance calculator.