Private Finance's Guide To Bridging Finance
Bridging finance is a topic around which much confusion persists. Many people still hold the mistaken view that such loans are a high-risk, high-cost option that nobody save the most reckless of investors would ever consider using. While this viewpoint may once have held some truth, this is no longer the case at all: bridging rates are now perfectly reasonable and such loans present an invaluable tool with which savvy property investors can take advantage of opportunities presented by the property market. Throughout this article we will explain what bridging loans are, how they differ from standard residential mortgages, and how these differences make them particularly useful in certain situations.
What is a Bridging Loan?
A bridging loan is a short-term loan secured against the value of a property. These loans differ from standard mortgages in a number of key ways:
- Income – when assessing the affordability of a standard mortgage, lenders look at the aspiring borrower’s income and use this information to determine whether the individual can afford the mortgage. Most lenders cap the size of the mortgage they are willing to offer at between 4 and 5 times the borrower’s income. In contrast, lenders rarely limit the size of a bridging loan based on income – provided, that is, that some other acceptable means of repaying the loan is specified. That being said, if a borrower can demonstrate the ability to service the interest payments of the loan using income alone, certain lenders may be willing to offer them a considerably discounted rate approaching and occasionally equalling the rates offered on their standard mortgages. In such situations, a good broker will know which lenders to approach according to the reliability of your exit strategy and the affordability of the loan.
- Repayment strategies – whereas residential loans can be repaid either on a capital-repayment basis or an interest-only basis, the only option available on bridging loans is interest-only. This being said, there is still some variety with regards to when a borrower makes their interest payments: they can either opt for a rolled-up interest repayment strategy, whereby they repay the entirety of the loan plus all of the accrued monthly interest at the end of the loan term; or else they can opt for a serviced interest repayment strategy, whereby they pay interest on the loan each month and then simply pay off the principle at the end of the term. A number of factors affect the suitability of each repayment strategy so it is advisable that borrowers seek the expertise of a qualified mortgage consultant, who will then be able to provide them with an informed recommendation based on their goals and circumstances, as well as the range of products currently available on the market.
- Rates – while bridging loans are still, as a general rule, more expensive than standard mortgages, rates these days are far more competitive than they were in the past, starting at as low as 0.5% per month in some cases.
- Property – lenders are far less selective about which properties they are willing to offer bridging loans on compared to those on which they’re willing to offer standard mortgages. This property of bridging finance makes it particularly useful to certain kinds of borrower.
- Speed – it’s often possible to arrange bridging loans far more quickly than standard mortgages; mortgages often take months to complete, whereas bridging loans can sometimes be arranged within 24 hours, though the average time between application and completion is between 7 and 28 days (a good broker should be able to push the loan through to completion more quickly).
- Length of term – there are two broad types of bridging loan, closed and open. Closed bridging loans have a set end date on which they are due to be repaid; open bridging loans can be repaid at any point in the loan’s term. No matter which type of bridging loan you opt for, however, the length of the term will in almost all cases be 12 months or less.
Uses of Bridging Finance
Because of their rates and length, bridging loans are rarely the first port of call for individuals looking for property finance. They can, however, come to be extremely useful in certain situations where standard mortgages are unsuitable for one reason or another.
Bridging finance can be used to save the sale of a property in a broken chain. One of our clients, for example, had agreed a price with a buyer for their main residence and had exchanged contracts with a seller on their onward purchase. In the last minute, however, their buyer pulled out of the deal and they were then left with no funds with which to complete the purchase. We were ultimately able to arrange a 12-month bridging loan, and they were able to purchase their new home. They then repaid the bridging loan in its entirety once they had sold their original property (see full case study here).
More generally, bridging finance can be used in any situation where an individual has found a property that they are determined to purchase before another buyer can make a bid. Two of our clients, for example, stumbled upon their dream home – a grade II listed thatched cottage in the Suffolk countryside – and came to us looking for a way to finance this purchase quickly, without selling their main residence, before another buyer could come in and steal it away. We were able to arrange a bridging loan, and they were ultimately able to purchase their dream property (see full case study here).
Another scenario in which bridging finance can be extremely useful is when the property in question is un-mortgageable. Perhaps, for example, the property has fallen into a state of disrepair and is therefore deemed uninhabitable by the lender. Or perhaps the property has no kitchen, or no bathrooms, and is deemed uninhabitable on these grounds. Mortgage lenders are unwilling to lend on such properties, leaving potential buyers with few financial options. But because bridging lenders are less selective with regards to the kinds of property they are willing to lend on, borrowers can use these loans to purchase unmortgageable properties. They can then make the renovations necessary to render the property mortgageable, before securing a standard mortgage and repaying the bridging loan in full.
Those purchasing property at auction are required to pay a deposit of 10% of the property’s value on the day of the auction; they are also required to sign a contract guaranteeing that they will pay the remaining 90% within the next 28 days. It can often be extremely difficult for buyers to generate these kinds of funds at such short notice – to push a standard mortgage through to completion within a month can prove highly challenging due to the complexity of underwriting associated with such loans. Bridging loans, on the other hand, can be arranged quickly and at short notice, allowing those purchasing property at auction to meet the obligations of their contract. These funds can then be used to ‘bridge’ the gap until their mortgage completes, at which time they can repay the bridging loan in full.
Like all forms of finance, bridging loans come with a unique list of pros and cons which makes them suitable for some situations and not others. Historically, the rates on such loans have been prohibitive; today, however, bridging loans are eminently affordable and may prove to be the optimal solution to a wide range of property-related problems. Throughout this article, we have provided an overview of what precisely bridging loans are, how they differ from standard mortgages, as well as the kinds of situations in which they may prove to be particularly useful. This discussion, however, is far from exhaustive; there are a wide range of situations not touched upon by this article that may be perfectly suited to a loan of this type.
When attempting to calculate the degree to which a bridging loan might be suited to your particular circumstances and the problems they present, it is advisable that you speak to a mortgage consultant. A consultant will be able to provide you with an informed recommendation based on a holistic view of your circumstances and the range of products currently available on the market.
If you would like to discuss bridging loans with one of our qualified professionals, you can get in touch by calling us on 0800 980 8777 or by emailing us at firstname.lastname@example.org.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE