Understanding Bridging finance is essential for deciding if a bridging loan is right for you and your circumstances. This bridging finance guide will cover everything you need to know about bridging loans to help you make an informed decision.
Below we will look at what is a bridging loan, the process, the advantages and disadvantages as well as answering many other questions you might have about Bridging Finance.
Bridging loans bridge the gap so that you are able to have access to funds quicker than main stream methods.
What is a Bridging loan?
Bridging loans are short-term loans that are used until arrangements for larger or longer-term financing are secured. Bridging loans is a way of bridging the gap allowing funds to be released quicker than traditional methods. These types of loans can be arranged quickly and are secured against property. Bridging loans are designed to be paid off as soon as money from elsewhere becomes available.
Types of Bridging Loans
There are two main types of Bridging loans:
-Open bridge loans: This type of bridge loan has no fixed repayment date, however, lenders normally expect you to pay them back within 12 to 24 months. Due to these loans being more flexible, they are normally more expensive. This type of loan may suit you if you have already found a property you want to buy but haven’t yet found a buyer for your current property.
-Closed bridge loans: This type of bridge loan does have a fixed repayment date and is normally cheaper than open bridge loans as it is less flexible. This type of loan may suit you if you have a buyer who is only waiting for completion to gain access to the funds they need for the property.
How do Bridging Loans work?
The application process will differ from lender to lender. In most cases, the lender will receive the enquiry, assess its merits and decide if they can assist, eventually, funds will be released to you if everything runs smoothly.
Here At Bridging Finance, we follow 4 Steps:
1. Indicative quotation
We review your requirements, and personal circumstances and find a solution for you. We then send you a quotation and if you are satisfied with the figures we will proceed to the next step.
2. DIP approval
We then get a decision in principle within an hour or two, once you are approved we will send a detailed quotation and a copy of the terms.
3. Property valuation and application process
If applicable a valuation is conducted. Your processor will collect all the needed information to apply to the lender for underwriter review. Once you are approved you will receive a full offer.
4. Completion
Once the loan is completed you will receive the funds.
Who can use Bridging Finance?
Bridging finance is available to any individual or company needing short-term finance to bridge a gap between purchasing a new property and selling an existing one. Bridging loans are typically used by property developers and investors, businesses and homeowners.
Advantages and disadvantages of bridging finance
Advantages of bridging finance:
-Flexibility: Borrowers can use the funds from a bridging loan for a variety of purposes therefore making them a valuable tool for various financial situations. The repayment terms of bridging loans can also be flexible to fit in with your plans.
-Speed: Bridging loans are designed to give you access to funds very quickly unlike more traditional methods. This can help in property situations where quick decision-making is necessary.
-Bigger loans: As bridging loans are secured against high-value assets you can borrow larger sums of money.
– Provides more options: Bridging loans can provide funding for properties that traditional lenders may not cover.
Disadvantages of bridging finance:
-Higher rates: As bridging loans are short-term loans they often have higher interest rates than the more traditional loans. It is therefore important to calculate whether or not the convenience of fast, flexible funds outweighs the higher interest rates.
-Fees: Bridging loans may come with additional costs like arrangement fees, valuation fees, legal fees and exit fees. It is therefore important to fully understand the fee structure.
-Secured against property: Bridging loans are secured against property. This means you will need to put up an asset against the loan. If you are unable to repay the bridging loan you risk losing this asset.
What can you use a bridging loan for?
Bridging loans are typically used for property-related purchases but can be used for various circumstances, these include:
–Buying a House Before Selling Your Own
How much does a bridging loan cost?
Bridging loan costs vary drastically as factors like security type, term and credit history of the borrower all play a part.
With the interest rate, there are other fees you may need to pay.
These include:
-Arrangement Fee: Normally around 1% to 2% of the loan cost
-Exit Fee: Fee charged for early repayment of the loan.
– Administration Fee: fee for paperwork and other tasks and is paid upfront.
-Legal Fees: the lender and you will need legal support.
-Valuation Fees: Fee for valuation of the property.
What is an Exit Strategy?
Exit strategies are plans borrowers put in place to repay their bridging loans. It is important to have a well-defined exit strategy in place to ensure you meet your repayment obligations and avoid the risk of unforeseen challenges. Lenders will also focus on an exit strategy when they are assessing your application, therefore it is essential to have a clear plan in place. There are various exit strategies available to the borrower like the sale of the primary property, the sale of other investments, refinance to a longer-term mortgage, inheritance, sales of shares and more.
How do you find the best bridging loan?
To find the right bridging loan for you, you need to:
1. Be clear about what you are looking for – know exactly how much you want to borrow and for how long.
2. Know your situation– Lenders want to know about your situation so be ready to provide them with the answers. Questions regarding the property’s worth, your monthly income and expenses, whether you have a mortgage, how much you owe, and how much equity you have in the property etc, can be expected.
3. Do your research– There are many loans available so it is important to compare the various borrowing options. For a bridging loan consider using a bridging loan broker as they have access to exclusive rates and deals.
4. Read the small print– Ensure you are aware of the fees included before you sign and try to apply for loans you are more likely to be approved for.
How can I learn more about my options?
With over 20 years of experience and a team of experts, Bridging Finance is ready to help you. Our longstanding relationships with the best lenders in the UK mean we can source the best finance products for our clients no matter the circumstances or individual needs. We provide our clients with the best rates & fast completions. Get in touch now to discuss your options.
