This is a short-term financing solution designed to provide a cash-injection to cover a temporary gap in funding.
For residential borrowers, Bridging Loans are used to buy a property using existing home equity to fund the purchase of a new one before the old one is sold.
The gap between buying and selling is a bridge, with the bridging loan the solution to fund that bridge. For landlords and property developers, the bridging loan is used until longer-term finance is put in place, such as getting a buy-to-let mortgage arranged on a property, or to fund the development of it.
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The types of bridging loans available
You can have one of two types, which depends on your circumstances. Those are open or closed bridging loans, with the latter being the lower risk option. That’s not to say it’s a risk-free way to borrow a quick stack of cash.
A closed bridging loan is only applicable when there’s a guarantee that a property or asset will be sold. Or there’s a certainty that funds are going to become available. If you’ve sold your home and awaiting the money to be paid in full, perhaps awaiting a mortgage to be put in place by the buyer, and have the sale of the contract in place, then a closed bridging loan would be accessible.
An open bridging loan is risky because there’s no telling if your home will sell or how long it’ll take to sell. When you do not have any contracts in place to assure a lender that a sale is pending, and therefore you cannot assure a lender that you will have the money to repay within a fixed time-period, an open bridging loan would be an option to consider.
However, because this is a riskier type of loan due to the uncertainty aspect of whether you will get a property or other asset sold, these are not favoured by lenders. The majority of lenders, in particular high street lenders are hesitant to approve applications for open bridging loans.
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Both Types of Bridging Loans are a Secured Loan
Both open and closed bridging loans will be secured. Usually, the security is the equity held in your home. For property investors, the LTV can be based on a property portfolio. Bridging loans typically require 75% LTV, although that can be extended to 100% LTV with additional security.
Nationwide Bridging Loans Comparisons
Typical interest rates are from 0.65% to 1.2%. Those are typical rates though and will vary at both ends by lender. What also needs considered are the fees attached to the loan. In the majority of cases, the fees are added to a bridging loan total so there are no upfront costs.
LTV ratios also vary from one lender to the next. Some cater to 75% LTV while others are willing to provide 100% LTV provided there’s additional security available.
Speed is the main differentiating factor between providers. Using a broker with market knowledge, a Bridging Loan can be arranged in days. For property developers interested in buying at auction, typically an auction purchase requires 10% initial deposit with the remainder paid within 28-days. It’s often longer than that to arrange a B-T-L mortgage. Using a bridging loan will get the property paid for, until refinancing is put in place.
Before applying for a bridging loan, it’s imperative to establish how you intend to repay the loan. The first question lenders will ask is about how you intend to repay.
There’s two ways considered acceptable:
- The sale of the property
For the intentions of property sales, if the property isn’t on the market for sale, lenders may require agreement on a specified date for the property to be listed. It’s worth considering the length of time it’ll take for any renovation work to be completed on a property as that can then be used to establish a date for the property to be renovated and put on the market for sale.
When your exit strategy is the sale of a property, borrowing is simple.
Using refinancing as an exit strategy can be trickier. Lenders will do their due diligence into your financial history to determine the likelihood of you being able to refinance based on your credit-worthiness i.e. are you likely to get a mortgage?
That involves an income analysis to determine your likelihood of getting alternative finance, and if so, will the amount of finance you’re able to access at a later date be sufficient to cover the amount you need, plus the loan amount, any fees added to the loan such as the arrangement fees, and the interest accrued.
The Length of Time to Repay
Due to the fluctuating nature of the property market, landlords and developers find it beneficial to agree to on the longest term possible, such as 24-month terms, provided that the lender does not have an early repayment charge (most don’t). In particular, when renovations are being carried out on a property as things don’t always go to plan, therefore it is possible that a development plan falling behind can lead to loans overrunning the agreed terms.
For that reason, flexibility is imperative with a lender. The majority are simply because they know they need to be. Provided you keep your account in good standing, extended lines of credit can be agreed, bridging loans renewed and should cash flow become a problem during the course of a renovation, an existing lender will consider granting further finance based upon your repayment history and the progress of works being carried out.
Property Investment Bridging Loans
Bridging loans can be used for residential borrowing, but they are primarily aimed at property investors. With the right financial backing in place with a bridging loan provider, it enables investors to power forward on projects knowing they have access to financing when they need it. That’s of great use in the auction room when buying properties cheaply, renovating to add market value to them, then refinance or flip them.
In essence, bridging loans are for high amounts of borrowing when it’s needed fast. They do have a higher rate of interest and because of that your exit strategy must be considered and will be asked by lenders as part of the application process.
How a Bridging Loan from Nationwide Can Help You…
Being first with a cash offer
A popular property attracts a lot of eyeballs. The longer the property sits on the market, the more interest can pique, driving the price of the property upwards.
For those with property portfolios, other properties can be used to secure a large bridging loan within a short space of time. This is ideal if you find a property with potential, gaining interest and you need to make an appealing offer that the seller would find hard to resist.
For residential borrowing, a bridging loan can help you be the first to put in an attractive offer on a property to upgrade your living arrangements. While others involved in the bidding process speak with mortgage advisors, deal with decisions-in-principle and all other necessary time-consuming tasks, a bridging loan can be arranged fast, used to secure the property, and then repaid when your old property is sold.
When problems in the property chain arise…
Property transactions are not straight-forward purchases when there’s more than a buyer and seller involved. That’s the majority of home purchases because in-between, there’s the estate agent, the solicitors, surveyors, and mortgage provider. Any one of those companies involved can slow the process down. A good estate agent is essential to keep things moving along.
Which? surveyed 2000 home-movers in 2016 whose property purchase fell through. 28% stated property chain problems as the cause. 21% stated it was the sale of their own property and 13% pulled out because the process was taking too long.
Property and mortgage chain issues are not a barrier to secure the purchase of a property. A bridging loan can be used to secure a property, bridging the gap between buying a new property and selling the old one, even when the sale of your home falls through.
Tip: When you’re selling a property, ask around different estate agents about how they manage the sales process. You don’t want a company who just handles the process. Proactive estate agents have sales progression teams dedicated to keeping the process moving along and keep you informed along the way so you know what stage the sale is at. Ideally use an estate agent with a sales progression division as they’ll do more to keep your sale on track.
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Self-build finance is usually provided at 50% to 85% LTV of the land value. This is only the first stage in the process. Further financing is released at various stages throughout the building works being done, with re-inspection required prior to further funding being released for the next stage of the build.
Any delays to the works progression will delay funding as traditional lenders typically do not release funding until the end of any stage. That’s going to delay the start of the next stage. A bridging loan may need used to keep a project on track, at least until a stage is completed for the next round of finance to be released by an existing lender.
Jubilee work with an exclusive panel of lenders, we have Bridging Loan Partners Nationwide, catering to residential borrowers, commercial borrowers and specialist corporate short-term finance providers.
Whether you need to bridge the gap between buying a better property and selling your old home, buying low at auction, or need fast short-term finance for a large construction project, Jubilee is strategically positioned to access whole-of-market short-term finance solutions that can help bridge a gap in funding for whatever you need it for.
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