Bridging Loans

Bridging Loans

Bridging loans are a vital tool in the house buying process.

A bridging loan is simply a short term loan that assists you with completing on a property transaction.  For example, you have your house on the market for £500,000, with a mortgage outstanding of £60,000 (equity of £440,000).

Someone has made you an offer which you have accepted, but completion won’t take place until two months time.

You are planning to move near your family and you have seen the ideal bungalow that meets all your dreams. It’s on the market for £350,000.

The seller wants a quick sale and is not prepared to get into a house chain or wait for you to sell your property. In fact, the agent has advised that there is quite a lot of interest in the bungalow, and the bottom line is that you need to move quickly if you want to secure your dream house. You have got about £20,000 in savings plus the equity in your existing home.

What options do you have? One answer: Get a bridging loan.

Lender red (Bridger) offers you a £350,000 bridging loan.

Duration: 3 months

Fees: 2% arrangement fee (added to loan)

Rate: 0.75% per month (interest to be rolled up into loan)

Bridging lender’s legal fees: £1000

Valuation fees: £600

Total bridging loan to be repaid at the end of three months: £365,033

The money is advanced to your solicitor within two weeks. You proceed to exchange and complete on the bungalow. You now have two properties.

You eventually sell your home for £500,000.

£500,000 – £60,000 (existing mortgage) = £440,000

Your solicitor pays off the bridging loan: £440,000 – £365,033 and remits the balance of £74,967 into your account.

The bridging loan has acted as a bridge, facilitating the cross-over from one property to another property.

Today, bridging loans are not just to prevent house chain breaks, they are also being used:

To purchase properties at auction

For property development

For property refurbishment

To purchase uninhabitable or unmortgageable properties

For lease extensions

For mortgage offer pulled after exchange

Bridging loan fundamentals

Bridging loans are short term loans. The term of the loan is based on how long you have anticipated in selling your property and the onus is on you to advise the lender accordingly. As such, you must factor for potential delays when deciding on the term of the loan, to ensure you repay the loan by the agreed time. If you don’t pay back the loan in the agreed time, you will incur late penalty charges. The worst scenario is that the bridger forces a quick sale of the property, which means it’s sold at way below it’s true market value and you’re left with nothing. You can request for the bridging loan to be extended but that could entail additional fees. If you request a term of four months but you pay back the loan in three months, then you will not be charged for month four.

Typical terms vary from one to twelve months.

Rates start from 0.75% per month for below 50% LTV deals to 1.5% per month (up to 75% LTV).

Watch out for exit penalties. Some lenders apply an exit penalty on redemption (1% to 2%).

There are new lenders coming on board every year. I have seen some rates advertised for as low as 0.42%.

You must have a clearly defined exit strategy from the outset, which is your defined method of repaying back the bridging loan at the end of the term. The typical exits are sale of the property or refinance/remortgage to another lender.

Golden rule: You do not take out a bridging loan without having a clear exit strategy from the start. To be honest, you won’t get the loan until the bridger knows how the loan will be repaid.

Documentation

As a result of the mortgage market review that came into force in April 2014— lenders have tightened their criteria on affordability. To ensure you have the widest choice of bridging options, I will strongly advice that you treat a bridging loan as a residential mortgage and have the following documents ready:

Last three months payslips or last three years trading figures if self employed

Last three months bank statements

Passports to confirm Identification

Utility bill to confirm your address (gas, electric, water, BT bill not more than three months old)

Full assets and liability statement

Holistic Bridging Solutions

The ideal bridging lender must have two key ingredients: speed of service and flexibility.

If you are buying a property at auction and you have got 28 days to complete on the deal, the last thing you want is a bridging lender that has a slow response time. You want to work with lenders that have good systems in place to handle call volumes and enquires in an efficient time-frame. Anyone can advertise a low rate of 0.25% per month, but how quickly can they process a bridging enquiry and release the funds? If it’s taking two days to get hold of an underwriter to get an affirmative answer, then that could be the difference between buying your dream home and the chain falling through.

By flexibility, I mean working with a bridging lender that can lend on residential homes (regulated) and BTL/investment properties (non-regulated). Some bridging lenders are only authorised to lend on BTL properties, commercial units etc. If you’re looking for a bridging solution for this type of non-regulated transaction, then by all means proceed with the best bridging lender in this space.

However, if the transaction involves lending on your current residential home or on a property that you’re looking to purchase as a new residential home, then you need to proceed with a bridging lender that can structure a bridging solution that enables you to achieve your objective. In some cases, the bridging lender may need to be able to cross charge (lend on more than one property), especially if there is insufficient equity in the property being offered as security. If the bridging lender can’t lend on residential properties, then it limits your options. As such, you want to make sure that you’re working with a bridger that can offer regulated and non regulated bridging solutions.

Interest paid monthly or retained interest for the term of the loan—having to cover the monthly cost on a bridging loan could be rather expensive. As such, the bridger must have the option to allow the interest to be retained for the duration of the loan, which means you don’t have to make any monthly payments.

Speed of service, competitive pricing, payment options, and regulated and non-regulated lending options are what I define as a holistic bridging solution.

100% bridging financing

For the right transaction, you could potentially obtain 100% financing. As I mentioned above, bridging is not just used to avoid chain breaks. For example:

Are you living in a large detached house with a massive garden and potential to build a small cottage bungalow at the bottom of the garden?

The value of the property is £1m with no mortgage.

Your personal income is just over £20,000 per annum and you have moderate savings.

You have been thinking of downsizing as you no longer require a large property, but you can’t get anything to buy in your locality nor do you really want to move out of the area that you have resided in for many years and where you have strong family ties within the community.

You have also been thinking of how you can increase your income. You’re constantly thinking you have all this equity in your property but are unsure how it can be leveraged.

Idea: Could you obtain planning permission to build a small three bedroom cottage bungalow at the bottom of your garden? If you can, fantastic. The total cost of the development (inclusive of fees and retained monthly interest) will be £300,000. Duration: 15 months.

A bridging lender could offer you the whole amount (using your current property as security). In addition, interest will be rolled up for the 15 months duration so you don’t have to worry about servicing the bridging loan during the construction phrase.

You reside in your property during the build stage. You occasionally pop down to the bottom of the garden with cups of tea for the builders. At the end of 14 months, the property is completed.

You put your house on the market in month 12 and you have a buyer lined up to complete by the end of month 15. At the end of 14 months, your new home property is completed and you move in. Your property is sold and your solicitor pays off your £300,000 bridging loan and remits £700,000 into your account.

You’re now living in a smaller property that you can manage comfortably going forward. You’re living in the same area as before and can continue to see your friends and family. Most importantly, you have £700,000 in your bank account which, if invested wisely, will provide you with additional income to last you during your retirement. This is how bridging can be used.

Could this be you?

Bridging Lenders

This is a specialist area and it’s best to speak to an experienced mortgage broker that has access to a wide panel of bridging options. Most importantly, experienced brokers are able to secure favourable terms with their bridgers. For the right deal, some bridging lenders are prepared to negotiate on their rates, unlike residential mortgage products where the interest rate and arrangement fees are set in stone.

Lastly, experienced brokers will always look to explore alternative finance solutions; it’s only if there are no viable options available that they resort to a bridging lender. A bridger should be your last line when nothing else works.

Speak to our panel of bridging experts to ascertain the most cost effective way to raise the funds.

Mortgageintellectual.com is not recommending that you invest in any specific property. You must conduct your own due diligence before investing in property or a crowdfunding platform. Property prices can rise and fall in value and past performance of the UK property market is no guarantee to future performance.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans and commercial loans.