Bridging loans, the loan of last resort explained
Buying and selling properties simultaneously can be a challenging task, especially when it comes to aligning the completion dates. Additionally, situations such as buying at auction or delayed financing can further complicate matters. In such cases, a bridging loan may come in handy.
A bridging loan is a short-term finance option that helps buyers bridge the gap between buying a new property and selling an existing one. While this option comes with certain risks, it can also provide benefits such as flexibility and speed.
It may be an option and appropriate to consider using a bridging loan in scenarios such as when you’re in a property chain that has collapsed and you don’t want to lose your dream home, or if you need to raise funds quickly for purchasing an auction property.
UNMORTGAGEABLE PROPERTY
Alternatively, you could consider a bridging loan when buying an unmortgageable property with the intention of making it habitable or lettable, so that a traditional mortgage can be arranged. It’s also important to note that bridging loans are secured against an asset, typically a property or properties. Since there is a risk of losing your asset, they are often referred to as ‘the loan of last resort’.
MAXIMUM LOAN AMOUNT
That’s why a bridging loan is a short-term financing option that can help you buy or refinance property. Depending on the equity you have available, you can typically borrow between £50,000 and £10 million through this type of loan. The amount you can borrow is secured against the property or properties involved in the transaction. Unlike a mortgage, your income does not directly affect your eligibility for a bridging loan. However, the maximum loan amount, including interest, is typically limited to 75% of the property’s value.
ADVANTAGES AND DISADVANTAGES
Repayment of the bridging loan occurs either by selling the property or refinancing with a traditional mortgage. Before applying for a bridging loan, you need to weigh up its advantages and disadvantages. The advantages are that you can quickly borrow funds to keep your property transaction on track and it may be possible to borrow significant sums of money. You can ensure that the repayment terms are flexible to fit in with your plans and secure lending on properties where high street lenders may not.
ASSET AS COLLATERAL
A disadvantage of a bridging loan is that, as it is a secured borrowing option, you must put up an asset as collateral. This means that if you cannot repay the bridging loan, you risk losing that asset (e.g. a property). Interest rates on bridging loans are higher than those of traditional mortgages and come with various fees that add to your expense. So while bridging loans provide fast financing solutions for property transactions and offer flexibility in repayment terms, they also come with risks and higher costs compared to other forms of borrowing.
There are three ways that interest can be charged on a bridging loan:
Monthly: Similar to an interest-only mortgage, where you pay monthly payments towards the interest without adding them to the loan
Rolled up: The interest payments are added to your loan and paid when you clear your bridging loan
Retained: You borrow the interest upfront for a set period, and any unused interest is returned when you repay the loan
OTHER FEES ASSOCIATED
In addition to the interest rate, there are other fees associated with bridging loans: an arrangement fee paid to the lender, typically 2% of the loan and added to it, an administration fee payable upfront and legal fees part payable upfront and part on completion.
Valuation fees typically range from £900 to £2,000 depending on how quickly you require funds and there is a broker fee payable upon receipt of the mortgage offer, either a flat fee or a percentage of loan. Lenders will also want an exit plan, in other words how you plan on repaying the loan and by when. If you need additional financial support such as a traditional residential or buy-to-let mortgage, evidence proving that these mortgages will be available is necessary.
UNDERTAKE AFFORDABILITY CHECKS
The lender will undertake affordability checks as standard with normal mortgage lending or look at rental income generated. This ensures that they are confident in your ability to secure a mortgage and make any required repayments on time. When taking out a bridging loan, a charge will be placed against your property since it is a secured loan. If you own the property outright, this will be a first charge loan, meaning that the lender will be the first to be repaid when the property is sold.
FIRST CHARGE LOAN
On the other hand, if you have an existing mortgage or loan on the property, that will be considered as the first charge loan and the bridging loan will become a second charge loan. With a second charge bridging loan, you will need permission from the first charge lender before you can take out the bridging loan.
Usually, second charge loans are more expensive than first charge bridging loans. When it comes to financing your property purchase, a bridging loan is not the only option available. There are several alternatives that you could consider based on your financial situation and needs.
By assessing all of these options, you can make an informed decision on which financing route best suits your circumstances and budget.
>> HOW MUCH COULD YOU BORROW? <<
Whether you intend to revamp your property portfolio or transform your home into your dream space, to start a conversation about how we could help, speak to Cedar Crest Ltd.
To find out more:
Cedar Crest Ltd – telephone UK T: +44 (0) 203 883 1017,
HK T: +852 6645 4462 – email info@cedar-crest.co.uk
Your home may be repossessed if you do not keep up with repayments.
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