Bridging Loans Explained – The Swift Property Finance Guide
At Swift Property Finance we often find customers asking, ‘How does a bridging loan work?’. We’ve put together this quick guide to bridging loans to help you understand some of their key features.
From the cost of bridging loans to why a property bridging loan may be used, this is our simple introduction to this often misunderstood financial product.
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What is a Bridging Loan?
At Swift Property Finance we often find customers asking, ‘How does a bridging loan work?’. We’ve put together this quick guide to bridging loans to help you understand some of their key features. From the cost of bridging loans to why a property bridging loan may be used, this is our simple introduction to this often misunderstood financial product.
Bridging loans, also known as bridging finance, are short-term loans designed for people or businesses that need to access capital quickly and may not be able to access other forms of finance, such as traditional mortgage products. The loan ‘bridges the gap’ between purchase and repaying the loan or securing more traditional finance.
What Are Bridging Loans Used For?
Bridging loans are often used by landlords and property developers, particularly for the purchase and renovation of a property or properties. They may also be used for ground-up property developments or for businesses looking to purchase additional premises.
The speed with which bridging loans can be approved, compared to other financing options, makes them useful for auction purchases where a quick completion time is required. Auction purchases must usually be completed within 28 days. This makes the standard 6-10 weeks that it often takes to complete a mortgage contact simply too long, and underlines the benefit of an auction finance bridging loan.
Property developers in particular are often purchasing properties that would be ineligible for a traditional mortgage, as they are frequently in need of extensive renovations. A standard mortgage, for example, requires a property to have a kitchen and bathroom in place, and to be roughly habitable. For developers who purchase properties in a state of disrepair, these won’t be an option.
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How Much Can I Borrow?
You can generally borrow up to about 75% of the market value of the property, with the length of the loan term considered in months, going anywhere from 1 month up to 24 months. Interest is charged monthly but can be “rolled up” or “retained” into the loan and is paid on exit, and so no monthly payment is required.
Bridging lenders will generally calculate their loan to value (LTV) based on the property’s actual market value, rather than what you paid for it as traditional mortgage lenders will. This means that if
you manage to purchase property below its actual market value the loan amount will help keep cash flow available for renovations
Swift Property Finance deal with loans of any amount between £50k to £5m
How Much Does a Bridging Loan Cost?
The biggest misconception about bridging loans is that they are particularly expensive when compared to other forms of finance. However, while it is true that interest rates tend to be higher than traditional mortgages, this must be balanced against the fact that the loan term is considerably shorter. Bridging loan interest rates start from around 0.65% per month and go up to about 1.5% where there is a particular risk.
Interest costs can mount up if they are left on too long, this is why it is important that you have a clear route to exit – which we’ll cover later – in order to ensure that you get out when planned and keep your costs down
In addition to interest there will be an arrangement fee – usually around 2% – a number of flat fees including legal and valuation costs, and an additional broker fee of between 1% and 2%.
Types of Interest
There are 3 main types of interest plans that a bridging loan can come with
1. Serviced Interest
This is paid monthly in the same way as a traditional interest only mortgage. This tends to be the least used method of repayment by users of bridging loans, as borrowers prefer to pay back the full amount owed at the end of the term.
2. Rolled Up Interest
Here the future interest payments on the loan amount are calculated at the beginning of the term and then added to the repayment amount. The borrower then pays everything off at the end. In this situation you are only paying interest on the amount borrowed on not on the interest itself.
3. Retained Interest
Retained interest is a sort of middle ground between the two previous types of interest designed to make monthly payments more manageable. Here borrowers retain from the loan an amount representing a number of monthly interest payments. As this retained amount now forms part of the capital sum, interest will be charged on it – in other words you will be charged interest on interest.
Rolled Up interest is by far the most commonly used, Retained Interest is rarely used.
What is an Exit?
An exit is the plan you put in place in order to repay your bridging loan. It tells the lender how you intend to pay back your bridging loan. The stronger your exit strategy is, the more likely you are to be accepted for a bridging loan, and the faster and more flexible bridging loan application process will be. Your exit strategy could for example involve repayment of the bridging loan once a property is renovated and resold. Alternatively, it may involve moving to a more traditional mortgage once a previously un-mortgageable property has been refurbished.
Whatever your exit strategy involves, it should be carefully planned, and you should stick to it closely.
Type of Bridging Loans
There are 2 types of bridging loans; open bridging loans and closed bridging loans
1. Closed Bridging Loans
With closed bridging loan you will have arranged with the lender to pay back the loan on a set date, i.e. you have a fixed exit date in place. This may be an option for you if you know that you are due to receive a sum of money, for example from the sale of another property or from an inheritance, which will enable you to pay back the loan. Once the repayment date is reached you will be required to pay off the principle amount of the loan, together with interest and fees.
Closed bridging loans often offer lower interest rates, compared to open bridging loans, as the risk to the lender is considered to be less. However, there may be penalties if you fail to meet the agreed repayment date.
2. Open Bridging Loans
An open bridging loan is more flexible than a closed bridging loan, and is suitable if you are unable to set a fixed repayment date. The loan will run for as long as you need it, generally up to a period of 24 months. Open bridging loans consequently tend to have higher interest rates than closed bridging loans, due to the increased risk to the lender, and if you allow it to run for the full period, costs will mount up.
Open bridging loans can be more difficult to secure, and, without the security of a fixed repayment day, you will need to do more to satisfy your lender that you will be in a position to repay the loan in the future.
Why Use Swift Property Finance for Your Bridging Loan? Trustworthy, Bespoke, Independent, Quick
Whether you want to look at bridging loans for house purchase, or a bridging loan for property development, Swift Property Finance can help. We offer:-
Swift Property Finance offers every customer a bespoke service designed to provide the most suitable bridging loan for their individual circumstances. Our expertise enables us to ensure that we can source and recommend the most suitable product for every client, every time.
At Swift Property Finance we know how vital securing fast bridging loans is to our clients. A delay can make the difference between grabbing that great property and missing out. We work quickly to complete your application in the shortest time possible. Without cutting corners.
Swift Property Finance is fully regulated by the Financial Conduct Authority for your peace of mind.