What is a Bridging Loan?

Have you ever come across someone pitching you Bridging Finance? Don’t know what this means and how to use it properly? Here are 5 common questions and their answers below:

1. How does bridging finance work?

2. What will a bridging loan cost?

3. Will adverse credit affect my application?

4. I need the money raised quickly, how fast can a bridging loan be set up?

5. How do I repay the loan?

1 How does bridging finance work?

“Does exactly what it says on the tin.” Bridging loans are designed to “bridge” the gap in funding property finance when other finance typically is not available.

For example, being able to offer a quick completion on a purchase can lead to greater discounts than normally accepted.

Bridging finance is a short-term fix to a problem, e.g. when a buyer pulls out of a property sale, buying a property that is not mortgageable or buying a property undervalue with a plan to remortgage and take your money out of the transaction.

Bridging loans is a secured loan i.e. a legal charge is taken over property(s), on either a first charge basis or, subject to consent, a second charge loan.

2 What will a bridging loan cost?

Some charges are consistent across all bridging loans, like interest, arrangement fees, legal fee’s and potentially a valuation fee, but not all are paid upfront.

Lenders Arrangement Fee

Typically, 2% of the loan amount, payable only if you draw the loan. This is normally added to the loan and paid at the end when you clear the loan.

Interest

Interest is calculated monthly. The rate is dependant on the asset class, the Loan to Value, your credit rating, whether you are taking a first or second charge loan.

Valuation Fee

Valuations are instructed by the lender, for the immediate benefit of the lender, at your cost. This ranges depending on property value, location, asset class but will be disclosed when you are deciding to proceed.

Legal Fees

Paid for at time of proceeding to application. This will include an “undertaking” for the lender’s solicitor.

Exit Fee

Case-by-case. Usually, no exit fee is charged for a standard bridge.

3 Will adverse credit affect my application?

Short answer – let’s have a discussion. Many bridging lenders are focused on the asset, the LTV and whether the bridge is regulated or not. Because of this, a lot of bridging lenders lend when traditional lenders are not comfortable with an application.

Be aware, if you plan to refinance the bridge loan as your exit route and have a black mark on your credit rating, you may be asked to provide evidence you can obtain a new loan.

4 I need the money raised quickly, how fast can a bridging loan be set up?

Money can be raised within 48 hours of application but note this can be a costly route if we are starting with no valuation or legal works having already been completed and we would not advise this route unless speed was necessary.

A standard bridge loan usually has an AIP issued within 2 hours from a lender. At this stage we ask all clients to be truthful about their case to prevent time being spent going to lenders that won’t take the deal once something new is uncovered. Once you agree to the terms, we instruct valuation and lawyers to begin working on the case and if everyone moves with the same urgency, you should complete an unregulated bridging loan from 7 days of receipt of application.

Timescales will always depend on your circumstances and how motivated you are to be pushing the case to completion.

If you have ever applied to a high street mortgage lender, a week is quick right.

5 How do I repay the loan?

This is always the biggest challenge to get comfortable with when you decide to apply for a bridging loan. Do I sell or refinance the loan?

Knowing your exit route at the start is important to understand your plans are feasible but be flexible if the need dictates.

Circumstances change so be aware 3-4 months before the end of your loan to start checking you are on track to repay or if you are going to need to revisit the loan with the lender to minimise risks of default.

Contact us here at TJ Capital to discuss your borrowing options today at admin@tj-capital.co.uk

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