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A Brief Guide to Bridging Finance in the UK
Bridging finance loans are an important part of the homebuying process in the UK. They provide the funds necessary to close the gap between the sale of your old home and the purchase of your new home. In this article, we will guide you through how to get bridging finance loans in the UK so you can make your dream of buying a new home a reality. -amended
The following topics are covered below:
What is Bridging Finance?
A bridging loan is a secured loan for a brief period. It is used to ‘bridge the financial gap’ between purchasing a new home and the sale of an existing one. A bridging loan/bridge loan, for example, can be used to purchase a property at auction before selling your current home. They can also be used to help pay for the purchase of a property that will be redeveloped and sold or rented. Some lenders will consider three-year repayment terms for bridging loans, but you’ll need to have a clear plan to return the debt in less than two years if you want to use this option.
Who can get bridging finance?
Since they are rapid and flexible, bridging loans are short-term loans that individuals or enterprises can use. They are typically for 12 months or less. Until a long-term financing solution is in place or alternative funds are received from another source, such as the sale of a property, the loan can be utilized to bridge your finances. When an opportunity arises, or you need a rapid financial injection, bridging loans, also known as swing loans or gap financing, can help you promptly get the money you need. A borrower must meet a certain set of bridging finance criteria before being approved for a loan from a particular lender. However, the vast majority of borrowers fall into one of the following categories:
- An individual, partnership, or limited liability company.
- Buying or renovating a house or a business.
- If you’re over 18, you may be eligible for a loan.
- Be a resident of the United Kingdom or have a registered address there.
- One or more properties can be used as collateral for the loan.
- Planned exit strategies include selling the property or refinancing it
- Borrowing at least £10,000,
- Have a full-time job, or are you self-employed?
Which lenders offer bridging finance?
Bridging loans are a type of secured loan, which means you have to put up some sort of collateral to secure them. As a result of the potential for asset loss, bridging loans are sometimes referred to as “loans of last resort”. Bridging loans were a more popular product offered by main street banks such as Nationwide, Halifax, and Santander before the 2008 financial crisis. Bridge loans were employed by folks who didn’t want to miss out on their dream property at this time. However, during the credit crunch, many businesses ceased offering them. Seasoned or professional investors are increasingly utilising this facility. Bridging loans are increasingly being given by non-traditional lenders such as United Trust Bank, Precise Mortgages, MT Finance, and several regional building societies like Harpenden. If you are looking for a last-ditch loan, a bridging loan is a way to go, and you should seek independent guidance. It’s important to find out whether other options are available, and specialised brokers like us can assist in the process.
Cost and Interest Rates of Bridging Finance?
Bridging financing interest rates are calculated on a “monthly” rather than an “annual” basis, as is typical for other loans. Typical bridging rates range from 0.75 per cent to 1.45 per cent for residential bridges and 1 per cent to 1.95 per cent for houses with numerous occupants or buy-to-let properties (HMOs). It would therefore be at least 9 per cent annually. Because the interest rates aren’t ‘off the shelf,’ as with mortgages issued by a building society, there is no set pattern to the acceptance process. However, professional brokers can conduct the discussion on your behalf to ensure that the rates are not inflated and could alter at a crucial period, such as exchange or completion, if the lender sees an opportunity.
Several other factors must be considered when estimating the total cost of a bridging loan. Arrangement fees, valuation fees, exit fees, and solicitor fees are all included in this category:
Arrangement fees, which are normally a percentage of the loan, are often included in the price of bridging finance. Some lenders may remove this fee totally if you borrow a large amount, while others may reduce this price to 1% if you borrow a large amount. If you decide to borrow money from a lender, you may also have to pay administrative costs. Avoid brokers who charge large advance fees that are not refundable because brokers should only be paid if they succeed. Only if they secure a contract do the advisers we work with charge. If this isn’t the case, they’ll reimburse any upfront costs.
Valuation fees are normally a lot more expensive for bridging loans. An independent surveyor or lender will charge for this service, which varies depending on the asset’s value, location, and appraisal type.
Some situations necessitate the use of an on-site or drive-by valuation. In contrast, others necessitate a desktop valuation (i.e., one that is carried out remotely through the internet).
Tip: You may have to pay additional valuation costs if you’re pledging more than one property or asset as security. This is because each property or asset will require its value.
Consider exit fees when calculating the total cost of a bridging loan. Some (but not all) lenders impose a fee for removing their charge from a security property, but this price is not universal. When a loan is repaid, the borrower is charged a fee of around 1%.
When determining the cost of a bridging loan, both the redemption charge and any solicitor fees fall under the ‘legal costs’ umbrella. This is because a solicitor employed by the lender will carry out legal, due diligence, and you may be expected to pay for it. But, of course, you’ll also be responsible for your legal fees, and the exact amount you’ll owe will depend on the circumstances.
Requirements to be accepted for Bridge Financial Loans
Criteria needed for bridging loans are:
Proof of income
When opposed to other mortgages and collateral-secured loans, bridging financing is treated very differently. Because bridge loans don’t require monthly payments, the value of income, affordability, and credit history isn’t examined in the same way. The ability to pay back a bridge loan’s monthly interest is not considered in the underwriting process when the loan is repaid via refinancing, even though interest is not added, retained, or subtracted from monthly payments on bridging loans. Income requirements are expected to be a part of the proposed refinance. Before taking up a bridging loan, make sure that you can get out of it with a refinance option.
Reason for Fund Application
As a result, the lender will want an idea of how you intend to spend the money. The lender must be pleased with your intended use of the loan before being used for any legal or reasonable purpose.
What is your collateral
One of the most critical aspects of bridging is the collateral used to secure the loan.
Loan to value
In most cases, bridging will let you borrow up to 75% of the value of the security property or properties as a loan to value. Fees and interest accrued on the facility are shown here. A few places allow up to 80%, but they’re usually quite pricey.
Another key criterion is your bridging loan’s planned exit strategy. Remember that bridging is meant for short-term use, so you need a fail-safe exit strategy. The sale of a property or piece of land is the most popular bridging loan exit strategy, and using a mortgage product to refinance your home.
A guaranteed return on investments, payback of money owing, awaiting divorce settlement, pending inheritance, and other exit routes should be considered.
How to get bridging finance loans in the UK
Step 1: Research Your Lender Options
The first step in getting a bridging finance loan is researching your lender options. There are many lenders who offer these types of loans, so it is important to compare rates and terms to find the best deal for you. It is also important to make sure that the lender you choose is reputable and has a good track record of working with borrowers. Once you have chosen a lender, you can begin the application process.
Step 2: Collect Your Documentation
The next step is to collect all of the documentation that you will need to apply for a bridging finance loan. This includes things like your proof of income, your proof of address, and your bank statements. You will also need to provide information about the property that you are looking to purchase. The more information you can provide, the better chance you have of being approved for a loan.
Step 3: Apply for Your Loan
Once you have gathered all the necessary documentation, you can begin to fill out your loan application. This process will vary depending on which lender you choose, but most applications can be completed online. Be sure to answer all questions truthfully and accurately, as this will increase your chances of being approved for a loan.
Step 4: Wait for Approval
Once you have submitted your application, all you can do is wait for approval from the lender. Depending on the lender’s policies, this process can take anywhere from a few days to a few weeks. If your application is approved, then congrats! You are one step closer to owning your new home.
Bridging finance can be a helpful way to finance the purchase of a property in the United Kingdom if you are unable to get a mortgage from a traditional lender such as a bank or building society. However, there are some things you need to keep in mind if you’re considering using bridging finance, such as the fact that loans are typically only available for properties in England and Wales and must be repaid within 12 months. Interest rates on bridging loans are also usually higher than on mortgages from traditional lenders. But if you’re aware of these considerations, bridging finance can help you buy your dream home in the UK.
Bridging Finance FAQs
Can I pull out of a bridging finance when I want?
Yes, you can pull out of a bridging finance anytime you want; it depends on your exit plan. An effective “exit strategy” (the word used to describe how bridging loans are repaid) is essential to a successful application for one. It’s possible to employ this type of financing to solve a wide range of short-term financial issues for residential buyers, company owners, and property developers alike if your client has a realistic strategy for repayment. Here’s a closer look at what constitutes a successful exit strategy and real-life examples of how bridging loans have been put to use to help you improve your loan conversion rate.
As a general rule, the best exit plan is to either sell the home or refinance the loan over a longer period (i.e. a mortgage). Here are a few real-world examples of effective exit strategies used in residential, commercial, and other types of real estate development:
- Redeeming cash
- Marketing and resale tactics
- Modify and reposition.
- Refinancing options
- Approval for construction
Who is Bridging finance mainly aimed at?
You should be aware of some of the most frequent bridging loan tests to get a loan from a lender, so you’ll know what to expect. In addition, your loan application will go more smoothly if you are familiar with the lending criteria for bridging loans.
Because more than a thousand lenders in the United Kingdom, lending standards can differ greatly, particularly between large financial institutions and private lenders. Individuals must be at least 18 years old to apply for a loan.
Can I get a Bridging finance on a low income?
A bridging/bridge loan may still be an option if your income is inconsistent or low due to bridging loans typically being secured by real estate. Also, borrowing a bridge loan is still possible if you own the house outright and have some equity left over. However, whether or not you may get a bridge loan even though you have no income depends on several criteria, including the purpose of the loan, the length of time you need it, and the method you plan to use to pay back the principal and interest.
It is normally necessary to use an FCA-regulated broker to obtain bridging loans because most bridging financing lenders do not deal with the general public. Borrowers with no income must usually put up collateral in the form of a house they plan to sell as repayment for the loan. A bridging loan with rolled-up interest, in other words, the ability to pay it back all at once when you repay the loan, is typically required. As an alternative, you may hunt for an additional lender who would allow you to borrow more money to cover the monthly interest payments and add this to the total capital to repay.
Can I get any loan amount on a Bridging Finance?
Yes, you can be based on your current situation and some of your lenders’ criteria. A short-term loan like a bridging loan might be a great financial tool if you’re in the correct situation. They can help with time-sensitive property acquisitions, such as those made at auction, those that aren’t eligible for a mortgage, and those that arise due to moving and encountering financial difficulties. The amount you can borrow is based on your present financial status and a variety of other considerations, such as;
- Your financial situation,
- Criteria of Your Lender
- The ratio of loan to value
- Location of the Property
- The lender’s assessment of your asset’s value
A bridging loan is a good option if you have a down payment of less than $25,000 and need the money quickly. Personal loans may be a better option if you’re seeking a lower interest rate than this one. There are no upper restrictions on the money you can borrow through the bridging. It is up to you and the lender to decide how much you can borrow. Bridging loans can cover the entire cost of a developer’s project in specific situations. According to your specific financial situation, the amount you can borrow will be influenced by various circumstances.
What is the main difference between commercial and Bridging finance?
Aside from the fact that they can be used to assist pay for residential and commercial property purchases and are secured loans, they are not identical. There is a slew of differences between the two as well. There are two types of property development finance, and understanding the differences is essential if you want to secure the best product to help you with your real estate purchase. Bridging loans are typically associated with properties that need to be completed quickly. Those who need to finalise the purchase of an apartment or a building in a month or even two weeks sometimes turn to bridging loans. Additionally, it can be used for:
- Bidders interested in purchasing real estate at an auction
- Homeowners who are planning to relocate but have not yet sold their current home
- Those that are attempting to raise money for the expansion of their businesses
On the other hand, development funding applicants intend to use the money for their projects. This indicates that those who are best suited for this type of financing are those who:
- Are planning to build a new home from a piece of land
- need to pay for the building’s expenses
- want to extend or create a new home or business