Matt Hunt from Assured FG joins us on the next episode of the Mortgage & Protection podcast to talk all about Bridging Loans.
What is a Bridging Loan and how do they work?
A Bridging Loan is effectively a form of short-term borrowing designed to provide fast funding and they quite literally bridge the gap between purchase, and being able to take out a main line of credit, such as a mortgage.
They’re just like a standard mortgage, but shorter, typically six months to two years, depending on the purpose of the loan.
What’s the difference between a regulated and an unregulated Bridging Loan?
A regulated Bridging Loan will be secured on a property that the borrower either intends to live in or currently lives in. If you’ve found your dream home, but not yet sold your existing property, a Bridging Loan can be used to purchase the new property, and be repaid once your property sells.
An unregulated Bridging Loan would be more for investment properties with a more commercial aspect, such as buying a property that you intend to let out.
What sort of type of Bridging Loan can you get?
Bridging Loans typically tend to be at a fixed monthly interest rate. You can choose to roll the fees up so you don’t pay them upfront, and have them deducted from the overall loan, depending on your exit strategy. Which could be to refinance onto a standard mortgage or sell the property, either way you will pay back the loan plus interest at that point.
Who is a Bridging Loan typically for?
Typically investors use Bridging Loans, for Buy to Let, where the property may need some renovation before a standard mortgage would be approved. You can use a Bridging Loan to buy and renovate the property, then remortgage it onto a Buy to Let mortgage and rent the property out.
Properties bought at auction need to exchange within twenty-eight days, so the finance needs to be arranged quickly, so again, investors and developers can buy properties this way. Or as mentioned earlier, they can also be used in standard residential purchases for your onward purchase, to bridge the gap until the original property is sold.
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We offer complete flexibility around you and can meet either face-to-face or online via a video consultation. And with us all being qualified in our specialist areas and having access to a wide range of lenders, we are able to help you no matter which part of the mortgage journey you are at.
How do you apply for a Bridging Loan?
A broker like ourselves would get to know you, discuss your objectives and ask about your intended exit strategy (the plan on how you’re going to repay the loan). Because typically short-term finance products are high interest, the lender will want to see solid proof that they will get their money back once the loan comes to an end.
We’ll then be able to do the research and look around the mortgage market to find the most suitable lender for your circumstances and handle the whole application process for you.
How long does it take to arrange a Bridging Loan?
In straightforward cases, it’s possible to have a conditional offer within days, subject to an evaluation on the property. Bridging Finance is much quicker than residential mortgages to arrange, because the lending decision usually hinges on the strength of the exit strategy. Having a good solicitor or conveyancer will really help, and we work with some really good solicitors who help speed the process along.
What are first charge and second charge Bridging Loans?
When you take out a mortgage, the lender will put that charge in place to represent the debt that will need to be repaid when you sell the property. The first charge is where there’s no existing finance on the property, therefore the lender has the first right to the money when the property is sold, or following a repossession.
A second charge would be in place when there’s already a first charge on the property, which means that if the property gets repossessed, the lender with the first charge will get their money first and the lender with the second charge receives their money second.
What is an Exit strategy?
It’s really just a plan for how you’re going to pay off the finance. So it’s along the lines of whether you’re going to sell the property or refinance onto a more competitive rate.
What if I have bad credit?
It all depends on the circumstances and the reason why the credit is bad. If there is a reasonable explanation, such as a bereavement or divorce, bills can be missed, but if there was always a history of bad credit, it can affect your chances of getting a Bridging Loan.
As Bridging Loans are more about the security of the loan, rather than the applicant, lenders might be more lenient towards bad credit, if there’s a good exit strategy. If you do have bad credit, always speak to an advisor, because it’s not always the end of the world.
Are there any alternatives to Bridging Loans?
They are a very unique product, and there’s lots of flexibility within the terms. Development Finance is a form of bridging, but it’s more for construction.
What sort of costs are involved with Bridging Loans?
It is high cost finance, and typically you’ll have an arrangement fee on top of the loan. This could be in the region of 1-2% of the overall loan value. They will likely also charge a valuation fee, survey fees, legal fees, broker fees, and of course interest, which tends to be 0.5 -1.5% per month. The interest can be rolled up, so you don’t necessarily need to make a monthly payment, it can be added to what you repay at the end of the loan.
Bridging loans are quite a specialist product and unless you’re a seasoned investor, speak to an adviser, as we’re experts, and that’s what we do. We’re more than happy to help.