A bridging loan is short term finance secured on property or land and are usually applied for when you have a short term finance requirement, or you need to find money very quickly.
Bridging loans are often repaid within 3 to 24 months. With this in mind, the interest is usually higher than that of a ‘normal’ loan hence the short term nature – they are very popular for people wanting funds for development, business use, to fill a shortfall on a purchase whilst another sale goes through, or to purchase properties at auction.
Bridging loans are interest only loans. As such you only pay the interest monthly and the capital is repaid in full when you redeem the loan. There are usually options for ‘rolling up’ or ‘retaining’ the interest – in these instances the interest will not be paid monthly but will be added to the loan and repaid when the loan is redeemed.
For example, if you borrow £200,000 at 1.25% then the monthly payments will be £2,500 per month.
If you don’t want to (or if you’re unable ) to make payments to a bridging loan, it may be possible to roll up or retain the interest.
Retained interest – The lender will ‘retain’ the monthly interest payments for the full term of the bridging loan from the outset and add it to the loan. Potentially the overall being repaid could be more than just paying monthly as the loan as been increased from day one with the retained interest.
For example: If you obtain short term finance of £200,000 over 12 months with retained interest at an interest rate of 1%, the monthly payments would be 2,000 per month. The lender would add 12 months of interest to the loan from the outset (£24,000), so without any fees etc the total initial borrowing would be £224,000.
Rolled up interest – The lender will roll up the payments when they become due each month and add them to the loan, this will typically result in less interest being paid as the interest payments are being added monthly, not in one lump sum at the start of the short term finance. Potentially the overall being repaid could be more than just paying monthly as the loan amount will increase monthly (increasing term) as payments are added when they become due but should be less than retained interest.
For example: If we keep the example of £200,000 but this time over 6 months with rolled interest at an interest rate of 1%, the monthly payments would be 2,000 per month. The lender would add 1 months interest to the loan each month of the loan term until it is repaid.
Retained and Rolled interest – This is a combination of rolled and retained and is popular with most bridging lenders who offer deferred payments (which is effectively what retained and rolled up interest options are). using the 2 examples above, the lender will put aside the 12 months payments (interest free) and add them to the loan when they become due (when added they would accrue interest), this benefits from allowing the lender to set aside the monthly repayments from the outset and also benefits the client by only paying interest on the monthly payments as they become due . The overall being repaid would be more than just paying monthly as the loan as been increased from day one with the retained interest but should be the same as a normal rolled up interest loan whilst giving the lender the security of having each months payment set aside.
Please note: the above are examples only and other fees and conditions may apply.
Loan to value or LTV is used by lenders to show the ratio from the loan to the value of an asset, for example: if you had a property worth £500,000 and you wanted to borrow a total of £250,000 this would be a loan to value of 50%
When working out any loan to value, it’s important to include any other loans secured against your asset. For instance, if you have land valued at £500,000 and you already have £100,000 as a first charge mortgage, if you want to raise an additional £100,000 as a 2nd charge bridging loan, this would be a total of £200,000 of secured funds on the land which would be a total of 40% loan to value.
The charges that could be applied to a bridging loan may very from lender to lender and may also vary depending on the loan to value and what the funds are to be used for.
In brief, bridging charges or fees may consist of some or all of the following: valuation, lender application, broker and lender completion fee among others – Charges will likely vary depending on what you are looking to do and how complex your application is but you should be given a full breakdown off costs prior to formally applying any short term finance so you can make an informed decision on how you wish to proceed.
A Bridging loan differs slightly to normal loans in that they require an exit strategy before a lender will agree to lend (as opposed to simply repaying capital and interest each month or with an interest only repayment vehicle). Some of the main factors lenders consider for an application are; the equity available (or the loan to value), affordability if monthly payments are being made (not so important if payments are being retained or rolled up) and the exit strategy, how you plan on repaying the loan. Typically this will be through sale of land or property or by refinancing a property or land the bridging loan is secured on with a more conventional mortgage – however in reality a bridging loan can be repaid via any viable and legal release of assets.
A typical example of this would be if a property wasn’t able to be mortgaged due to it not being habitable (such as a buy to let which needed heavy refurbishment). A bridging loan could be used to make improvements to the property to make it habitable at which point the loan could be repaid via a standard buy to let mortgage.
If you have an asset with enough equity you could borrow up to £10 million (possibly more), however there are limited options for very large loans. Typically we are seeing bridging loans of up to £1,000,000 completing without issue, with the minimum you can borrow being around £30,000. It should be noted that there isn’t actually a limit on what a lender will fund, if the asset, fund use and exit strategy stack up there is no ceiling on the funds which can be raised.
The lending available for bridging loans is subject to loan to value and other criteria. Generally speaking the lower the loan to value, the more options you will have available. Bridging lenders typically lend up to 80% loan to value, although loans of 70% or less should give access to more lenders, the lower the loan to value the more security for a lender.
We aim to give you an initial decision over the phone and a formal decision in principle within a few hours. If you chose to proceed we will issue documents and as long as they are returned promptly we should be able to complete your bridging loan within a few weeks – although this may be shortened if the funds are needed more quickly.