There was once a time when bridging loans were not only difficult to acquire but were considered a niche market. Today, however, the story is completely different, and the bridging loan market has been revolutionised.
Thanks to the credit crunch of 2007/8, mainstream financial institutions became more reluctant to lend, whereas the drop in property prices opened up cheaper opportunities to those looking to invest. As a result, bridging finance became more common, as more lenders responded to the demand for loans. Thus, the market was transformed and it’s estimated that the industry is now worth over £4 billion per annum.
So, that’s the basic history covered, but what is a bridging loan and what do you need to know before you sign on the dotted line? Read our guide to answer all your questions.
What Is A Bridging Loan?
As the name suggests, a bridging loan bridges a gap; in this case a financial gap. It’s a short-term solution of usually 12 months or less, to manage your finances until permanent funding becomes available through selling other property, funding release, partner investment or similar. Your monthly interest can be incorporated into the loan so that you don’t have to make part repayments during the loan’s term.
The size of the loan is also flexible, Novellus Limited start from £50,000 for example. There is often no cap on the maximum loan amount, offering availability to a large range of projects. There are usually fewer lending requirements than requested by High Street mortgages, making it an ideal form of finance for developers looking to buy unusual sites and properties, or any niche assets.
Let’s say you want to buy a property at auction to refurbish and rent out as a buy-to-let. Mortgages are not always easy to acquire on properties that need work, or if you need to purchase quickly. By using a bridging loan, you can buy the property at auction, complete the renovations in a reasonable timescale and then apply for a standard mortgage against the property.
How Does A Bridging Loan Work?
A bridging loan differs to a normal loan in that it is much quicker to secure, making it an attractive option when you need to finance a project fast. The arrangement fee and interest are deducted in advance, so there are no monthly interest payments. Anyone can apply for a bridging loan; they are used commonly when buying at auction, or if you need to buy before a sale, as well as by property developers and businesses looking to flip a property (the process of buying and selling quickly).
You can usually borrow up to 70-75% of the property’s value that you are using as security if it is a first charge (no other mortgage attached to it). Lenders often have different criteria when considering an application and it is not just a simple income multiple.
There are two types of bridging loans, called ‘open’ or ‘closed’ bridging loans. If you have a guaranteed exit plan in place this is known as a closed bridge. An open bridge is used when the exit date has not yet been set, due to financing not currently finalised. This is a more common form of bridging loan, as it can be difficult to guarantee long-term finance at the time you take out the bridging loan.
The exit strategy is an important part of the process and should be considered before you take out a bridging loan. Bridging loans are an effective short-term solution to obtaining finance quickly when long-term finance is not currently available but will be by the time the bridging loan is due to be repaid.
Are Bridging Loans Secured?
A secured loan equates to money borrowed against an owned asset, which is generally property such as buy-to-let or a refurbishment project. Bridging loans are secured against property but this can be against the new property you are purchasing or a property you already own. This means if you default on the loan repayment, your lender has your property as collateral, which is a much less risky option for the lender. It does, however, put more risk on you, as you could lose your property if you do not meet your loan repayments.
Why Choose an Unregulated Bridging Loan?
For commercial purposes, unregulated bridging loans are often the product of choice, as there are few restrictions on the terms. Because of this, lenders are usually able to help clients with whatever requirements they need. So for those commercial companies or individuals who need bespoke bridging loan solutions or need a bit more flexibility, unregulated loans are a better choice.
What’s the Difference Between an Unregulated and Regulated Loan?
Regulated loans must comply with the Financial Conduct Authority (FCA) rules and regulations, and are usually secured against property that you live in or are going to live in. They provide protection to consumers, ensuring the loan is suitable for the clients’ needs. This is determined through discussions between the broker, lender and borrower. This type of loan can be either first or second charge (see below), although second charge loans may have limited FCA regulation. Should issues arise, you can complain to the Financial Ombudsman Service, who will investigate your case.
If loans are secured against investment properties, they can be unregulated. This could include buy-to-let properties or any property being used for business or commercial purposes. If the loan is secured against property that is not currently occupied by the person(s) obtaining the loan, it will also be unregulated.
As a general example, it is the purpose of the loan that decides if it is within the range of FSA regulation. According to the Council of Mortgage Lenders, “bridging lending secured by a charge over owner-occupied property is regulated, whereas loans secured on non-owner-occupied property (to a property investor, for example) is not.” Buy-to-let bridging loans are an example of the unregulated market.
‘Unregulated’ does not mean unprofessional, borrowers should not be concerned at obtaining unregulated loans. For example, Novellus Limited only work in an unregulated capacity, Many highly professional companies provide unregulated loans, which go into the 100’s of millions of pounds. Companies providing these loans have stellar reputations with extremely high and fair treatment policies. According to a study by EY.com, 54 percent of bridging loans are unregulated.
What Is the Difference between First and Second Charge Bridging Loans?
When a bridging loan is secured against property, the property can be either debt free (ie no mortgage to pay on it), or there may still be outstanding mortgage payments to pay on it. If the property has no loans against it, and thus is owned outright, the bridging loan is known as First Legal Charge.
A Second Legal Charge is security taken by a lender behind the first lender (so in effect it is the second time this property has a charge on it). However, the owner has to own enough equity in the house to cover the bridging loan, offering a viable option if further capital is needed for other projects.
When a loan has a ‘charge’ on it, this refers to the priority the lenders have on the property. If considering taking out a Second Charge often the First Charge lender needs to give consent. The actions of the First Charge lender will have an impact on the Second Charge lender, as the primary loan takes priority over further loans secured against it.
How Much Do Bridging Loans Cost?
The amount a bridging loan costs will depend on the lender and the agreement you have, but on average lenders charge an agreed percentage of the total sum as an arrangement fee, plus a monthly interest charge. Some loans also have a final redemption fee. The rates are determined by factors including the assets, risk profile and time period. Use the Novellus Bridging loan calculator to find out more.
It is possible to add the payments to your mortgage. For example, if you were charged 2% Arrangement fee and 1% interest PCM, if you borrowed £400,000 over 12 months to secure your new property, you would incur £56,000 fees and interest. When securing your new mortgage you may be able to add this to the loan.
Remember this is just a guide; the actual figures will be determined by the fees and interest rates charged by your lender. As the market becomes more competitive, it is possible to find more competitive terms but in general, bridging loans have a higher overall cost than a mortgage. This is however offset by the speed of this loan type. All-in money on vanilla bridging loans is getting closer to the mainstream market in terms of rates. It is not unusual to see all-in money at 6% per annum on the right types of loan.
How Long Can You Have A Bridging Loan For?
Bridging loans are only intended as short-term finance and the maximum term tends to be 12 months (although 18-month terms have been negotiated in certain circumstances). Some lenders may provide finance for very short terms; 1-day loans are not totally unheard of. The average length of a Novellus bridging loan is about 6-7 months.
How Long Does It Take to Get A Bridging Loan?
One of the most attractive aspects of a bridging loan is the speed at which finance can be procured. The initial arrangements only take a few hours to organise, and funds can be in your bank account within 72 hours, although up to 14 days is a common time frame.
Novellus Limited use their own capital, therefore can comfortably release funds within this timeframe. Borrowers should note lenders in the market often use a 3rd party credit line which may mean the lending process takes longer than those lenders who use their own money. Borrowers are advised to seek this information from their lender should they require funds in a short timeframe.
Compare this time frame to a mortgage, which generally takes 30-60 days, and it is easy to see why bridging loans are an attractive proposition for short-term finance. Novellus provide a very short time-frame between enquiry-to-loan payment.
Can I Use A Bridging Loan to Buy A House?
Bridging loans can be used for both residential and commercial properties, and by private property owners, developers and investors. Bridging loans can be used for several reasons, including:
- Buying at auction. Auction contracts usually demand a quick completion, therefore bridging loans can offer finance while other finance is secured
- Mortgage free. Property owners who are looking to downsize or buy a home for a lower value than their current property can use a bridging loan while they sell their current property. This offers a quick and straightforward option, often used by older people
- Quick purchase. If you have seen your dream home but have not yet sold your current property, a bridging loan ensures you don’t miss out
- Broken chain. Buying and selling property can rely on a series of people selling homes before they can purchase a new one, and sometimes the chain can be several links long. If any of these links break down, it can cause issues with your own purchase. A bridging loan provides a solution to this issue
- Building or converting. If you want to get going on a new build or a conversion project, a bridging loan can provide you with the initial finance to begin.
Where to Get A Bridging Loan
As the demand for bridging loans has increased, there are now many more companies providing this type of funding. Brokers obtain bridging loans on behalf of their clients. However, the best rates are often obtained directly through companies such as Novellus, especially for nationwide bridging loans. Borrowers should not be afraid to go to lenders direct, in order to obtain the best possible deal.
A Final Word
As with all types of finance, there are pros and cons of bridging loans. Yet in the right circumstances, with due care and attention, bridging loans can be very beneficial to the borrower. They can mean the difference between securing your dream home or losing it to lack of speedy finance. Whether you require a regulated or unregulated loan, take advice from FCA approved brokers to ensure the loan is the right one for your needs.