If you are thinking about getting a bridging loan you’ll probably have lots of questions. You might be unsure or uncertain about what you might be getting yourself into! You might have a good or bad understanding of the benefits and how they work. Read our blog to find out more from Barr Financial, the expert bridging loan brokers:
Myths of bridging!
Let’s dispel any myths and kick off with making sure you’ve got a good understanding of what a bridging loan is.
A bridging loan is just like any other type of mortgage. That's it! It's not scary, it's just used for a particular purpose which it's designed for.
The difference between a bridging loan and a regular mortgage is essentially the term. A bridging loan is for a short-term generally 12 months, but it can be more or less. A regular mortgage, on the other hand, might be for 35 years! Big difference right?
A bridging loan is usually used when it is not possible to finance a property on a standard mortgage. This might be because it needs refurbishment, planning issues need to be sorted, or there might be some other problem with the property. It is stop-gap that enables you to move forward before planning your exit strategy, which is usually either remortgaging or selling.
A bridging loan can be used to great effect for buying properties quickly, such as at an auction when getting a regular mortgage will just take too long. Or if someone wants to buy a new home before selling their own property, this can really help avoid the risk of losing the house.
Bridging loans are often used for property developments on a commercial basis, but equally can be used for self-builds, renovations and conversions.
As I said, they are designed to be used for a short term and to ‘bridge’ between a short-term requirement and a long-term loan. It is usually used as a stop gap until something more permanent is arranged. Property developments and auction purchases are typical examples where bridging finance is a great solution.
Does bridging always have to be related to property? Yes and no; the reason for the bridge could be for anything, but the bridge itself has to be secured against an asset and this is usually property.
How do I get a bridging loan?
There are lots of bridging loan companies and more and more popping up. The market is getting saturated with lenders in this sector some which are good but lots who have shady practices!
Don’t worry, the good news is that it means there is lots of competition and it helps drive the cost of borrowing down for you.
Be careful who you choose to be your partner!
The bad news is there are a lot of new lenders and private money with an unproven track record. Because the sector is unregulated, my advice would always be to use a mortgage broker with experience and allow them to be the middlemen to help and advise you throughout the process. I am not saying this to say “use us” but I’ve seen so many clients have poor service when they use certain lenders or just broken promises which ends up costing them lots more money.
Why a broker who works in the regulated sector is the perfect fit?
My other little tip is to use a mortgage broker who isn't solely a commercial mortgage broker. Let me explain why, as this is important and a little insider secret!
The advantage of working with a firm who are regulated by the FCA (like us who also do residential and regulated buy to let mortgages) is that:
- Their systems and procedures are designed to be robust as they work in the regulated sector.
- They are able to help you plan holistically. Planning the exit strategy is a vital part of bridging finance and if your broker has expertise in residential, buy to let, HMO, holiday let or whatever then they can make sure you can exit and aren’t forced to sell unless you want to of course.
This is a vital insider secret and something you need to know; I said “their systems and procedures are designed to be robust”, but this probably doesn’t mean much to you, so let me explain;
Robust basically means a firm/broker is always looking out for your best interests. That's easy to say or claim, right? The difference is that we are required to have thorough procedures and evidence that we are always doing the right thing.
Now I know bridging and commercial mortgages are not regulated, but the point is, we are set up to work this way. The problem with commercial brokers who do not operate in the regulated sector (the ones that don’t do residential or regulated buy-to-let) is that they are highly unlikely to have those robust systems and procedures!
If you want to test them just ask how they store your data, your bank details, your personal information? Do they just scribble it down on a bit of paper and only use email? If you do use one, why not ask to see all your notes and evidence of why a recommendation was made! You’ll be amazed at how bad some of these commercial brokers are…but if truth be told, it doesn’t surprise me. It just frustrates me, as they are acting unprofessionally and doing you a disservice.
Remember what robust means to you? It means being able to prove you are being looked after in every single way, from your data being protected, to being offered the right advice and to you getting the best deal possible.
Just be careful!
Why ‘no’ is sometimes the best ‘yes’ when it comes to bridging lenders!
At Barr Financial we get approached by new lenders, financiers all the time who are looking to do deals. We don’t just say yes to them all and you would be surprised how poor, un-knowledgeable and sometimes unprofessional some of these companies are!
The reality is a lot of them are usually ‘yes’ men and women who say what you want to hear, but later let you down. We’ve experienced it and have learnt the lessons the hard way! Which is why now, we only work with bridging loan companies we know, trust and are comfortable with.
The reason is simple, fundamentally if a deal was to go south, we are the ones who look bad and get it in the neck from our clients.
Remember we are in the people business, so relationships and doing a good job is really important.
Of course, that’s not to say we aren’t open to new lenders and innovation. We just have to be very confident and we will carefully carry out our due diligence. It’s all too easy for a lender to just wipe their hands clean and move onto the next deal, the difference is we just don’t want to let our clients down.
How does a bridging loan work?
Practically a bridging loan is just a mortgage so a lender will agree to lend based on a number of factors:
- The quality of the asset (the land or property).
- The amount you want to borrow as a proportion of the value.
- Your plans.
- Your experience.
- Your exit strategy (how you plan to repay the loan).
The lender will secure a legal charge on the property or land (just in the same way a normal mortgage works) and when you complete on the deal, the funds will be released to you so you can move forward with your plans.
The terms of the deal will be agreed and this will include the term of the deal (how long you have the bringing loan for), the cost, interest rate and all the fine detail. In fact very similar to a mortgage offer.
The monthly cost of a bridging loan can either be rolled up and paid at the end or paid monthly just like a normal mortgage. Rolled up interest basically means you don’t have to pay a monthly amount, instead the interest is compounded and you repay this as well as the original amount you have borrowed. This can be great for some who might otherwise have cash flow issues as everything is repaid at the end.
Once you have completed your project, then you need to execute your exit strategy. This might involve keeping the property and remortgaging it onto something else and thereby repaying the bridging loan. Or selling the property for a profit and repaying the bridging loan then.
When would a bridging loan be used?
There are many uses for a bridging loan, but typically they fall into these categories:
- Buying and selling a property
- Development finance
- Short term requirements
- Properties which are unmortgageable
You might be selling a home and buying a new property but there are delays with your sale. You don’t want to lose the house you are buying and are confident your sale is going to happen. Rather than risking your purchase, some people will finance the purchase with a bridging loan, secure the property and then sell the other property in due course. Of course, there is a risk; the sale might fall through in which case you are left with a large debt that has to be repaid within a short deadline.
There are of course other examples where people use bridging finance:
Property developers often speak to a broker for property development finance. Sometimes this is done through bridging as they need the finance quickly, have fewer hoops to jump through compared to some commercial lending routes. The property developer will either sell and pay off the bridge, or the value would have increased and they will then be able to re-finance onto better terms.
How much does a bridging loan cost?
Typically a bridging loan will cost about 1% a month as an interest rate (more if it's a higher risk). There are companies and individuals who might offer better terms, but this is pretty much an industry standard.
Be careful of firms hooking you in with really low rates! From experience they are used to tempt you into applying and then they will find a reason to increase the interest rate; the valuation didn’t stack up, your application throws up some issues, whatever! Remember this sector is unregulated and they can pretty much change the terms of the deal right up to the last moment until you sign the legal paperwork!
If you are using a broker a reasonable fee is 1-1.5% of the loan amount. Depending on the deal, the broker and lender, you might be able to include the fee in the overall borrowing amount, thereby avoiding to have to physically find this money upfront.
A broker is likely to also charge an administrative/research/application/commitment fee of a few hundred pounds. Remember if they are able to manage the process, make a recommendation, help you find a solution, and avoid some of the earlier pitfalls I’ve highlighted, they are worth every penny.
A lender fee is typically 2% of the loan amount. Of course, this can vary but again it’s quite standard. Some lenders will allow you to include this in the overall borrowing amount which means you don’t necessarily have to find this upfront.
The lender may charge a valuation fee, but some don’t. If they do charge a valuation fee, the amount will likely be dependent on the value of the property.
It is highly likely you will have to pay the lenders legal fees, plus your own. Again the amount will probably depend on the size of the deal.
Be careful with additional lender fees. Bridging loan lenders will have small print and some of these extra fees are reasonable, such as fees and interest rates for late payments. However, others might not be so reasonable! Some lenders not only charge the lender fee but also charge you for when you pay off the bridging loan! This is known as an ‘exit fee’ which can often be a percentage of the original loan amount or worse still a percentage of the value of the asset!
Advantages and disadvantages of a bridging loan:
Bridging isn’t for everyone lets be clear about that. It must be used for a particular purpose and if it is, then it’s a great way to fund things.
If you are an experienced investor or developer and have done the sums, worked out your strategy and thought about an exit plan, then it can be a great solution.
If a property is unmortgageable, you need to move quickly, you want to buy at auction, or you are planning a development, then it's great. You just need the advice to help you plan it out properly.
A bridging loan may seem restrictive due to the interest rates charged or the short-term nature of the loan. This can I’m sure worry some, but for those who have a very clear plan and a strategy to repay the debt, then it can be a great way of finding something.
Like I’ve said, the positive news, on the other hand, is bridging finance is getting much cheaper than it once was and there is a lot of competition from lenders and funder’s who want your business.
Bridging finance can be relatively expensive, but in the grand scheme of things, it isn’t at the moment. Bridging loan rates can vary a little from lender to lender but provided the project works and the figures stack up, then it is a great solution. Particularly if finding an alternative funding solution is closed to you.
Also don’t forget, if you looking at borrowing money for a short-term, often a traditional mortgage or commercial lender might not be interested in helping as there is no long-term gain for them.
Peer to peer lending alternatives:
Interestingly, there are also new sources of funding that are emerging, namely, peer-to-peer borrowing and lending.
Peer-to-peer borrowing has developed off the back of the high street not lending. It has seen huge growth in recent times and it has filled a gap left by the usual high street lenders.
It is not really any different from private funding which has been around for hundreds of years. The key difference in recent times is systems and technology which has opened up this opportunity for those wanting to lend and those wanting to borrow.
It has also enabled those people wanting to lend their money to spread their risk by not putting all their eggs in one basket.
The key, of course, is to work with a bridging loan broker like us who has the contacts, relationships, and experience to know who is the best lender for you and whether your circumstances fit the lender’s criteria. If you need help, please feel free to reach out to us.