Bridging Loan Example
One of the main uses of bridge loans is where an applicant does not want to miss out on the purchase of a new property (to upsize/downsize/move areas etc.) but have not yet sold their current property.
|Current property valuation:||£800,000|
|Outstanding borrowing on current property:||£100,000|
|New property valuation:||£500,000|
|New loan required (the applicant has £200,000 cash)||£300,000|
In the above scenario, we could raise the £300,000 shortfall required to complete the purchase, which would be secured across the current and new properties via a standard mortgage type charge. Normally, the lower the LTV (percentage size of the loan compared with the value of the properties being used as security), the better the interest rate. Due to this, it can be advantageous for the borrower to use more properties if available, to reduce the interest rate charged.
A Bridging Loan Cost Calculation Using the Above Example:
|Net Loan amount required:||£300,000|
|Arrangement fee @ 1%:||£3,000|
|Interest generated per month @ 0.59% – no monthly payments required:||£1,181.70|
If the property is sold after 6 months, the first £300,000 + fees + generated interest etc from the sale would be used to repay the bridging loan and the balance released to the client i.e.
|Net Bridging Loan to be repaid:||£300,000|
|Arrangement fee @ 1%:||£3,000|
|6 months interest @ 0.59%:||£7,090.20|
|Total to repay:||£310,090.20|
|Balance to borrower:||£489,909.80|
In the above example both properties would typically be used as security as this would be the most cost effective way in which to arrange a bridging loan. If preferred, provided maximum LTV levels are not exceeded, only one property could be used as security however the monthly interest rate available, could be higher.
The better interest rates currently start on loans below 50% LTV and increase at stages thereafter up to 70% on regulated bridging finance and 75% on unregulated bridging finance albeit exceptions are always available in certain circumstances and especially for property in particular hot spots.
The LTV used to choose the interest rate or to define the maximum net borrowing is calculated from the gross loan. The gross loan is the term used for the total of the net or actual loan required plus any arrangement fees added to the loan plus the total interest applicable should the loan run for the full term. We would normally advise arranging a bridging loan for the longest term possible which is usually 12 months (although exceptions can apply) but due to the manner of the calculation, it may sometimes be more beneficial for the borrower, to choose a lower term as this could achieve a higher net borrowing amount and on the best bridge loan rates possible.
The reason for choosing the longest term is that this allows the borrower the maximum possible time available to repay the bridging loan should a problem occur with the initially chosen exit route. Even if the loan was arranged for a 12 month term, the borrower is usually only liable for interest for the time the loan was outstanding. Monthly interest payments are not usually required with a bridging loan, so if the borrower repays the loan after 3 months and 6 days of a 12 month term, they will additionally repay the interest for the time that the loan was outstanding i.e. 3 months and 6 days plus any arrangement or set-up fees that were added to the loan.
Interest is normally calculated on a daily basis after the 1st month.
All terms and conditions connected with the arrangement of the loan will be presented in writing prior to commitment on behalf of the borrower. Unless stated in the T&C’s, early repayment or exit penalties will not be charged if the loan is repaid within the chosen term.
Upfront Costs for Bridging Loans
The upfront costs with a bridge loan should be the same as with traditional finance such as a mortgage i.e. valuation and legal fees.
Alternatives to Bridging Finance
There are several alternative options to bridging finance, which depending on the requirements of the borrower could prove appropriate. Examples of which include conventional and commercial mortgages, secured loans, commercial loans, development finance and equity release.
In all such instances however, there are typically delays involved in the procurement of the funds required. If financial support is being sought to bridge an immediate gap, bridging loans are usually the preferred option.
Nevertheless, it pays to speak to the professionals before making any significant decisions regarding financial products like these. Independent expert advice should always be sought ahead of time, in order to carefully consider all available options. Working with a leading broker means gaining access to the largest market of established and independent lenders across the UK, offering an endless array of dynamic and flexible financial services.