Bridging Loan Example
One of the main uses of bridge loans is when an applicant does not want to miss out on the purchase of a new property (to upsize, downsize, move areas, etc.) but has not yet sold their current property.
|Current property valuation:
|Outstanding borrowing on current property:
|New property valuation:
|New loan required (the applicant has £200,000 cash)
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. The lower the LTV (the 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:
|Arrangement fee @ 1%:
|Interest generated per month @ 0.59% — no monthly payments required:
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 would be released to the client, i.e.
|Net Bridging Loan to be repaid:
|Arrangement fee @ 1%:
|6 months interest @ 0.59%:
|Total to repay:
|Balance to borrower:
In the above example, both properties would typically be used as security, as this would be the most cost-effective way to arrange a bridging loan. If preferred, provided maximum LTV levels are not exceeded, only one property can 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, although exceptions are always available in certain circumstances, especially for properties 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 the best bridge loan rates possible.
The reason for choosing the longest term is that this gives the borrower the maximum possible time available to repay the bridging loan should a problem occur with the initially chosen exit route.
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&Cs, 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 cost of 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 this 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 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.