What are bridging loans?
As the name suggests, a bridging loan is a temporary solution for a short-term financial gap. Typically, issued over the course of no more than a few months, bridging finance effectively ‘bridges’ the gap between a purchase or investment and the procurement of funds by other means.
What can bridging loans be used for?
One of the most appealing aspects of bridging finance is the way in which it can be used for almost any legal purpose whatsoever. Even so, some of the most popular applications for bridging finance in the UK are as follows:
- Opting out of property chains or reversing chain break scenarios
- Purchasing properties at auction for less than their true value
- Beating competing bidders to the punch by purchasing properties for cash
- Buying ‘unable to mortgage’ properties to renovate and sell on
- Covering unexpected business costs and general outgoings
- Buying homes to be renovated and let out to tenants
- Just as long as you can provide your lender with proof of a viable exit strategy (how you plan to repay the loan), there are no limitations placed on how you can use the funds.
Bridging loans are not restricted solely to property use, but, as we’re writing a property blog, that’s what we’ll stick to here today.
How is interest calculated on a bridging loan?
Interest and overall borrowing costs on bridging finance vary from one facility to the next. Instead of a conventional APR, bridging loan interest rates are usually published as a monthly rate of interest (which can be as low as 0.5%).
This interest can be repaid monthly or rolled up into the final loan balance. Likewise, all associated borrowing costs (arrangement fees, transaction fees, completion fees, etc.) can be added to the final balance payable.
In the meantime, no monthly repayments are necessary, enabling the borrower to maintain total cash flow efficiency. The full balance is then repaid in a single lump-sum payment on an agreed-upon date.
What is the difference between open and closed bridging loans?
Open-bridging loans are those that are issued with no fixed repayment date. The borrower enjoys a greater degree of flexibility with regard to when the loan is repaid, but open bridging loans are riskier for the lender and therefore have higher overall borrowing costs.
With a closed bridging loan, the borrower agrees to repay the loan on or before a specific date. Such loans are considered lower-risk for the lender and are therefore usually more competitive in nature.
What’s the difference between first charge and second charge loans?
A first-charge loan is primarily taken out against an asset of value, such as a home or business property. For example, when you buy a home with a conventional mortgage, this is a first-charge loan: the first and only debt secured against your home.
If you then take out a bridging loan against the equity you have built up in your home (but while you are still repaying your mortgage), it will be issued as a second-charge loan. This is because there is already a primary debt (first charge loan) secured against your home, which, in the event your home is repossessed to repay your debts, will take priority.
Second-charge loans can be more difficult to secure than first-charge loans, and due to their higher risk, they can also be more costly than first-charge loans.
Who can qualify for bridging finance?
Bridging finance eligibility centres on the availability of assets of value to secure the loan and evidence of a viable exit strategy. Where both of these requirements are met, the applicant will most likely qualify, irrespective of their credit history and employment status.
Even so, the key to qualifying for a competitive bridging loan lies in comparing the market with the input and support of a specialist broker. This is particularly true where ‘ subprime’ bridging loan applications are concerned, but it also applies to mainstream bridging finance applications in general.