WHAT IS A BRIDGING LOAN?
This type of loan is commonly used a short-term solution (usually for up to twelve months for regulated lenders and up to 24 months for non-regulated bridging lenders) whilst trying to sort out a longer-term and more sustainable form of finance:it is an option that ‘bridges’ a gap between a debt and other credit then becoming available, it is often used to the bridge the gap between completion dates and the sale of a property being sorted out. It is also frequently an option chosen by businesses to buy property that would have been otherwise difficult to purchase.are used with the intention of paying a debt whilst a mortgage or the sale of a property is being sorted out. It is a popular finance option for house buyers, property developers, house builders as it can be used to help with almost any aspect of the property process.
There exist different types of bridging loans. For example, they can be open or closed bridging loans, and they can be 1st, 2nd and 3rd charge loans for residential, semi-commercial, commercial and land properties. The bridging loan amount will be dependent on a number of factors, such as the value of the property that you require the finance for as well as the type of loan you are looking for. All loans are secured against a property (whether it be commercial or residential) and generally speaking, the higher the value of a property, the more that you will be able to borrow.
In the event that you are unable to keep up repayments and you default, lenders as part of the bridging loan agreement between the two parties have the right to recover any losses by making repossession.
TYPES OF BRIDGING LOANS
It is important to know the difference between open and closed bridging loans, as it will affect the amount you borrow, the rates you will receive and the duration of the loan as lenders will assess your eligibility based upon the reason as to why you are applying for a bridging loan.
Open bridging loans
An open bridging loan is when the borrower has not planned how and when they will start making repayments from the outset of agreeing to the loan. This means that the bridging loan is open-end with no guarantee they will be selling or receiving a big payout in order to repay their loan. However, there will usually be a cut-off point agreed by both borrower and lender as to when the loan must be paid back. Most bridging loan applications fall into this category.
Closed bridging loans
Closed bridging loans are essentially the opposite of an open bridge loan. The borrower knows when they will be able to make the repayment of the loan, and therefore they have designated an exit date for the loan agreement. For example, it is quite common for people refurbishing a flat to choose a closed bridging loan, as they usually know exactly when they want to re-sell it or a popular option for those who have already exchanged on selling a property and are simply waiting for the completion date to be sorted out. In this scenario, the property sale will take care of the bridging loan repayments. Lenders tend to prefer this type of bridging loan due to an exit strategy being clearly defined from the outset, given the lender confidence repayments will be made promptly.
WHAT IS THE ELIGIBILITY CRITERIA FOR A BRIDGING LOAN?
The exact criteria for bridging loans will be dependent on the lender, however, it will usually include:
- Your credit history
- Age – to get a bridging loan you will need to be at least 21
- It can only be for UK, Scotland and Wales property only
- That it is possible to secure the loan against a property (first and second charge)
- Income and that you will be able to make the repayments
WHAT ARE THE BENEFITS OF BRIDGING LOANS?
There are a number of advantages to bridging loans, such as:
- They can be organised at a much faster rate than a normal mortgage, with it being possible that loans can be sorted in a matter of weeks rather than months. This can be particularly beneficial if you are keen to remortgage the property fast, and in line with an increase in value, or are selling a house at auction which can give you a distinct advantage over cash buyers
- Bridging finance can also be a good option in any potential situation where the seller is willing to provide a discount if you can sort out finance quicker than organising a mortgage would take.
- Bridging loan finance can also be a good choice if the property isn’t mortgageable, due to the quality of the premises, but you are intending to refurbish it and make a profit at a later date.
ARE BRIDGING LOANS REGULATED?
A large number of bridging loan companies are able to undertake regulated mortgage contracts. If they are ASTL members they have to abide by a Value Charter and Code of Conduct. This is the case whether or not they are regulated.
However, there are lenders who provide non-regulated bridging loans. This is usually for those applying for loans against:
- Buy-to-let properties
- Investment properties
- People with limited companies
- Mixed-use properties (e.g. shops or restaurants that has a residential property above it)
How can I apply for a bridging loan?
If you are trying to find the right bridging loan, our expertise and knowledge in this field can help you to compare bridging lenders and find the best product for your needs.