Bridging Loans Explained: A Step-by-Step Guide to Getting the Funding You Need
If you're in need of quick funding for a property purchase but don't have the necessary funds available, a bridging loan could be the solution you're looking for.
But what exactly are bridging loans and how do they work?
Whether you're a property investor or a developer looking to complete a project, bridging loans can provide the funding you need.
When To Use Bridging Loans
Bridging loans can be useful for a variety of situations where quick funding is needed, such as:
- Purchasing a property at auction: If you're buying a property at auction, you'll usually need to complete the purchase within 28 days. A bridging loan can provide the funding you need to complete the purchase quickly.
- Property development: If you're a property developer, you may need funding to complete a project before you can secure long-term financing.
- Chain breaks: If you're in a property chain and your sale falls through, a bridging loan can provide the funding you need to complete the purchase of your new property.
- Refurbishments: If you're renovating an existing property, a bridging loan can provide the funding you need to complete the work before securing long-term financing.
How Do Bridging Loans Work?
A bridging loan is a short-term loan that is usually taken out to bridge the gap between buying a new property and selling an existing one. It is often used by property investors who need to act quickly in order to secure a property, as it can be arranged much faster than a traditional mortgage.
Bridging loans are typically secured against land or property, and the loan amount is based on the value of that land or property. You usually get a Loan to Value (LTV) of up to 80%, however for some lenders this will be lower than 80% LTV. Also, the type of property and value could impact the LTV.
Bridging Loans are usually offered for a period of up to 12 months, although some lenders will offer longer terms.
Bridging loans can be used for a variety of purposes, such as buying a new property, renovating an existing property, or even purchasing a property at auction. They can also be used to develop existing land, property or builds.
Types of Bridging Loans
There are two main types of bridging loans: closed bridging loans and open bridging loans. A closed bridging loan is used when the borrower has a clear exit strategy in place, such as the sale of an existing property. An open bridging loan is used when the borrower does not have a clear exit strategy, such as when they are waiting for planning permission to be granted.
There are also first charge bridging loans and second charge bridging loans. A first charge bridging loan is secured against the property being purchased or an existing property already owned by the customer. A second charge bridging loan sits behind an existing mortgage or loan and is based on the remaining equity after the existing mortgage or loan is taken into account.
Pros And Cons of Bridging Loans
Like any financial product, bridging loans have both advantages and disadvantages. Here are some of the pros and cons to consider before taking out a bridging loan:
- Quick funding: Bridging loans can be arranged much faster than traditional mortgages, which can be useful for those who need to act quickly.
- Flexibility: Bridging loans can be used for a variety of purposes, such as buying a new property, renovating an existing property, or even purchasing a property at auction.
- No early repayment charges: Many bridging loans do not have early repayment charges, which can be useful if you're able to repay the loan sooner than expected, however each facility is subject to it’s own specific terms and conditions.
- Short-term: Bridging loans are usually offered for a period of up to 12 months, which may not be long enough for some borrowers, and may not always be cost effective.
- Fees: Bridging loans often come with fees, such as arrangement fees and valuation fees, which can add to the overall cost of the loan. These fees are sometimes taken out of the loan advance, which negates the requirements to service debt on a monthly basis, however, this will lower the amount of funds the customer will receive up front.
- The amount you can borrow depends on the amount of equity you have in the land or property being used as security (LTV).
Steps To Getting a Bridging Loan
If you've decided that a bridging loan is the right option for you, here are the steps you'll need to follow to get approved:
- Find a lender: There are many lenders that offer bridging loans, so it's important to shop around to find the best deal for you.
- Provide information: You'll need to provide information about the land or property you're using as security, as well as your personal and financial information.
- Valuation: The lender will arrange for a valuation of the property you're purchasing to determine the loan amount (please note this is usually done at the customer’s cost).
- Offer: If the lender is satisfied with your application, they'll provide you with an offer of funding.
- Legal work: You'll need to work with a solicitor to complete the legal work for the loan.
- Funds transferred: Once the legal work is complete, the funds will be transferred.
Documents Required for a Bridging Loan
When applying for a bridging loan, you'll need to provide the following documents:
- Proof of income: Payslips or bank statements to show your income or accounts if you’re a business.
- Proof of identity: Passport or driving license.
- Proof of address: Utility bill or bank statement.
- Property/Land details: Details of the property/land you're purchasing, including the purchase price and any refurbishment costs.
- Details of what the funds are being used for.
- What your exit strategy is.
Alternatives To Bridging Loans
If a bridging loan isn't the right option for you, there are a number of alternatives to consider. These include:
- Commercial mortgages: If you have enough time to secure long-term financing, a commercial mortgage may be a better option.
- Development Finance: If you required funding for renovations, then a specialist renovation loan can be a good option.
- Business loans: If your company is a financially strong position then a business loan may be a better option.
Is a Bridging Loan Right for You?
Bridging loans can be a useful tool for those who need quick funding for a purchase or renovation. If you're considering a bridging loan, it's important to shop around to find the best deal for you. You may wish to consider using a broker as they will have multiple credit lines, some of which may not be available directly to you as some lenders only accept business via pre approved brokers.
You should also consider whether a commercial mortgage or one of the alternative options mentioned above might be a better fit for your needs.
In conclusion, bridging loans can be a valuable tool for those who need quick funding for a property related project. With the right research and preparation, you can find the right bridging loan to help you achieve your property goals.
Whilst RLA Capital cannot offer financial advice, we can provide various business loans to assist with cash flow. RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.