Why Would I/We Want A Bridging Loan?
You might want a bridging loan to enable you to:
a. Buy a property at an auction where there is a limited time to complete a purchase, so a bridging loan would enable you to complete a purchase within an auction contract timeframe and you could then re-mortgage once the property has been purchased and refurbished, extended or whatever.
b. To buy a property that is not conventionally mortgageable ie uninhabitable or with structural defects, making it not possible to obtain conventional long term finance. A bridging loan could be arranged to enable you to purchase the property, provide the funds for dealing with any structural issues with the property or completed refurbishment required in order to make the property mortgageable in a conventional way.
c. To buy a second property before you have sold your existing property. In some situations you may have the opportunity to buy a property in a location you particularly like where properties are few and far between, or where there is a price advantage if you can buy your new property immediately before you have sold your existing property. A bridging loan could enable you to buy the property of your choice in the location you wish to move to before you have sold your current property. In these situations it is normal for a charge to be taken on the property you are buying and maybe a second charge on the one you are selling.
Do I have To Pay Interest?
There are different ways of dealing with the interest on a bridging loan in some situations the interest could be added and deducted or there is the option for the interest to be rolled up and paid on redemption when the loan is redeemed, but you have to remember that in that situation the interest is compounded so it would cost you more at the end of the day. If you are able to pay the interest on a monthly basis that would be the cheapest option.
Borrowing on a bridging basis being short term the interest rate is not as competitive as a long term mortgage because the lender only has a limited period in which to make a profit on the transaction. Currently the lowest interest rate you could expect to pay or incur would be a rate of 0.49% per month. This means for every £1,000 you borrowed the interest incurred on a rolled up basis or that you would pay if you are able to make monthly payments is going to be £4.90 per month per £1,000 borrowed.
Whilst applications for bridging loans are not as complicated as applications for conventional mortgages, all lenders and packagers in the bridging sector are required to undertake normal credit checks and other enquiries to be sure that any bridging loan transaction is appropriate to the individual financial circumstances of each applicant. Any adverse credit that exists would not necessarily mean that a bridging loan is not available but it almost certainly would mean that the interest rate would be higher as the risk to the funder would be higher.
Generally speaking it is possible to consider bridging finance upto 75% of purchase price or valuation for residential security or 70% if it is commercial or sem-commercial security.
Bridging loans are a shorter term funding option secured on property taken out for a period of 1 month to 24 months pending a property sale or pending longer term financing or re-financing. They are used to bridge a situation where a person wants to buy their new property before they have sold their existing property. They can also be used to buy a property in a poor condition, generally un-mortgageable and a bridging loan is used to buy the property, carry out the necessary refurbishments and then a long term re-mortgage can be obtained to repay the bridging loan.
Bridging loans can also be used at auctions with a limited period of days to complete a bridging loan would be used to complete the purchase and then the bridging loan would be repaid by a long term re-mortgage or sale.
Bridging loans can be taken out for a period as short as 1 month and as long as 24 months but 6 to 12 months is the norm.
Lets look at January 2018 and see the types of bridging loan applications that we are processing – we have an application from an independent College which had a short term cash flow problem due to many of its overseas students having visa issues causing revenue to plummet. We are arranging a bridging loan the visa problems have been resolved and the income stream is building up again but the bridging loan is needed to deal with cashflow issues pending the College being sold. This is a facility of in excess of £1M.
We are also processing an application for a funding facility of £100,000 secured on agricultural land in Scotland. The applicant has the option to apply for planning on some of the land currently in charge to another lender, he asked that lender to release a portion of the land but the lender refused. We are therefore arranging a bridging loan to redeem the existing borrower taking a charge on the remaining land excluding the plots which the applicant can then sell off independently.
The largest bridging loan that we have ever processed was for £15.5M on a Hotel complex in London and the smallest bridging loan arranged was for £26,000 – we have no maximum and a minimum of £26,000.
The Directors have over 25+ years experience in arranging bridging loans and hold CeMAP and CeRER qualificiations.
Question – What is the interest rate on a bridging loan? – This depends upon the amount of the loan, the relationship between the loan and the value of the security, whether the security is residential or commercial and also the term of the bridging loan but currently the lowest interest rate Lerwick Financial Group Ltd can offer is 0.44% per month.
Our client required £400,000 to exit a bridging loan from another lender.
Property worth £700,000 let to 5 separate tenants. The client will require an HMO licence in early 2016 but granted a grace period.
Lerwick succeeded in arranging a new bridging loan with a 5 day completion to repay an existing bridging lender to give the client more time to find low cost longer term finance linked to the obtaining of an HMO licence.
The clients discounted rate with the existing lender had come to an end and they weren’t in a position to redeem the loan because of the HMO situation.
The property comprises a South London, mid terrace property worth £700,000, let to 5 separate tenants on individual assured shorthold agreements thereby coming under the impending HMO licence requirement.
The new bridging loan was at a lower rate of interest than the bridge from the current lender and lending completion fees were reduced in order to see that the client was in a better place than would otherwise have been the case.
Lerwick Financial Group helped to deliver the right solution to the delight of the client.
If any Intermediary has any clients who are in an existing bridge there are opportunities to re-bridge as long as it is to the the benefit of the borrower in terms of overall costs.