Bridging loan
Bridging finance is a short term secures finance option offering funds to investors and public alike. The funds are accessible by many brokers on the market and are offered by both high street lenders and bridging finance specialist in the private sector.
The market availability for bridging finance has seen a growing trend of new lenders to the market in the last few months and the future signs of the bridging finance market look steady and show this trend set to continue with the FSA offering regulation to new bridging finance lenders on the market.
Bridging finance is a valuable source of funding in many situations where funds are otherwise trapped for traditional finance lending and can enable a borrower to make required changes to a property that in traditional mortgage lender criteria may be currently unacceptable such as where the property is not currently habitable or has no kitchen or bathroom. Most traditional lenders will decline lending on this type of property or hold a full retention on the mortgage amount until all works required on a property are completed. This can leave a purchaser in a catch 22 position whereby they cannot complete the purchase without the mortgage funds and cannot complete the works without the completion of the purchase. In this instance the bridging lender will step in, release the required purchase funds on the property enabling the purchaser to complete the required works, draw down the funds on the mortgage offered and repay the bridging loan with the mortgage funds.
Bridging finance rates can vary dependant on the deal in question and the property type or reason for loan. For a standard first charge bridging loan rates on the market are around 1.25% at present and will allow a release of equity or purchase on a first charge basis of up to 75% loan to value. This is as much as most traditional mortgage lenders will lend on a buy to let mortgage which in turn, sue to the smaller deposit requirements have been recently making bridging loans for investors a more desirable finance option.
Short term finance loans can be varied according to the bridging borrower’s requirements and can have a term of between one and twelve months. The interest on short term finance can be serviced on a month by month basis or rolled on to the loan and repaid at the end of the bridging loan as per the borrower’s requirements.
Second charge bridge loan rates start from approximately 1.5% per month dependant on the reason for funds. Loan to value on a second charge bridging loan is usually restricted to a maximum of 60% due to the increased risk of having a charge behind another lender and therefore being second in line for payment should the property have to be sold. Keeping a lower loan to value on a second charge ensures that there is enough equity within the property in question to repay the provided loan even if the property is sold quickly for cash.
When assessing the costs of a bridging loan or short term finance offer, it is imperative to look at all aspects of the deal, you may find that although a property can look tempting for example at auction where it may be sold at a below value price, the works required on the property may be substantial and when coupled with the costs f a bridging loan may not produce such a desirable profit. However in some cases for example if you are purchasing your dream home but have to complete quickly as with auction purchases, making the desired profitability margin is not applicable and getting a still cheap deal and your dream home from the bridging finance route may be enough to satisfy your requirements.
Should you require a larger loan than that available on a current property value; a bridging finance lender can combine property values of several assets and secure the bridging finance over more than one property if necessary to enable you to obtain the large loan amount required.
There are many different scenarios and alternative routes to finding the correct bridging finance for your situation and getting an advisor who holds quality and specialist knowledge within the bridging loan sector is usually the first step to a successful bridging loan transaction.
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