Bridging loans have proven themselves as an effective tool for borrowers to fund a range of purchases and projects. While certainly versatile, bridging loans have found the most success in the property development industry. Bridging loans sport a range of advantages that make them well-suited to the property market, affording developers the opportunity to quickly raise large sums of cash. In turn, developers who utilise bridging finance enjoy a greater chance of seizing opportunities in the market.
But, there’s a catch. Bridging loans require borrowers to use some of their assets as collateral, along with putting forward a deposit on the property up for sale. The difference between this deposit and the total value of the property leads to one of the most important parts of bridging loans – the loan-to-value ratio. For bridging loans to properly work for you, knowledge of this ratio is a must.
In this article, we will cover bridging loans, the loan-to-value ratio, and whether 100% bridging loans are an option for property developers.
What are bridging loans?
Bridging loans are a form of secured finance, one that specialises in raising large sums of money in a short space of time. In practice, bridging loans aim to “bridge the gap” between a purchase and a long-term means of covering the cost. For this reason, bridging loans are extremely short-lived, with a full year being at the upper end of the spectrum. In most cases, bridging loans are expected to last only a few months before a full repayment is made.
As a secured loan, bridging loans require borrowers to put forward one or more of their assets for use as collateral. Assuming these assets are of sufficient value, they will be used to secure the loan, and the lender will establish a lien. This lien entitles the lender to seize collateral assets should the borrower default, up to the value that remains outstanding. Naturally, this exposes borrowers of bridging loans to a higher degree of risk than with alternative solutions, but this risk is precisely where bridging loans source their key benefits. By requiring collateral, bridging loans are able to boast an expedited application process, raise large sums of cash, and offer a near-unparalleled level of flexibility.
What is a 100% bridging loan?
A 100% bridging loan is a type of bridging loan with a 100% loan-to-value (LTV) ratio. This refers to bridging loans taken out by borrowers who haven’t put forward any cash deposit. Naturally, borrowers unable or unprepared to put forward a deposit of any kind lead to a unique scenario, one wherein lenders assume much more risk, and the loan is more expensive overall. As such, 100% bridging loans are not a common service whatsoever and are usually only approved sparingly.
Is it possible to obtain a 100% bridging loan?
While 100% bridging loans are not the most common financial service on the market, it is still entirely possible to obtain one. However, 100% bridging loans are uncommon for a reason. Not only do they typically mean greater expense for the borrower, but they also pose a greater risk for the lender, leading to much more stringent application requirements and fewer lenders willing to offer the service. For example, banks and other traditional lenders are highly unlikely to offer 100% bridging loans, even if they otherwise offer other forms of bridging loans. To obtain a 100% bridging loan, borrowers will require a private lender.
Also Read: Refinancing an Existing Bridging Loan
Assuming a lender who offers 100% bridging loans as a service is found, borrowers must still face additional hurdles. Most notably, lenders providing 100% bridging loans often require borrowers to submit some form of plan detailing how the loan will be repaid. As 100% bridging loans are typically used to purchase properties that are difficult to obtain using other means, plans usually involve the development and sale or rent of the property, with an estimated end value and profit of the project. In practice, such a plan will detail the property itself, how value will be added, estimated costs, comparable properties in the area, and necessary documents, such as planning permission. Assuming the business plan is thorough and profitable, a lender may well agree to the proposal, though there are no real guarantees.
Costs of a 100% bridging loan
100% bridging loans can mean the difference between seizing an investment opportunity and not, even when developers have their money tied up elsewhere. However, this convenience comes at a cost, often quite a hefty one when compared to other loans.
Quite like ordinary bridging loans, borrowers can expect to pay higher than average interest rates, meaning swift repayment is paramount in order to keep overall costs down. Borrowers may still have some flexibility in how interest is paid, such as rolling interest up into a single payment, but this varies between lenders. In addition to interest, borrowers can also expect to pay a range of fees, including an arrangement fee, an exit fee, property valuation fees, and legal fees. If a bridging loan exceeds its agreed term, but a borrower is not in danger of default, then the lender may apply certain penalty fees. Lastly, borrowers may expect to pay fees to a private bridging loan hub, if one was used to introduce a lender. While each of these rates and fees vary depending on the lender in question, 100% bridging loans are not cheap, especially if not repaid quickly.
Should I use a 100% bridging loan?
100% bridging loans are a perfectly viable, if difficult to obtain, form of finance. They retain the vast majority of the features of an ordinary bridging loan, including the swiftness in raising finance, a wide variety of applications, and so on. However, they are less common due to fewer lenders offering the service, less accessible due to more rigorous vetting of borrowers, and, most importantly, considerably more expensive. This last factor, in particular, can preclude some borrowers from using 100% bridging loans, as it ultimately exposes borrowers to more risk. A larger loan sum to be repaid and higher fees to cover can put a much greater pressure on a borrower’s finances, and may make repayment more difficult. Should borrowers default, they risk losing their assets used as collateral to cover the remaining amount outstanding. As such, it is essential you obtain professional financial advice before taking action.