What Is a Bridging Loan?

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• What is bridging finance?

  Bridging finance is a short-term loan typically secured against a property. It is normally used when a traditional finance agreement such as a mortgage is unsuitable.

  A bridging loan may be considered when a property does not meet the traditional requirements of mortgage lenders, the borrower does not meet normal mortgage criteria or because the finance is only required for a short term – between 1 month and 3 years.

  In this guide Seek Finance discusses the most frequently asked bridging finance questions.

  What can I use bridging for?

  We can provide bridging loans for any legal purpose.

  How long does it take to get a bridging loan?

  We have lenders who will guarantee a turnaround within 48 hours; however, this is over and above the norm and you should expect to pay a higher rate for the privilege. Typically, a turnaround time of 2-3 weeks should be expected.

  How long can I take a bridging loan out for?

  This entirely depends on the type of loan you take out. Regulated loans can run for a maximum of 12 months, however unregulated loans can be taken out for up to 36 months.

  Do I need to make monthly payments on a bridging loan?

  A bridging loan is not repaid in instalments like a normal bank loan or mortgage. In fact, with almost all bridging loans you will only be required to make a payment when you close off the loan. The interest will be added to the loan each month, so the longer you hold the loan the more interest you will pay.

  How much equity is required to obtain a bridging loan?

  Depending on the purpose of the loan and the source of the capital, different providers will set different equity requirements. Your entry equity may also affect the rate you pay for the loan. In almost all instances the maximum Loan to Value (LTV) will be 85%.

  Will a bridging loan appear on my credit file?

  Yes, bridging loans and applications for them will appear on your credit file. However, getting a quote from us will not as this is not a formal application.

  Can I get a 100% loan to value bridging loan?

  Yes this is possible in two circumstances. Firstly, as we have lenders who ignore purchase price and lend to the open market value, provided the discount on your purchase price is significant enough to be below the open market value then you could receive 100%. Secondly, if this is not the case or you don’t have an open market value to go off, then 100% is still possible with extra security requirements.

  What is the difference between a first and second charge bridging loan?

  If you do not have finance on a property or are using the bridging loan to purchase the property, the loan will be registered as a first charge at the Land Registry. This simply means that if you default, the bridging provider will have the right to sell your property and recoup its money first.

  A second charge bridging loan is where there the existing mortgage on the property remains in place and you raise additional finance. This is registered at the Land Registry ranking behind the existing mortgage and is known as a second charge. In effect, you will then have two charges registered on your property.

  Are Bridging loans regulated?

  If the loan is secured against a property that you or your family live in, then the loan provider will be regulated by the FCA.

  Is my home at risk if I don’t keep up with the repayments?

  You do not have to make regular monthly repayments on bridging loans, so there are no repayments to keep up. However, if at the end of the term you cannot repay the loan, the lender could seek to repossess it, especially if you have used the property as security.

  Can I use bridging finance to stop a repossession?

  As there are no monthly repayments, the same income requirements do not exist as they do with a mortgage or secured loan. Therefore, the bridging company will consider the financial result of your project and not your monthly income.

  If you have a standard loan and you cannot keep up your repayments on your property you could therefore take out a bridging loan to make your repayments when you sell the property to help monthly cashflow and avoid a repossession scenario.

  Can I borrow via a corporate entity?

  Yes, provided there is sufficient security and the ability to repay the commercial bridging loan.

  Do I need income for a bridging loan?

  Not necessarily as the loan will usually be for a specific purpose to plug a short-term capital requirement. With the release of capital from the sale of an asset being the means of repayment, income requirements do not exist in the same way as they do for mortgages and other loans.

  If I have credit issues can I still apply for a bridging loan?

  Yes, there are lenders that provide bridging finance for clients who have County Court Judgements, defaults, arrears and discharged bankruptcies.

• What types of bridging loans & security are there?

  The short-term capital made available through bridging loans can be used for a variety of commercial purposes. From housing developments to contract fulfilment, short term loans that allow borrowers to only repay capital and interest at the end of the project can have a hugely positive cashflow impact.

  Because of the wide-ranging reasons behind a borrowers need for bridging finance, different types of bridging loan exist, each tailored to the borrowers’ specific requirements.

  In this guide Seek Finance discusses the most frequently asked questions revolving around the types of bridging loans available.

  What is classed as a light refurbishment bridge?

  Different lenders have different definitions of what constitutes a light refurbishment but broadly speaking, this applies to a project that does not require any structural change to the property or the requirement for planning permission.

  What is classed as a heavy refurbishment bridge?

  Unlike light refurbishment, a heavy refurbishment will normally involve structural changes to a property and in most cases, planning permission (unless covered under PDRs) will be required.

  What is a non-regulated bridge?

  Typically, this applies to an investment property which you have never lived in and have no intention of doing so. This can be a residential or commercial property and in some cases land. This type of loan will normally have a maximum term of 24 months but in some cases, this can be increased up to 36 months.

  What is a closed bridge?

  A closed bridging loan is one that is taken out when there is a guaranteed exit date, or date when the loan will be repaid. An example of a guaranteed exit date would be the date of completion for a property sale having exchanged contracts. When taking out a bridging loan under these circumstances a guaranteed exit date can be provided. This type of bridging loan is obviously less risky to both the lender and the borrower, and this is reflected in the lending rates and charges.

  What is an open bridge?

  An open bridging loan does not have a guaranteed exit date and therefore a borrower can only indicate to the lender or guess how long the loan will be required. An example of an open bridging loan would be when funds are to be cleared following the sale of a property, but at the time of taking out the loan there are no confirmed buyer. Open bridging loans are a riskier proposition for both the lender, who does not know when to expect repayment of the loan, and also the borrower who does not know how long or how many monthly interest payments they will have to pay.

  What is meant by an exit strategy?

  This refers to a borrower’s plan to repay their loan. Typically, this will be by refinancing on to a longer-term loan agreement, selling the security property or using other personal funds when they become available such as inheritance. In most cases a lender will want evidence of a borrower’s proposed exit strategy prior to the release of funds.

  What is meant by Security?

  Security is the term used for whatever land or property the lender secures the bridging loan charge against.

  What is meant by additional security?

  This refers to additional property that is offered to a lender to increase the security and lower the total loan to value (LTV) of a loan. Additional security to help recover their funds will generally lead to better lending terms being offered to the borrower.

  What if my property already has a mortgage, can I still use this as security?

  The bridging loan facilities can be secured as first or second charges, and in some circumstances even third charges. Whether a lender will want to do this is dependent on if there is still sufficient equity in the property after other lenders have recovered their funds first.

  What type of security can be used for a bridging loan?

  We have bridging loans that can be secured on residential property, commercial property, building plots and land.

• How much does a bridging loan cost?

  Bridging finance is a great way to “bridge the cashflow gap” between starting a project and realising its underlying value after completion.

  Using a bridging loan will often give you an upfront capital boost, with the cost of that capital coming after the profit on the project has been realised. However, both that capital boost and the cashflow quick win comes at a cost.

  This cost can vary depending on several factors including the certainty of an exit date, the amount of security available from the borrower and the loan to value ratio.

  In this guide Seek Finance discusses the most frequently asked questions revolving around the cost of bridging finance.

  How much can I borrow?

  Bridging finance is designed to help finance commercial projects, therefore the amount you can borrow is determined on a case-by-case basis. The amount you borrow is based on the scope of your project and not your monthly income like a normal loan. We have extensive bridging finance facilities that can provide bridging loans from £26,000 to £50 million or more.

  Are there any upfront fees?

  We do not charge any upfront fees for bridging loans. Lenders may charge upfront fees depending on the level of work required to value your project. For example, in the absence of a suitable valuation report for your unique project, a lender may ask you to cover their valuation fees in advance and in some circumstances you may also need to cover the lenders legal fees.

  What costs are involved with bridging?

  For bridging loans there is usually an arrangement fee which is only payable once you have your bridging finance facility. Therefore, if you do not receive your bridging loan there are no arrangement fees to pay.

  Can I get additional funds after I have completed my bridging loan?

  This will be possible provided that the existing bridging loan facility is not in default and that there is sufficient equity available to secure the additional borrowing.

  How is bridging loan interest calculated?

  Lenders have different ways of calculating interest. We generally work with lenders where you have the option of rolling up the interest on the loan. This provides several benefits, including reducing the need for a monthly servicing charge and can be extremely attractive for cash flow purposes. Instead of paying interest monthly the interest is added to the loan balance every month and payable upon completion of the loan. Therefore, when you pay off the loan, the redemption repayment will include accrued interest and you will simply pay for the number of months you used the facility.

  Can you make capital reductions to a bridging loan?

  Yes you can, this will reduce your outstanding bridging finance balance and also reduce your monthly interest charges. You will need to weight up the benefits of paying a lower interest amount on your loan against the opposing cashflow benefits of not doing so.

  Can I pay the bridging loan off early?

  With the providers we work with, there are no penalties for paying of a bridging facility early provided you meet the minimum term requirement. Most loans are set up typically for 12 months with a minimum loan term of 1 month. This means that if you pay off your loan after 4 months you will only pay for the loan plus interest for 4 months.

  What does retained interest mean?

  With retained interest calculations, a lender will calculate the estimated interest charges for the term of the loan, add this to the loan advance and then retain the funds to service the interest payments every month until the loan is repaid or the term comes to an end.

  What does rolled interest mean?

  Rolled interest is when a lender agrees that the repayment of capital and interest can be deferred for a period, usually until the end of the loan term. In this period, you won’t make any repayments at all. Interest will continue to be added to the loan monthly, weekly or possibly daily. In this situation you should make sure you understand the impact of compound interest, namely you will be paying interest on the interest each time a new interest amount is added.

  What does serviced interest mean?

  This means that the interest charged on a loan is being repaid monthly rather than being added to the loan. Given the nature of this type of arrangement, lenders will normally want to see evidence that the borrower can afford to make the repayments every month in much the same way as a traditional mortgage.