At Home Group we are able to provide advice, support and arrange bridging finance. Often bridging finance is known for ‘bridging the gap’ between buying one property before your current property is sold. However; bridging finance or short-term finance comes in a variety of forms and can be secured against anything of asset value, you can raise capital on this asset value for an interim period. You may be requiring this capital to buy land, purchase a property at auction, renovate a property or simply enable you to complete a new purchase before your existing property is sold.
What is a Bridging Loan?
Bridging finance is a form of secured finance and works similar to a mortgage; the difference is that usually it is used to gain access to short-term funding, normally no longer than 12 months until the asset is sold or longer term funding is arranged.
Bridging loans can be used for residential, investment or commercial purposes.
What types of Bridging Loans are there?
Often bridging loans come in two forms:
● Open Bridge: this is where the borrower does not have a fixed date of the asset being sold, therefore the date of the loan to repay is ‘open’ – there will still be a cut-off or term for how long the funds can be borrowed for before needing to be repaid. The lender will check repayment vehicles in place to ensure the bridging loan can be repaid; the date of when these are sold is simply not set. For example; you are raising capital to purchase a property at auction but the completion date is not set and you need to complete the renovation work, therefore the date is open but the repayment vehicle is to sell the property once renovation work is complete OR refinance to a new lender
● Closed Bridge: the duration of the funds needing to be borrowed is fixed. For example; the new property has a fixed completion date of 31st May but the existing property is being sold on 30th June and therefore the funds are set for a month to ‘bridge the gap’ between new property completing and existing property being sold at a later date.
Retained Interest
On a bridging loan you can choose to make monthly interest payments rather than the interest being added to the balance. This effectively means the interest you are paying isn’t compounding or accumulating and you are only paying interest each month on the original amount borrowed. This option is often required to show proof of income and often defeats the objective of the borrower realising capital they need once the asset is sold.
Rolled up Interest
You can choose to make no monthly payments whilst the bridging loan is outstanding, therefore rather than making payments the interest is added onto the final balance you pay at the end of the bridging loan term or if you repay sooner you will only pay the interest for the amount of time you’ve had the bridging loan. This is the most common form of bridging loan, as often it’s being used due to a lack of capital
Rates and Fees
The rate and fees charged for bridging loans vary depending on the amount of capital needed against the asset value – normally 75% is the maximum that can be borrowed against the asset value. You can also expect to pay a 1-2% arrangement fee and a 1%-1.50% rate of interest on the balance each month. These will vary depending on the circumstances of the asset ie. renovation, commercial and even the experience of the borrower.
Reasons for a Bridging Loan
Homeowners
● Securing a new dream home: completing on a new purchase before existing property is
sold
● Downsizing; able to secure a new home before selling existing home to avoid stress and
hassle of selling and buying
● Break in the chain: you’ve been in a chain for months and your buyer pulls out but you still want to complete on the new property before yours is sold
● Building a home: securing the land to build your new dream home before selling existing property to fund the build with equity from sell and self-build mortgage or a regular mortgage once the property is mortgageable
Investors, Business & Commercial
● Property is derelict or unmortgageable: purchasing as an investment to renovate but unable to secure BTL finance due to property condition; require a bridge to purchase and complete renovations before selling or refinancing
● Tax Bills: raising capital on assets to pay a tax bill
● Cash-injection: an alternative to invoice finance by raising capital on assets through a bridging loan to meet business obligations or stock requirements based on upcoming auditors or debtors owed to you