Bridging is a form of short-term finance, secured against an asset, typically property. It is used for a variety of different reasons, including:
- Buying a property at auction
- Refurbishing a property
- Preventing a ‘chain break’
- Business ventures
- Paying a tax bill
- Divorce settlements.
It is an important tool for a property investor as Term Lenders (BTL Mortgage, Commercial Mortgage) will not lend on a property until it is considered habitable, so if you are buying a 'fixer-upper' you need to use bridging finance in the first instance to borrow your purchase and refurb costs, unless you have the cash to do it on your own.
How much do you want to borrow?
Most specialist property lenders will offer funding from £25k to £25m (and more when it comes to development finance).
How much is the investment property worth?
The value of the property will affect how much you can borrow and the rates you will be charged. Most bridging lenders will loan up to 75% of the value of a property, known as the ‘loan-to-value’ or LTV. The higher the LTV the higher the interest rate. Some lenders can offer a higher LTV, but it’s unusual unless it’s development finance. While typically based on the lower of the purchase price versus the open market value, some bridging lenders will loan against the gross development value (GDV), i.e., the value of the property after renovation.
How long do you need to borrow for?
Most bridging lenders will charge a minimum interest period of 3 months, although the loans themselves may last weeks only or typically up to 18 months. Normally, if you exit the loan early, as long as you have paid the minimum interest, you will be refunded any excess interest you may have paid. Some lenders do charge exit fees.
What is your exit strategy to pay off the loan?
There are only two options and the bridging lender will want to see that you have a clear exit strategy in mind:
a) Sell the property
b) Refinance onto a Term mortgage
Bridging loans are expensive compared to a Mortgage. You can expect to pay between 0.4% to 1.5% interest per month, depending on a variety of factors including size of the loan, loan-to-value (LTV), duration, experience and credit rating of the borrower.
There are lenders that can disburse the money very quickly, but these tend to be more expensive.
There are three types of interest facilities, which are sometimes combined depending on the lender's and the borrower's circumstances.
These are:
Retained Interest: The interest is deducted from the Gross Loan upfront. In this case, the borrower does not need to make monthly repayments, and the capital is repaid at term.
Rolled Up Interest: The interest is added onto the loan and paid at the end. There are no monthly payments, with both the capital and interest paid at term.
Serviced Interest: As with Term mortgages, serviced interest is paid off on a monthly basis, with the capital repaid at term.
In addition to interest fees, there are also other facility costs that you need to be aware of, including:
Arrangement Fee: Charged by the lender for providing the facility, typically around 2% of the value of the gross loan.
Administration Fee: Charged by the lender to cover the paperwork and other disbursement costs.
Legal Fees: You are expected to cover both your own and the lender’s legal fees. These are charged on the value of the property and expect to pay upwards of £1,200 + VAT.
Valuation Fees: This is another fixed fee, paid to the Valuer chosen by the lender determined by property value, starting from £400 + VAT. If you prefer to get a valuation done privately, ahead of taking out a loan, check with your broker if a “re-type” is allowed, i.e. will the existing valuation be usable by the lender.
Your broker may also charge fees. We charge nothing for initial quotes and advice up front. Once you select a lender and proceed to application it's £199 and then on formal offer post valuation it's 0.5% of the gross loan.
With over 199 lenders we work with - with Finanze®, it’s personal. Providing bespoke solutions for bridging, buy to let, development finance and commercial mortgages for private and corporate clients.
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