Bridging Loans
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Bridging Loans
Christian Morris talks to us about bridging loans.
Podcast approved by The Openwork Partnership on 12/12/2024.
What is a bridging loan and how do they work?
A clue is in the name – it’s finance which bridges a gap. You might be buying a property with a view to doing something to it, or maybe there’s a gap in the period of time.
Let me elaborate. Let’s say you’re currently in a three bedroom semi-detached house and you’re looking for a bigger property with a garden. You’ve found a four-bedroom detached house you wish to buy, and you plan to sell your property.
On the property you’re buying, you’ve had your offer accepted and everything’s ready to go. But there’s now a three month delay on the sale of your current property. You’re worried that the vendor of the property you’re buying may pull out.
What you can do is take a bridging loan out to buy the property. That will bridge the gap until you sell your property and release that money. When that money comes through, you pay off the bridging loan and take a standard mortgage on the new property.
Bridging finance is also often used at auction, because you usually have to complete within 28 days of the sale. Sometimes you may get up to six weeks or a couple of months.
You may be looking to buy a property that’s very run down. If it doesn’t have a working kitchen or a bathroom, it’s not habitable, which means you can’t get a standard mortgage. You could take a bridging loan to buy that property.
You may want to invest in Buy to Let. If the property isn’t going to attract a decent rent because it needs a lot of work, you could use a bridging loan to buy the property and do some refurbishment. Once you’ve refurbished it, you take out a standard Buy to Let mortgage and pay off the loan.
There are lots of different uses for bridging loans. This is predominantly based on property, but people can also use bridging loans for other things such as paying inheritance tax. Once you get the proceeds from the estate, you can pay off the bridging loan.
What is the exit strategy?
The exit strategy depends on what you’re buying the property for. If you need a bridging loan because a property purchase is not going to be a simultaneous transaction, the equity in your property could be tied up for several months. The exit strategy ultimately would come from the sale of your property, at which point you pay the bridging loan back.
If you were to go to auction to buy a property, for investment purposes or to live in, you take a bridging loan to meet the 28-day deadline from the auction house. You might do some work on that property, and then your exit will be to take out a Buy to Let mortgage or a residential mortgage to pay back the bridging loan.
99.9% of the time, bridging finance is short term. You would need to have an exit strategy in place that’s acceptable to the bridging lender, and you need to confirm that at the start of the application process.
There are two types – open bridging and closed bridging. With closed bridging, you need an exit strategy. At the end of the term, which is usually 12 or 18 months, you need to initiate that exit strategy to pay the bridging loan back.
There are however, one or two lenders that offer open bridging, where you can take a bridging loan out that runs forever. There must be a clear reason for doing that. Usually that sort of bridging finance is secured on an asset like farm machinery or factory equipment. This is a much smaller part of the market.
Some bridging loans are first charge and some are second charge. What does this mean?
First and second charges apply where there is a property involved as part of the transaction. The vast majority of bridging loans are secured on property.
With a first charge, whoever is providing the bridging loan has the first charge on the property. Usually they are the only charge on it. If you can’t pay that bridging loan back and the property is repossessed, that lender is the first in the queue to get their money back.
A second charge bridging lender will sit behind a first charge lender. Again, in the event of repossession, the property will be sold. The first charge will be paid back first, and then the second charge.
If the property isn’t sold for a sufficient amount or there isn’t enough equity to pay both charges back, the second charge lender could end up out of pocket. Because of that increased risk, the second charge lender will always charge a higher rate of interest than a first charge lender. The first charge lenders will usually get their money back.
Second charge lending is possible sometimes if you’ve got lots of equity. For example, if you own a property that’s worth £200,000 and you have a mortgage for £80,000, which is a 40% Loan to Value, you’ve got £120,000 equity. There’s plenty there for a second charge lender to lend against.
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Why would you use a second charge lender?
If you have a first charge with a mortgage lender, and you’ve taken out a five-year fixed rate and you’re only two years into that, you’ll have a redemption penalty to pay that mortgage back and take out a new loan. The answer could be to get a second charge.
There may be good equity in the property and you don’t want to pay the redemption penalty to the first charge lender when redeeming that loan. Instead, you leave the mortgage in place and take out a second charge, which would sit behind the mortgage lender on that property.
How long does it take to arrange a Bridging Loan?
A key reason for using bridging finance is because you want to move quickly. Maybe you’ve put a cheeky offer in on a property and the vendor has agreed to sell it at that price providing you can complete it within two months.
It would be unusual to get a standard mortgage through in two months, both for a residential or a Buy to Let. It could take three or four months to get that through. Bridging finance is usually quick – it’s not unusual to get a bridging loan within four to six weeks, although it depends on the circumstances.
I would advise anybody looking at a bridging loan to make sure that their solicitors are familiar with bridging finance. That solicitor will need to work to a tight timescale to make sure it can go through as quickly as possible.
One of my jobs as a mortgage broker is to advise people on the bridging lenders that have good service standards and can get the bridging loan through in the timescale required. I can also suggest solicitors that are experienced in handling the conveyancing for a bridging loan.
I would walk you through what you need to do and we would go to a bridging lender that can complete in the required timescales.
What if I have bad credit? Can I still get a bridging loan?
Bad credit does not inhibit your ability to get bridging finance, but you will pay a slightly higher rate. If you’ve got County Court Judgements, defaults or arrears on credit arrangements, that does not stop you getting a bridging loan. There are specialist lenders who do bridging finance for people who’ve had credit blips in the past.
What costs are involved with a bridging loan?
Bridging finance is intended to be short term, usually for 12 or 18 months and the interest is charged monthly.
If you, for example, buy a property at auction and take a bridging loan out, as soon as you get the keys to the property, you would apply for a standard mortgage to repay the bridging finance.
Let’s say that process takes three months – you will be charged three months’ interest. Even though the bridging loan may have a term of 6, 9 or 12 months, you would only be charged interest for the months you borrowed.
You would pay a valuation fee and legal fees to the bridging lender and your own legal fees. The great thing about bridging finances is there’s no penalty to come out of it. You just pay the interest while the loan is in place, and no longer.
How do you apply for a bridging loan?
First of all, you need a mortgage advisor. There aren’t any bridging lenders that deal directly with the public. Bridging finance can be quite complex and it’s important to make sure you get the right lender and a deal that exactly fits your circumstances.
There can be lots of reasons for taking a bridging loan and lenders specialise in certain areas – for example auctions, refurbishments, all sorts of things. A good mortgage advisor will get you quotes from specific bridging lenders in the area you’re looking at, and come back to you with the right deal tailored to your circumstances.
We then just put an application in. We will walk you through the whole process to completion.
Are there any alternatives to bridging loans? What are the other options?
Ultimately, it depends on why you are taking bridging finance. The most obvious alternatives are not to take a bridging loan because you’ve got savings or investments that allow you to to bridge the gap.
If you’re buying a bigger property and you need the equity from a property sale but that’s been delayed, having some savings migh mean you don’t need a bridging loan. Perhaps you’re £100,000 short – and if you have that in savings, congratulations!
If you’ve only got £50,000, perhaps you only need a £50,000 bridging loan. But it might be that those savings are tied up in stocks and shares or an ISA and you don’t want to take that money out.
But usually, people need bridging finance because they’re not lucky enough to have £100,000 in savings or investments.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
PLEASE NOTE, MAPLE LEAF FINANCIAL SERVICES CAN ADVISE ON REGULATED BRIDGING FINANCE. NON-REGULATED BRIDGING FINANCE IS A REFERRAL SERVICE.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Approved by The Openwork Partnership on 12/12/2024.
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