Bridging finance can be taken out on a first or a second charge basis. Some lenders use the term 'closed' bridging loan, meaning there is a fixed term to the contract usually applicable when completion dates for buying a new property and selling one are known. An 'open' bridging loan is where there is no fixed term to the contract.
Bridging loans are available for all types of client from limited companies to individuals; from those with excellent credit status to those who have found it difficult to obtain mortgages and loans, including businesses, self-employed and those with a poor credit history.
All types of security can be considered, from residential, semi-commercial and commercial properties or land. Properties can be fully or partially developed, in perfect condition or need of renovation, plus of standard or non-standard construction. A bridging loan can be taken out across a number of securities and / or a number of clients.
The traditional use for a bridging loan is to purchase a new home before a buyer has been found for the current property. This type of chain-breaking finance became popular in a buoyant and fast-moving property market. As well as increased demand from housebuyers who need to prevent a house purchase falling through, the different uses for bridging finance are now extremely varied.
Bridging finance is used for property development including site purchase, self-build projects and property conversions. In the property investment market bridging loans can be used for completing purchases quickly; for example, when property has been secured at auction clients usually only have up to 28 days to complete. They can also be cost-effective for clients wishing to acquire property for refurbishment and re-sale.
In circumstances where a re-mortgage is taking too long for whatever reason, a bridging loan can pay off the initial mortgage whilst a longer term re-mortgage is arranged - helping to fulfil any further requirements and bridge the gap.
Bridging loans can also be used for non-property related reasons - businesses may need short term funds to meet business obligation payments or to fund a special business opportunity. In fact, bridging finance can typically be used for any genuine purpose as a short-term measure.
Cost-effective and versatile
For the majority of clients the most important initial questions are: "Can you finance me or not?", "When can I have the finance?" and; "How do I go about getting it?" They need to know the answers to these questions quickly to be able to plan ahead and make informed decisions.
Bridging loans are available from high street banks as well as non-mainstream lenders. However the latter will be much quicker to answer your questions and complete the finance in time. Typical turnaround for completion is about 7 working days (normally depending on how quickly the conveyancing is processed by the client's solicitor or agent).
A common misconception about bridging loans is that they are expensive and the client is confused about payments. The fact is, that with a bridging loan the client is aware at all times of the balance outstanding and what the redemption value will be.
There should be no up front fees and rates normally start around 1.25 per cent per month. Rates are normally chosen on the merits of the application, client status and the speed of completion required. A valuation is required in most cases and is paid for by the client. Typically, the lender will charge a completion fee of 1-2 per cent.
Bridging loans offer a high degree of payment flexibility. There are three main payment options:
- Predetermined monthly interest payments
- Interest payments which can be rolled-up for a set period, acting almost like a payment holiday. After this period, monthly pre-determined interest payments resume.
- At the client's request a number of monthly interest payments can be deducted upon completion.
A useful feature of a bridging loan is that the client can repay capital at any time, thus reducing the outstanding balance and monthly instalments.
Understand the consequences
The most important consideration for introducers when advising clients on bridging finance is to understand the consequences of taking out, or not taking out, this facility for each individual case. In today's markets a client can lose substantial sums, for example deposits, by not moving quickly enough. Also businesses can earn or lose money when a potential deal is on the table. Introducers need to be sure the client has provision to pay back the loan in the timescale envisaged. Lenders can offer a large amount of flexibility with repayments, and some lenders will convert a bridging loan into a term loan if the need arises.
In summary, bridging finance is quick and simple to arrange, giving introducers and clients a cost-effective short term funding option to meet their needs, plus it's a useful addition to an introducer's portfolio.
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