Bridging Finance as an option for a short-term secured loan has been used by investors in the UK more often in recent years. Many borrowers use this type of fast funding for property transactions. Although it has become very popular in recent years, many are still unfamiliar with Bridging Finance and how they can benefit from options available.
WHAT IS BRIDGING FINANCE?
A Bridge Loan is a secured, short-term, fast access to money for the purchase of property or investment. Buying property in an auction is a great investment but often new investors will not be financially prepared to purchase. The quickest way to access finance is via a Bridge Loan.
Here are some of the reasons why property investors apply for a Bridge Loan:
TYPES OF BRIDGE LOAN:
There are 2 types of Bridge Loans – Open Ended and Close Ended. Open-Ended Bridge Loans have no set end date and borrowers can repay as soon as funds become available. These loans normally last for a year, but the borrower might be able to extend the time to pay back the loan. Also, these are more costly because they offer more flexibility to the borrower. Close-Ended Bridge Loans have a fixed end date and tend to last for two weeks or months.
FIRST AND SECOND CHARGE:
There are two types of Bridge Loan charges – First Charges and Second Charges. When you take out a Bridge Loan, a charge will be placed on the property to be used as security. If the borrower is unable to repay the loan, this charge will determine the debt priority. First Charge loans are available when the loan is the first or only borrowing secured against the property. Traditional mortgages are normally First Charge loans. Second Charge loans are for borrowers who take out a loan on an asset with a loan or mortgage outstanding against it. If a property is repossessed and sold to pay off any outstanding debts, a First Charge loan would have to be paid off first, before applying for the Second Charge loan.
AMOUNT OF BORROWING AND COST:
The amount to be borrowed depends on the value and equity of the property – usually 75% of the property value. Property investors are typically able to borrow more with a First Charge Bridge Loan. Loans are priced monthly because they are normally taken for a short period, with rates between 0.5% and 1.5% per month. Interest is normally charged in one of three ways: monthly interest, with interest payments made each month; rolled up or deferred interest, with all interest payments made at the end of loan term, along with the original loan; and retained interest, with the total interest deducted from the advanced, at the start of the loan. Some lenders will offer the facility of combining all options.
FEES:
Depending on the lender, money can become available within 7 working days. It all depends on the property valuation, lender checks and legal work. The fees to be expected include the arrangement fee (normally between 1-2%), administration fee, valuation fees, legal fees (you will pay for both yours and the lenders solicitors), broker fee, and with certain lenders, an exit or early repayment fee. Bridge
PROS, CONS AND EXIT:
Some of the pros of bridging loans include fast application process, ability to borrow a large sum and flexible of borrowing options, with the ability to repay any time, only paying interest for the period when money is needed. On the other hand, some of the cons include high interest rates, high fees and security against the borrower’s property. Borrowers need to weigh up the pros and cons and include this in their business plan. Another vital area of the plan, prior to borrowing, is the
Exit Strategy. The exit strategy will help avoid any hassle when the loan term comes to an end. A clear exit strategy needs to be in place in case the property is sold or if there’s a refinance to term loan.
In Conclusion… If you are a property investor or developer looking to get access to fast cash, Bridging Finance could be the perfect solution for you. Funds arrive fast and charges may vary but ultimately it all depends on how wisely you have invested and how well you have planned your exit strategy. There will be fees to pay, but nothing in life comes for free. If you invest well, you’ll see a great return on your investment.
