What is a bridge loan and how do you obtain one?
What is a bridge loan? In situations where you need short-term borrowing for various purposes, such as residential or commercial, a bridging loan can be very helpful.
This type of loan provides quick access to funds, making it particularly helpful for individuals who need a temporary financial solution to purchase a new home,plot of land or complete works on a property before selling their current property.
In addition to the benefits above, bridging finance can also be a valuable option for individuals who require fast-paced auction finance or are trying to acquire a high-demand property, such as a plot of land for development or a knock down and rebuild on a an old bungalow.
In this blog post, we’ll go into more detail about how bridging loans work and how you can obtain one.
How do bridging loans work?
These loans provide you with the necessary funds to complete a purchase while you work on freeing up money from other assets or securing a long-term financial plan, such as a buy-to-let mortgage. A bridging loan is an efficient solution for obtaining a temporary cash injection, allowing you to develop a more sustainable financial plan or liquidate assets as required.
There are two kinds of bridging loans to choose from;
Open bridge loan
Bridging loans typically have a fixed end date, although there are options for open ended bridges meaning the borrower isn’t restricted to a finite time to repay the debt. We utilise these types of debt vehicle in most cases for developers wanting to buy land with no planning. With an open ended Bridge, the borrower must pay the monthly interest when it is due as it cannot be rolled into the loan facility as with short term bridges.
Closed bridge loan
Unlike open bridge loans, short-term loans have a fixed end date and account for the majority of the bridging market. This type of loan is suitable for individuals or companies who require a quick cash injection for a brief period, ranging from a few months to a year. Unlike open ended Bridges, borrowers can ask to “retain” interest payment within the loan and repay these on exit along with the capital sum loaned. We utilize these short term bridges in the majority of cases for developers needing to complete works on a project which is water tight or to finance an exiting asset in order to facilitate the purchase of a new project
Bridging is a secured loan meaning lenders add a 'charge' to the property when you apply for bridging finance; these charges determine the priority of debts in case of default. In the event that a property is seized and sold to pay off outstanding loans, the first charge loan takes precedence over a second charge loan and must be paid back first.
First-charge loans refer to situations where the bridging loan is the primary or sole borrowing secured against your property. Second-charge loans, on the other hand, are applicable when there is already an existing loan or mortgage against the property. For these loans, the second-charge lender typically requires the first-charge lender's consent before securing the loan.
How to obtain a bridging loan
To start off, you may want to consider getting help from a mortgage broker to find a good lender. However, there are a few criteria that lenders will look into, and these will determine whether or not you’ll be eligible for a bridging loan.
The lender will ask for collateral in the form of a property.
In addition to collateral, the lender will require information on your exit strategy for repaying the bridging loan and the timeline for repayment. If you plan to secure a conventional residential or buy-to-let mortgage on the property being renovated or the one being purchased, you will have to demonstrate to the lender that you have evidence of the mortgage being approved.
Most bridging lenders will cap funding levels at 75% of loan to value against the security. If one property doesn’t hold enough equity to meet this requirement lenders can cross charge against others and use the combined equity to meet their requirements.
If you meet all these requirements, you may be eligible to apply for a bridging loan.
What is a bridge loan? Ask a reliable mortgage broker
If you’re still unsure about how a bridging loan may be beneficial to you, you should speak with a well-reputed mortgage broker. Not only will they help you find the right lender for your needs, but they’ll also help you have a better understanding of how bridging loans work.
Book your appointment with a good mortgage broker in your area today!