What is Bridging Finance?
For those in need of short-term financial assistance to make a purchase, a bridging finance loan can be a helpful solution. However, they do come with high interest rates, as well as the need to secure a high-value asset to ensure repayment. We discuss what bridging finance is, what it can be used for, the repayment costs and more.
What is bridging finance?
The term bridging finance refers to short-term secured loans, known as bridging loans. These loans are used in situations where funding is required quickly, such as when someone wants to purchase a property before the sale of an existing property has been finalised.
Bridging loans are secured, meaning a high-value asset, such as property or land, has to be secured against them. A repayment strategy for paying back the loan at the end of the agreed term is also required before the loan can be approved.
What is bridging finance used for?
As mentioned above, bridging finance is often used for home buying situations, such as when the buyer is waiting for their own property to sell to secure the funds for a deposit, but they don’t want to miss out on a new home they have found. This could also be the case when a buyer in the chain has dropped out after a deal for the seller’s new property has already been agreed upon.
Bridging finance can also be used for other property purchases, such as for buying land for a self-build, buying properties for refurbishment or development that may be unmortgageable, or buying properties at auction, where a deposit may need to be paid at short notice.
Bridging finance can be used for non-property-related reasons too, such as business ventures, paying a tax bill, divorce settlements and more.
How much can be borrowed?
Most lenders will offer bridging loans between £5000 and £10 million, though in some cases this can be higher. The amount that can be borrowed will be determined by the borrower’s credit rating, the value of the property that is being used to secure the loan, and the value or cost of whatever the loan is being used for. The maximum loan for a bridging loan, including interest, is usually limited to 75% loan to value (LTV).
Bridging loan length and repayment
An exit plan for the bridging loan will be required before it is approved. This must include how the loan will be repaid and by what date. In cases where the bridging loan has been used to buy a property, the loan may be repaid either by the sale of the owner’s existing property or by raising finances through a traditional mortgage. The length of a bridging loan can be as short as one month, or as long as two years.
Open and closed bridge loans
Bridging loans can either be open bridge or closed bridge. Open bridge loans don’t have a set end date and can be repaid whenever the borrower’s funds become available. These loans may not have a set repayment date, but they still only usually last up to a year.
Closed bridge loans have a fixed end date based on when funds are expected to become available to pay back the loan. They are typically used by people who only need to borrow money for a few weeks or months.
What are the bridging loan interest rates and costs?
Because bridging loans are intended as a short-term solution, the interest rates are usually high. This will vary from lender to lender but could range from 6%APR to 20%APR.
The interest is usually charged monthly, but it can also be deferred, where the entire interest is paid at the end of the bridge loan with the loan itself. It can also be retained, where the interest is borrowed for an agreed period and then paid back at the end of the loan.
In addition to the interest rate, bridging loans usually come with other fees as well. These could include valuation fees, broker fees and legal fees, as well as an arrangement fee paid to the lender (usually 2% of the loan) and an administration fee.
If you want to know more about bridging finance, or need a broker who can find you the best range of bridging loans available to you, then please get in touch, we’ll be happy to help.