I am sure many of you are aware of the latest property purchasing trend which is Bridging Finance. Bridging finance, or a 'bridging loan', is a short term loan from a lending company typically withdrawn for around 6-12 months. Terms may vary but it is repayable in full at the end of the loan period. A bridging loan is typically used to 'bridge' you through a short period of time when you are planning to refinance a property to a longer mortgage or sell it after adding value to it. A bridging loan usually requires a 30% deposit on a properties asking price. However, it can work by using another property as 'collateral' or 'security' to additionally borrow the deposit sum.
Many people find bridging finance advantageous because;
✔ It allows you to compete with cash buyers and can also help you buy in auction.
✔ Bridging finance applications can typically be completed within 14 days, as opposed to the lengthy process of a residential or buy to let mortgage.
✔ If you are purchasing the property to add value, many lenders will allow you to borrow the amount needed to refurbish it.
✔ Bridging finance is often popular when buying properties which are inhabitable and you would not be able to get a regular mortgage on it.
✔ Lenders typically look at the property which is being used as security rather than your income.
But it's not all good news. If you are thinking of using a bridging loan for the first time, pay close attention to what's next.
There are a few misconceptions to bridging finance which are caused by social media's portrayal of them as magical ways of funding 'no money down deals', especially if you're new to this profession. Although, a bridging loan can be a great way to finance a deal, they entail many hidden fees and higher interest rates.
Arguably, interest rates on bridging loans are competitive by lenders as it has become a much more popular way of financing. Interest rates vary from around 0.37 to 1% per month, completely depending on your application and security. However, due to the short term loan period this can be costly. Although many lenders do what is called a 'roll up'- which means you pay the interest rate when you pay back the loan- meaning you don't have to worry about paying it back monthly, but it is still going to be less profit from your deal.
What many people seem to fail to mention is the costs in which it takes to simply complete the application.
Lender Arrangement Fee. The name is in the title. The fee payable to the lender for arranging the loan. This will normally be 1-2% of the loan sum. This fee can be added to the loan so you might not have to pay it upfront.
Broker Fee. This can be very specific to the individual mortgage broker you are using. For a bridging loan application these fees can be considerably higher than a normal mortgage application. Fees can vary from around £400 to as much as £1000. But remember, cheaper is not always better, you are paying for their expertise, knowledge as well as a speedy completion.
Valuation Fee. A valuation fee is charged for taking a basic survey of the property as well as the 'security property' (if used). The valuation fees are usually dependent on the lender and are around £300-£750 per property. However, new lenders are beginning to introduce AVM which is a form of desktop valuation. If this were the case, then your valuation would be free!
Legal Fees. When using a bridging loan many lenders will require separate legal representation this needs to be paid for by the applicant.
Exit Fee. Yes, they actually charge you when you want to pay the loan back. The exit fee is payed when the loan is being payed back in full. Usually 1-2% of the loan or equal to one months interest, it can be added onto the loan sum.
Although there are many fees which may not be mentioned when the term 'bridging' is thrown around online a lot, bridging loans are indeed a very advantageous way of buying property, especially if you want to add value to it!
Once again, thanks for reading and check back on our blog for more useful content!
Join us on the socials!