Bridging finance, or a bridging loan, is a type of short-term loan that is used to “bridge the gap” between the purchase of a property and the long-term financing that will eventually replace it. This type of loan is typically used by property developers, investors, or homeowners who need to quickly buy a property before they have the long-term financing in place to do so. The loan is secured against the property and is typically paid back within a year. The interest rate on bridging finance is generally higher than on a traditional mortgage loan.
How Does Bridging Finance Work?
Here’s an example of how bridging finance might work:
- A property developer wants to buy a property that is currently on the market but doesn’t have long-term financing in place yet.
- The developer applies for a bridging loan from a lender, and the loan is secured against the property they want to buy.
- The lender approves the loan and the developer uses the money to buy the property.
- The developer then has a set amount of time (usually 12 months) to secure long-term financing for the property.
- Once the long-term financing is in place, the developer pays back the bridging loan, including any interest and fees.
It’s important to note that bridging finance is usually more expensive than traditional mortgages, and the interest rate is generally higher. Additionally, because these loans are secured against the property, there is a risk of losing the property if the borrower is unable to repay the loan.
Bridging finance can be used for various purposes like purchasing a property, refinancing, cash out, development finance etc.
How To Get Bridging Finance
To obtain bridging finance, you will need to go through a lending process similar to that of a traditional mortgage loan. Here are the steps you can take to get bridging finance:
- Determine your eligibility: The lender will evaluate your creditworthiness and the value of the property you want to buy or refinance. You will typically need proof of income, employment, and assets.
- Find a lender: There are many lenders that offer bridging finance, so it’s essential to shop around and compare rates and fees from multiple lenders. You can find lenders through online research or by working with a mortgage broker.
- Submit an application: Once you have found a lender, you will need to complete an application and provide all the required documentation. This may include proof of income, employment, assets, and the property’s value.
- Appraisal: The lender will appoint an independent valuer to evaluate the property and its value.
- Underwriting: The lender will assess the application and supporting documentation and decide whether to approve the loan.
- Closing: If your loan is approved, you will need to sign the loan documents and pay any closing costs or fees. Once the documents are signed, the lender will release the funds and you can use the money to purchase or refinance the property.
It’s also important to note that bridging finance is usually more expensive than traditional mortgages, so it’s important to consider the total cost of the loan, including interest and fees, before applying. Additionally, because these loans are secured against the property, there is a risk of losing the property if the borrower is unable to repay the loan.
How Much Does Bridging Finance Cost?
The cost of bridging finance can vary depending on a number of factors, including the lender, the loan amount, and the property value. Here are some of the costs you can expect to pay when taking out a bridging loan:
- Interest rate: The interest rate on a bridging loan is typically higher than that of a traditional mortgage loan. Interest rates can range from 0.5% to 2% per month, which can add up to a significant amount over the course of a year.
- Arrangement fee: Some lenders charge an arrangement fee, which can be a percentage of the loan amount or a fixed fee. This fee is charged to cover the lender’s costs of underwriting and processing the loan.
- Exit fees: Some lenders charge an exit fee when the loan is paid off. This fee is intended to cover the lender’s costs of closing the loan.
- Valuation fee: Lenders will appoint an independent valuer to evaluate the property and its value. This cost is usually passed on to the borrower.
- Legal fees: You will need to pay for a solicitor to handle the legal aspects of the loan.
It’s important to consider all the costs associated with a bridging loan and to compare rates and fees from multiple lenders before deciding which one to use. To get an idea of the costs involved, you can ask for a quote from the lender for a loan of a certain amount and for a certain period.
It’s also important to note that bridging finance is usually more expensive than traditional mortgages, so it’s important to consider the total cost of the loan, including interest and fees, before applying. Additionally, because these loans are secured against the property, there is a risk of losing the property if the borrower is unable to repay the loan.
What is closed Bridging Finance?
Closed bridging finance is a type of bridging loan where the lender has a specific exit strategy in place to repay the loan. This means that the lender has a clear plan for how the loan will be repaid and when, and the borrower is expected to stick to that plan.
For example, if a borrower takes out a closed bridging loan to purchase a property, the lender may have already agreed to refinance the loan with a long-term mortgage after a certain period of time. In this case, the borrower is expected to have secured the long-term financing by the agreed-upon date, and the loan will be repaid in full at that time.
Closed bridging finance is generally considered less risky for the lender, as they have a clear understanding of how the loan will be repaid, and it is typically less expensive for the borrower as well.
On the other hand, Open bridging finance is a type of loan in which the lender does not have a specific exit strategy in place and the borrower may have more flexibility in how they intend to repay the loan. These loans are considered riskier for the lender and therefore more expensive for the borrower.
What is the interest rate for bridging finance?
The interest rate for bridging finance can vary depending on a number of factors, including the lender, the loan amount, and the property value. However, in general, the interest rate for a bridging loan is typically higher than that of a traditional mortgage loan.
Interest rates for bridging finance can range from 0.5% to 2% per month. This can add up to an annual percentage rate (APR) of 6% to 24%. This is significantly higher than traditional mortgage rates, which can range from 2% to 5% per annum.
It’s important to note that the interest on a bridging loan is usually charged on a monthly basis, rather than annually as with traditional mortgages. This means that the interest payments can add up quickly, so it’s important to have a clear plan for repaying the loan as soon as possible.
It’s also important to consider all the costs associated with a bridging loan and to compare rates and fees from multiple lenders before deciding which one to use. To get an idea of the costs involved, you can ask for a quote from the lender for a loan of a certain amount and for a certain period.
It’s also important to note that bridging finance is usually more expensive than traditional mortgages, so it’s important to consider the total cost of the loan, including interest and fees, before applying. Additionally, because these loans are secured against the property, there is a risk of losing the property if the borrower is unable to repay the loan.
Why use bridging finance
Bridging finance is a popular option for individuals and businesses who need to quickly purchase or refinance a property before they have long-term financing in place. Here are a few reasons why someone might choose to use bridging finance:
- Time constraint: Bridging finance is a fast and flexible way to raise funds quickly, which can be useful when a property is about to be sold or when a unique opportunity arises that requires quick action.
- Short-term needs: Bridging finance is typically used for short-term needs, such as purchasing a property before long-term financing is in place, or to cover the costs of renovations or refurbishments.
- Unconventional property purchases: Bridging finance can be used to purchase unconventional properties that might not qualify for traditional mortgage financing, such as auctioned properties, distressed properties, or commercial properties.
- Cash flow: Bridging finance can be used as a way to release equity from a property to improve cash flow, without having to sell the property.
- Development finance: Developers often use bridging finance to purchase land, complete planning, and then refinance the loan with a development loan to complete the project.
It’s important to note that while bridging finance can be a useful tool, it’s usually more expensive than traditional mortgages, so it’s important to consider the total cost of the loan, including interest and fees, before applying. Additionally, because these loans are secured against the property, there is a risk of losing the property if the borrower is unable to repay the loan. It’s always recommended to consult with a financial advisor before making any decisions.
How long does it take to get bridging finance?
The time it takes to get bridging finance can vary depending on a number of factors, including the lender, the loan amount, and the complexity of the application. However, in general, bridging finance can be obtained much faster than traditional mortgages.
Some lenders can provide a decision within 24 hours, and the loan can be funded within a week. This is because the process of underwriting and approving a bridging loan is typically less complex and time-consuming than that of a traditional mortgage. However, this also depends on the lender and the complexity of the case.
Other factors that can affect the time it takes to get bridging finance include the property valuation, legal work, and the lender’s underwriting process. In some cases, it may take a few weeks or longer to complete the application process.
It’s important to note that while bridging finance can be obtained quickly, it’s not always the best option. It’s always recommended to consult with a financial advisor before making any decisions.