In general bridging loans, from the term itself, bridge borrowers to a solution in cash flow issues. With the flexibility on its uses, bridging can be tapped for personal or business uses.
In commercial property financing, the design of bridging loans is to pay the buy-out of the new property. Hence, light refurbishments to massive property renovations and the building of a property ground-up.
Bridging loans can provide fast cash, often in a week or within the day, depending on the case at hand. Thus, the financing option is available where mortgages you are purchasing requires to be habitable.
Furthermore, repayment of loans for bridging can be done in two ways. Either via the resale of the property or the liquidation of another property currently in the borrower’s portfolio.
Besides, bridging is an excellent option when in need of quick access to cash. The business can grab the opportunity of buying a property or land at a low market price; purchasing a property via auction; or acquiring a dilapidated property that can still be profitable after undergoing restoration works.
How costly is bridging loans?
Since it is quick access to significant cash, then, expect that interest rates are high. It is relatively high compared to other property financing options like mortgages that have interest rates averagely at 5% per annum.
Bridging contracts usually run up to two years and are high in annual interest rate, which averagely reaches 1.5% per month or 18% annually, excluding other fees.
Among the additional costs on top of interest, are legal fees, arrangement fees, and broker fees if you would choose to tap a broker. Each service imposes a fee that ranges from 1% to 2%.
How much can be borrowed through Bridging Loans?
Bridging loan arrangements usually offer 70% to 75% of the property price, but this varies depending on the case. Indeed, higher-risk businesses can avail as much as 50% to 60% of the loan amount. However, if the borrower can put up additional collateral, the business can avail the full loan-to-value deal.
Most lenders can offer as much as over £1 million, depending on a borrower’s case.
Repayment terms of Bridging Loans?
Bridging offers two main types of repayment schemes:
Closed bridge: lenders and borrowers set a date for the repayment of the loan.
Open bridge: the borrower sets out a proposed exit plan to repay their loan, but no definite date is set. However, some lenders expect the full payment of a loan, including interest and fees, in a year.
Most lenders are flexible enough to provide you with the option to pay your obligations on the usual monthly basis, on a rolled-up deal, or on retained interest.
A rolled-up deal is a one-time payment made after the initial deposit and at the end of the contract. Some borrowers who are short on capital until their exit strategy usually opt for a rolled-up arrangement.
As for loans set on retained interests, borrowers can choose to set aside the payment of the interest from the borrowed sum whereas the interest charges may be paid on a more flexible basis, say, quarterly, depending on your lender, while the loan an amount will be paid on the regular monthly terms.
How to be eligible?
Most lenders are more welcoming to customers equipped with these:
Strong exit strategy
Exits refer to how you intend to clear your the bridging obligations in full, including interest and other costs. In a bridging loan, you can either sell the property, place it on a mortgage, or resort to buy-to-let.
Good credit history
As with several other financing facilities, lenders consider a borrower’s credit profile as a reliable metric to determine your capability to clear your obligation.
Experience in property development
Because of the high return that can yield from the property market, many, even inexperienced developers or investors, scramble to get a share of the sector’s gains. Inexperienced borrowers, of course, have a higher chance of failing in their exit plans, in turn, defaulting on their debt. Although some lenders are open to newbies, the consideration is mostly on the condition that experienced brokers guide them.