What is bridging finance and what are the pros and cons of it?
Bridging loans are short-term loans for property investors in a variety of situations. Since the financial crisis in 2008, lenders have been hesitant with lending on ‘high risk’ properties and with Brexit looming, this is only likely to continue until we have left the EU and there is more certainty in the market.
Bridging loans offer a borrowing solution for property investors in the short-run, who are struggling to obtain a standard mortgage at that point in time. With bridging loans typically running up to a maximum of 18 months, this reduces the risk on the lenders’ behalf as they are not lending money on a high risk property for a long period of time. A bridging loan offers investors a certain period of time in which they can decide what their next port of call should be regarding the property in question (selling or remortgaging the property).
There are two types of bridging loans:
Open bridging – Used when there isn’t a definite exit date for the lender because long term finance isn’t in place. This type of bridging is most common.
Closed bridging – This type of bridging is only applicable if there is a guaranteed exit in place because long term financing has been sorted.
There are certain benefits and risks associated with bridging loans:
Bridging loans are quick to arrange – Bridging for investment is unregulated by the government so lenders can act swiftly with the process.
Repayment options – Unlike standard mortgages, investors can add up all of their monthly payments and pay the total sum at the end of the bridging period.
Can be done as a second charge – Most of the time, a lender has the first call on any funds that come from a property sale but bridging loans can be approved as a second charge so lenders can still issue bridging loans on properties that already have long term financing in place.
Less strict lending criteria – Lenders often place the potential profitability of the deal as a priority over the financial situation of the borrower so credit scores can sometimes be disregarded.
No early exit fees – Most bridging lenders make their profit via interest rates so if there is an early repayment on the loan from the borrower, no charges will be applied.
You can get up to 100% LTV – A small collection of bridging lenders offer 100% of the property value, provided that there is some sort of security in place.
High interest rates – You can expect monthly rates to be around 1%-1.5%for an open bridge which works out as 12.68%-19.5% yearly.
Larger fees – Product fees for the borrower are higher than standard mortgages and can be expected to be around 1.5% of the loan amount.
Currently unregulated for investment – Although this speeds up to mortgage process as mentioned in the Pros section, it also means that you are not protected by the Financial Conduct Authority (FCA) and are not eligible for any compensation should the worst happen.
Varies lending rates – There can be wide variations of interest rates charged between lenders in contrast to standard mortgages so seeing a broker in order to get the best deal for you is strongly advised.