Bridging Loan Example
One of the main uses of bridging loans is where an applicant does not want to miss out on the purchase a new property (to upsize/downsize/move areas etc.) but have yet to sell their current property.
A typical example of a bridging loan: 0333 332 55 44
|Current property valuation:||£800,000|
|Outstanding borrowing on current property:||£100,000|
|New property valuation:||£500,000|
|New loan required (the applicant has £200,000 cash)||£300,000|
In the above scenario, we could raise the £300,000 shortfall required to complete the purchase, which would be secured across the current and new properties via a standard mortgage type charge. Normally, the lower the LTV (percentage size of the loan compared with the value of the properties being used as security), the better the interest rate. Due to this, it can be advantageous for the borrower to use more properties if available, to reduce the interest rate charged.
A bridging loan cost calculation using the above example:
|Net Loan amount required:||£300,000|
|Arrangement fee @ 1%:||£3,000|
|Interest generated per month @ 0.59% – no monthly payments required:||£1,787.70|
If the property is sold after 6 months, the first £300,000 + fees + generated interest etc from the sale would be used to repay the bridging loan and the balance released to the client i.e.
|Net Bridging Loan to be repaid:||£300,000|
|Arrangement fee @ 1%:||£3,000|
|6 months interest @ 0.59%:||£10,726.20|
|Total to repay:||£313,726.20|
|Balance to borrower:||£486,273.80|
The charge is removed from both properties, when the bridging loan is repaid.
In the above example both properties would generally be used as security as this would be the most cost effective way in which to arrange a bridging loan. If preferred, provided maximum LTV levels are not exceeded, only one property could be used as security however the monthly interest rate available, could be higher.
The better interest rates currently start on loans below 50% LTV and increase at stages thereafter up to 70% on regulated bridging finance and 75% on unregulated bridging finance albeit exceptions are always available in certain circumstances and especially for property in particular hot spots.
The LTV used to choose the interest rate or to define the maximum net borrowing is calculated from the gross loan. The gross loan is the term used for the total of the net or actual loan required plus any arrangement fees added to the loan plus the total interest applicable should the loan run for the full term. We would normally advise arranging a bridging loan for the longest term possible which is usually 12 months (although exceptions can apply) but due to the manner of the calculation, it may sometimes be more beneficial for the borrower, to choose a lower term as this could achieve a higher net borrowing amount and on the best rates possible.
The reason for choosing the longest term is that this allows the borrower the maximum possible time available to repay the bridging loan should a problem occur with the initially chosen exit route. Even if the loan was arranged for a 12 month term, the borrower is usually only liable for interest for the time the loan was outstanding. Monthly interest payments are not usually required with a bridging loan, so if the borrower repays the loan after 3 months and 6 days of a 12 month term, they will additionally repay the interest for the time that the loan was outstanding i.e. 3 months and 6 days plus any arrangement or set-up fees that were added to the loan.
Interest is normally calculated on a daily basis after the 1st month.
All terms and conditions connected with the arrangement of the loan will be presented in writing prior to commitment on behalf of the borrower. Unless stated in the T&C’s, early repayment or exit penalties will not be charged if the loan is repaid within the chosen term.
Bridging Loan Case Study
UKPF were approached by a client looking to purchase a new residential property in Turkey. We were informed they needed to borrow the full purchase price, along with some additional to cover the set up costs and fees involved following the move to Turkey. The clients current residential property owned in London (with no outstanding mortgage) still currently had the title in her late fathers name; however, luckily, probate had been granted and she have available a copy of his death certificate and Will documents, we were able to proceed with the clients application.
This current property was used as the security as the clients plan was to repay the finance with fund received from the sale of her this residential. Due to the property being abroad, the client had a tight dead line to get the funds processed and received, due to UKPF’s good relationship with the lender and productive service we were able to meet the clients deadline with time to spare; allowing client to move abroad and purchase her dream home in Turkey.
Bridging Loan Exit Routes
Bridging finance is only arranged on a short term basis so it is of paramount importance that a strong and realistic exit route is identified from the outset. The most common and accepted exit route is often the sale of one or more properties. In this instance, the lender will always check to ensure that the proceeds from any sale would be sufficient to repay the bridging loan. The lender could also request within the terms of the loan agreement, that the property or properties to be sold are being marketed prior to the loan commencing or by a certain time during the term of the loan.
Another regularly used and designated exit route would be via refinance on to longer term finance such as a mortgage. Lenders in this scenario would always check the background of the applicant in relation to credit status and income etc, to ensure that refinancing is a very strong possibility prior to the end of the agreed term and based on the mortgage products currently available.
Other exit routes can be acceptable to lenders however they are less common and will legitimately attract additional scrutiny. Lenders tend not to like exit routes which are outside of the borrowers control such as proceeds of an inheritance, sale of property or land which is outside the UK etc.
Upfront Costs for Bridging Loans
The upfront costs with a bridging loan should be the same as with traditional finance such as a mortgage i.e. valuation and legal fees.