Bridging Finance FAQs
The amount you can borrow is dependent on the value and type of security property being used. This question is very difficult to answer properly without reviewing the case fully however based on 1 property as security, in theory, the maximum loan size available on a regulated bridging loan (arranged on a property where you or an immediate member of your family live, have lived or intend to live in over 40% of the useable floor area) is 70% of the security properties valuation and on an unregulated bridging loan (an investment property where you or a member of your immediate family has never lived, does not live and does not intend to live in over 40% of the useable floor area) is 75/80% of the security properties value.
The above figures are based on the gross loan (including all fees and interest). The net loan (without any fees or interest) would be between 5 & 10% less than the figures stated above.
Additionally, it is possible to borrow a larger amount of say 100% or more of the properties valuation via using additional security. For a bridging loan example, if you wanted to purchase a property for £500,000 and required the full £500,000 or more you could use other properties as additional security properties to make the deal more appealing and less risky for the lender i.e. if you had another property valued at £500,000 which was unencumbered (without a mortgage) or even if it had a small mortgage, the lender could secure across this property also to allow the full loan amount required.
|New property value:||£500,000|
|Additional security value:||£600,000|
|Total security values (£600,000 + £500,000):||£1,100,000|
|Loans: £100,000 (outstanding mortgage) + £550,000 (loan required):||£650,000|
£650,000 is approximate 59% of the £1.1million value of the securities (£650,000 / £1,100,000 x 100) making the loan acceptable to the lender as the maximum loan allowable in this situation would be 70% LTV of the value of the securities, including all fees and added interest.
As interest payments are not required on a monthly basis, the loan increases in size throughout the term, until repaid. Depending on the scenario, by the end of the agreed term, fees and interest can add a further 5 – 10 % to the size of the original loan.
It may also be possible to use more than 2 properties as security to borrow the funds required and/or to qualify for better rates by reducing the LTV.
Lenders will determine the maximum LTV available by adding the net loan plus arrangement fees plus interest generated should the loan run for the full term arranged.
Bridging Loans are arranged for short term requirements and the lender would be expecting the loan to be repaid within the set timeframe.
Bridging Loans are always arranged with the 1st question being, how will the loan be repaid. Brokers and lenders will put a huge amount of emphasis on this point and if the exit does not sound feasible or make sense, then the lender will normally not allow the loan to proceed as the loan will have a good chance of a failure to repay.
Acceptable exit methods are more often than not, sale of property or refinance. If sale is the stated exit route, then a lender would expect agreement that the property to be sold would be either on the market prior to commencement of the loan or on the market within a specified timeframe, such as following completion of certain renovation works. If the exit route is listed as refinance, then lenders will do much due diligence beforehand to ensure that this is a possibility i.e. the lender will perform checks to ensure that the clients credit is likely to be good enough to achieve a refinance at the end of the term and that the income is sufficient to raise enough funds via a refinance to repay the bridging loan plus any accrued fees or charges etc.
Even with very careful underwriting, it is inevitable that some loans will overrun the term agreed as not everything in the housing market goes to plan. Lenders will normally contact the borrower approximately 3 months prior to the end of the agreed term to determine how the exit is coming along. If the lender believes that the exit is looking unlikely, then they will normally make recommendations, such as reducing the asking price of a sale, to help the borrower get the exit back on track.
The lenders clearly want the loan repaid as per the offer but will normally work with borrowers who have overrun provided they are keeping in regular contact and provided they are working together on action plan.
We would always suggest taking out a bridging loan for the longest term available as experience suggests that many plans overrun the expected timeframe.
We suggest commencing the bridging loan process as early as possible to limit the potential problems arising from funds not being available. Our quoted guidelines however are:
|Decision in Principle:||approx. 1 – 2 days|
|Formal offer:||approx 1 – 2 weeks|
|Completion:||approx 2 – 4 weeks|
Bridging finance is usually determined by the security in the property being offered and the exit route. Providing the chosen lender is happy with the answers on these two points, credit issues should not be a problem.
It is important to note that refinancing a client with credit issues from out of a bridging loan is extremely rare, so the exit route in this scenario would normally be sale.