In simple terms, a bridging loan helps property investors to fund their investments. Bridging finance is a short-term flexible loan that is used to cover the gap between two transactions. Here, the gap will be defined in monetary terms.
The loan will cover financial obligations until you secure permanent funding or remove an existing obligation. The lender will provide immediate funds to offset the current obligation. Generally, the maximum term of a bridging loan is one year and collateral should be in place as security.
This is a helping hand when a homeowner purchases a new property while waiting for their current property to sell. If the buyer plans to use the equity in the current property as the deposit for the new mortgage, they can take out a bridging loan as the deposit for the new property to tide them over. Here, the loan will be used to bridge the gap until the old property is sold and the funds become available.
This short guide offers the facts you need to know if you are looking to take out bridging finance.
Are bridging loans regulated?
A bridging loan may be either regulated or unregulated. If the property against which the loan is secured is occupied by the borrower the mortgage will be regulated. The mortgage will be regulated when a home mover uses bridging finance for the deposit or when a home buyer wants to secure a place in a property chain. The bridging loan will not be regulated if the borrower is not going to occupy the property. This is the most common type of bridging loan. The borrower will use the funds to purchase land, a BTL property or to fund some other form of investment.
What can a bridging loan be used for?
The loan’s flexibility has opened up opportunities for investors to borrow funds for many reasons.
Typical reasons may include:
- A property purchase
- Home improvements (converting, restoring or renovating properties)
- To secure a place in a property chain
- To prevent repossession
- To get the necessary funds for future projects
How to get a bridging loan
Generally, high street lenders do not provide bridging loans. This means borrowers will have to approach a specialized lender in order to get bridging finance. Generally, the interest rates are relatively high. You can get advice from an expert in the market. You should discuss your investment project, requirements and circumstances with your mortgage advisor. The advisor will assist you in getting the loan which best matches the needs of your investment project. After this stage, the application process will be the same as a standard loan application.
How does it work?
As an example, assume the outstanding mortgage on your current property is £300,000 and the funding required for the new property purchase is £600,000. You will need to borrow up to a maximum of £900,000 in bridging finance. This will be the peak debt. You will have a short-term debt of £900,000 on which interest is payable, until you finalize the sale of your current property. Assuming you pay only the interest towards the mortgage, your peak debt remains at £900,000.
If the proceeds from the property sale are £350,000 and you put the whole amount towards the peak debt, you will be left with a loan of £550,000.
From this point, you will be on a standard mortgage on which you make regular payments.
What is the maximum I can borrow?
Generally, the floor is £25,000. The maximum loan amount will differ from lender to lender. The maximum loan will depend on the borrower’s financial standing and credit history, the amount of the deposit put towards the mortgage, the property valuation report and the strength of the project plan.
Do lenders provide 100% bridging finance?
No. Generally lenders offer up to 95% LTV (loan to value) on standard residential mortgages. However, lenders will usually only provide up to 75% LTV funding for bridging finance. This is mainly because lenders want to mitigate the risk inherent in these investment projects.
How about the lending assessment?
The lending criteria and documentation required will differ from lender to lender.
In addition to general criteria such as income and credit history, lenders will also look at:
· Equity in the existing property
Before deciding the maximum funds the bank can lend, the underwriters will look at the equity in the current property. The more equity in the property, the more the loan amount will be.
- With or without end debt
Most banks will lend on the condition that there is an end debt. If the borrower is downsizing their home and there will be no end debt, the fees that the lender is charging may be higher.
· Maximum end debt
If there is end debt, this cannot be higher than the value of the property. Generally, if the end debt is more than 80% of the value of the new property the borrower may be liable to pay the lender mortgage insurance.
· Sale contract for existing property
The lender may require a document which proves the current property has been sold. The borrower will have to provide a copy of the sale contract. The lender will use this as a prerequisite for approval.
At WIS, we consider your priorities and circumstances, and discuss any complications with the business development managers of lenders when and where it is required. As we are operating throughout the whole of the market, WIS is always capable of providing you with the most suitable deal.
So, why not contact us to take you to the right option?
Most buy-to-let properties are not regulated by the Financial Conduct Authority (FCA).
Your home may be repossessed if you do not keep up repayments on your mortgage.