Bridging loans are a popular way to secure quick funding. But how exactly do they work? And what should investors consider before taking one out? In this article, we’ll explore just how bridging loans work and how to apply for one.
What Is A Bridging Loan?
A bridging loan is a short-term loan designed to “bridge the gap” between the need for quick financing and the availability of future funds.
These loans are normally used in situations where you need quick access to cash, such as buying a new property before the sale of another one is completed. Bridging loans can also be a great tool by investors for property development projects, business purposes or to cover other financial needs.
What Are The Different Types Of Bridging Loans?
- Open Bridging Loans: These loans don’t have a fixed repayment date, which means they have more payment flexibility. They are usually used when the sale date is less clear. However, bridging loan lenders generally expect repayment within a year, though some may allow longer terms.
- Closed Bridging Loans: These have a fixed repayment date, usually aligned with a known event, like the completion of a property sale. Because of the certainty, closed bridging loans often come with lower interest rates compared to open bridging loans, so are preferable if you can get one.
There are also two loan categories:
- Regulated Bridging Loans: Regulated bridging loans are regulated by the UK’s Financial Conduct Authority (FCA) and are usually borrowed against a person’s primary residence.
- Unregulated Bridging Loans: Unregulated bridging loans are not overseen by the FCA, which means they are unregulated but usually also very quick. These are commonly used by investors to access fast capital.
How Much Can You Borrow With A Bridging Loan?
The amount you can borrow with a bridging loan depends on several factors, including the value of your property, your financial circumstances, and your credit history. Not to mention, it’s at the discretion of your lender.
Lenders typically offer loans ranging from £5,000 to over £25 million but may assess your situation before committing to an amount.
To enquire about how much you could borrow, visit Blue Square Capital to enquire today.
What Is the Process For Getting A Bridging Loan?
Finding A Broker Or Lender
A bridging loan broker can be helpful because they have access to a wide range of lenders, but going direct can get you a better deal by cutting out the middle man. Once you have found a lender, they will be able to give you more information about the application process and the criteria you have to meet.
Preparing Your Application
Once you’ve chosen a lender, the next step is preparing your application. This usually involves handing over information about your financial situation and your need for the loan, including:
- Property Valuation: You will need to provide a valuation of the property you plan to use as collateral for the loan. This may mean hiring a professional surveyor.
- Payment Plan: Lenders will want to understand how you might afford the loan repayments if they are required to be paid monthly.
- Existing Debts: You’ll need to disclose any existing debts, including mortgages and other loans secured against your property.
- Exit Strategy: Most importantly, a lender will want to understand how you plan to repay the loan at the end of the term and evaluate any risk of delay based on this.
Not sure if you qualify? See our guide around What to consider before getting a bridging loan
Showcasing Your Exit Strategy
A key part of your application, maybe the most important part, is demonstrating how you plan to repay the loan.
This is known as your exit strategy. Common exit strategies include:
- Sale of Property: If you’re using the loan to purchase a new property before selling your current one, or for a refurbishment project, the sale of your current property is typically your exit strategy.
- Refinancing: Another common exit strategy is refinancing into a longer-term mortgage once the bridging loan term ends.
- Other Assets: You may also plan to repay the loan using funds from another source, such as an inheritance, a bonus, or the sale of other assets.
Lenders will look carefully at your exit strategy to ensure it is realistic and achievable within the loan term.
Approval and Funding
Once your application is submitted, the lender will review it and conduct any necessary checks. If everything is in order, the lender will approve the loan, and funds can be made available quickly—sometimes within days.
The speed of approval and funding is one of the main benefits of bridging loans, particularly in time-sensitive situations like property purchases.
How Can You Find The Best Bridging Loan?
Finding the right bridging loan involves careful planning and research. Start by thinking about exactly how much you need to borrow and for how long.
It’s also important to fully understand your financial situation. Lenders will want to know about the value of your property, how much equity you own in it, your existing debts and your plan for exiting. Comparing different loan options, possibly with the help of a broker, can also help you find the best rates and terms.
To enquire about securing a bridging loan, visit Blue Square Capital to enquire today.
