Bridging lenders carry out a number of checks to look at the risk involved in a loan.
Here’s a breakdown of the usual checks carried out by bridging lenders and some tips on how to be prepared for them.
What Kind of Security Do You Need for a Bridging Loan?
One of the most important things that bridging lenders look at is the security for the loan.
Security, in this context, means the asset used as collateral, which is typically another property.
Lenders need to be sure that the security being offered is strong, sellable and fits within their lending policies. They may look at a number of things, like the type of property being used as security—whether it’s residential, commercial, or land—and analyse the value of its location, condition, and resale value.
If the property is in a bad condition, some lenders may increase the interest rate or reject the application completely.
To be sure about the property’s value, a valuation by an external surveyor is sometimes requested. However this is done on a case-by-case basis and not all lenders will impose this policy.
How Much Can You Borrow With A Bridging Loan?
Bridging lenders analyse the amount they are willing to lend against the value of the property using the Loan-to-Value (LTV) ratio.
The LTV ratio measures the loan amount relative to the property’s value. Each lender has a different LTV limit, but these can usually range between 50-70% depending on asset type.
For specialist lenders like Blue Square Capital, the LTV can be up to 70% for residential property and 65% for commercial.
After a valuation of the property is provided or agreed, the LTV is finalised and the borrowing amount is decided. Here’s how you work it out:
A Simple Example Of LTV
Imagine you want to get a bridging loan to buy a house. Here’s how LTV works:
Property Value: Let’s say the house you want to buy at auction, renovate and resell is worth £500,000 when you buy it.
Loan Amount Needed: You need a bridging loan of £300,000 to buy this house.
LTV Calculation: £300,000 is 60% of £500,000 meaning the LTV is 60%.
An LTV of 60% means the loan amount is 60% of the property’s current value. This is beneficial because the lender can see that if the property sells for less than its original amount, there’s still a good chance the borrower will be able to repay the loan.
Lenders like lower LTVs because they are less risky. Having a lower LTV may help you get a better interest rate or easier approval.
Do Lenders Check Your Credit History?
Unlike more regulated lenders, who often look very closely at a person’s credit history, bridging lenders tend to be more flexible. Especially if the client has a strong exit strategy.
However, this does not mean they completely overlook credit checks. Some lenders are willing to approve loans for borrowers with poor credit, provided the collateral they put down is strong.
Essentially, unregulated bridging lenders care more about the plan for repayment than previous repayment history.
Additionally, given that there is collateral put down against the loan, like equity in another property, the lender has peace of mind that the loan can be repaid if the borrower defaults.
Why Is an Exit Strategy Important For Bridging Loan Approval?
An exit strategy is the plan for how you intend to repay the loan. It’s an important part of the bridging loan application process.
Since bridging loans are short-term, lenders need to know there is a clear plan in place for settling the debt. Exit strategies can include a number of things, like selling the property, refinancing with a longer-term loan, selling a business or shares, or cashing in on other investments.
Lenders look at how feasible the exit strategy is, and if it seems unrealistic, the application may be turned down. Sometimes, lenders might need evidence of the exit strategy’s viability, like a valuation of a property or a loan in principle.
What Legal and ID Checks Do You Need to Pass For A Bridging Loan?
Legal checks are an important part of the due diligence process for bridging lenders.
These make sure that all documents are in order and that they have legal rights over the property being used as collateral if they need to.
Additionally, lenders will likely want proof of ID, such as a driving licence or passport. They will also want proof of a registered address, such as a utility bill.
If you are unsure if you are eligible for a bridging loan, check out our guide: Am I Eligible For A Bridging Loan?
Are There Any Additional Fees and Costs Associated With Bridging Loans?
Aside from the principal amount and interest, there are usually a few additional fees and costs associated with bridging loans. Though these are at the discretion of the lender.
Whilst borrowers might come up against other costs, such as asset manager fees and exit fees – some lenders like Blue Square Capital do not charge an exit fee, so it’s worth shopping around.
What To Know Before Applying For A Bridging Loan
Applying for a bridging loan may involve several checks and considerations. However, understanding what lenders look at, like the security for the loan, LTV ratios, a clear exit strategy and legal and ID checks, can make the process much smoother.
Each lender has its own unique criteria, so it’s wise to shop around to find the best deal for your situation.
To enquire about a bridging loan, visit Blue Square Capital today.
