Bridging loans

Bridging loans are high-interest, short-term loans primarily used to help complete the purchase of a new property inthe event of a delay completing the sale of anexisting one. They can also be used to help those who are planning to buy a property at auction, possibly torenovate or refurbish, and then sell quickly.

As the main purpose of a bridging loan is to cover something unexpected, for example, an unforeseen but temporary breakdown in a property chain or buying a property at auction, the principal benefit of a bridging loan is that the money is made available quickly. Important as this benefit my be, it comes with several disadvantages: the loan is secured against your property, which means you may risk losing it; interest rates are high and there are a number of fees that add to the overall cost.

In the wake of the financial crisis many high-street financial institutions became cautious about lending, particularly in what could be considered ‘high-risk’ situations, and this gave rise to a growth in specialist ‘bridging lenders’. Be wary: many of these capitalize on ‘misfortune’, offering bridging loans at outlandish rates.Careful consideration should be given before taking out a bridging loan and this is best done with the help of an experienced adviser.

Types of bridging loan

Bridging loans are categorized in a variety of ways: they can be ‘closed’or‘open’, have a ‘charge’ category and can be either ‘fixed’ or ‘variable’ rate. 

• Closed or open?
  A ‘closed’ bridging loan has an ‘exit plan’ which means you’ll know how and when you’ll be repaying the loan: generally, this is within a few months.‘Open’ bridging loansdon’t (usually) have an exit plan and are often used as a means to raise finance for an urgent transaction.  Although most open bridging loans have to be repaid within a year, the lack of an exit plan means they can be a time-effective solution.

• First or second charge?
  This depends on whether you already have a loan, a mortgage for example, secured against the property you intend to use as security.  If you do, then the bridging loan will be classified as being a ‘second charge’ loan – if you don’t, it’ll be classified as a ‘first charge’ loan.  The distinction shows which lender has repayment priority in the event that you default.

• Fixed or variable rate?
  Fixed rate loans offer stability as you’ll know exactly how much interest you’ll be paying during the term; variable rate means the interest rate may fluctuate.  Although the term may be brief, meaning any interest rate movement may be limited, a small rise in interest base rate when applied to a large loan could lead to a substantial amount of additional interest having to be repaid.

Repaying the interest

As bridging loans are short-term loans and the term is usually measured in months, paying the interest can be done in one of three ways:

• Monthly – you pay the interest on a monthly basis; it’s not added to the loan which is repaid at the end of the term.
• Rolled-up – you pay compound interest when the loan is repaid at the end of the term.
• Retained – your monthly interest payments are included within the value of the loan.

Taking out a bridging loan

Bridging loans, because of their nature, carry a relatively high-level of default.  Not surprisingly, loan providers want to make sure they are going to get their moneyback at the end of the agreed term, along with the interest due.  To reduce the risk posed by a borrower defaulting, lenders invariably have a number of pre-conditionsthat must be met before they offera loan. Commonly:

Lenders will always require the loan to be secured and, inevitably, security will be against property.

• You may have to show proof of income, as this shows your capacity to pay the interest.
• If the loan is for a commercial venture then lenders will probably expect you to have a business plan (which is ‘A Good Idea’ anyway!).
• If the loan is for a property development project you may have to prove you already have a successful track record.
• Lenders may only be prepared to offer you a loan if you have a mortgage with them or, depending on what the loan is for, youragreeing to take one out with them.

How can One Financial Solutions help you?

One Financial Solutions is here to help you.  We’ll talk to you about what you need and then introduce you to a specialist commercial finance broker who will work with you to secure a financial solution.

The commercial finance brokers we work with are acknowledged experts within the industry and have enviable relationships with a wide range of financial institutions throughout the whole of the market.  They offer a complete service and can provide practical advice on all aspects of commercial finance.  They can secure working capital, venture funding, development finance, bridging loans and asset-based finance schemes; help with business purchases and sales, including management buy-outs and buy-ins, and advise and assist with all aspects of share capital, proprietor loans, vendor deferment and mezzanine finance.  They can also provide a lead role in liaising with all parties in these transactions including the financial institutions involved, accountants, specialized valuers and lawyers, and can write business plans, balance sheets, profit and loss statements and cash flow forecasts to support the proposal.

So, if you’re looking for help securing any type of commercial finance, please call us on 020 3714 9565, or ask us to call you by sending an email to admin@onefinancialsolutions.co.uk.

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Bridging Loans

A bridging loan is a loan against the freehold or long leasehold interest of a property.

Bridging Finance is well suited to circumstances where finance is needed quickly and for relatively short periods of time. Typical examples of the uses of bridging finance are:

• Traditional chain breaking
• Auction Finance
• The subject property is uninhabitable / unsuitable for mainstream lenders
• Speculative property purchases where future planning permission changes are intended

The repayment of such loans typically comes from the sale of the asset or restructuring onto a longer term loan.