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Ben Murphy who looks after all aspects of commercial mortgages for JB Mortgages answers some frequently Googled questions on bridging loans.
What is a bridging loan and how do they work?
A bridging loan is a short term finance option to help bridge a gap when you want to purchase a property. That could be for an onward purchase, a below market value transaction or potentially an auction purchase.
What can bridging loans be used for?
They provide help to bridge a gap – a bridging loan is a short term finance option. It’s not like traditional Buy to Let or residential mortgages. During an auction purchase they often require you to complete in 28 days, but a traditional mortgage cannot facilitate that – therefore a bridging loan would be the most suitable option.
It’s fast finance. The process from application to completion is around four to six weeks.
What is the exit strategy?
There are many different exit strategies. The two common ones are refinance or sale. It is dependent on whether you have the ability to refinance, first of all, with a residential or Buy to Let mortgage. You would have to make sure that the loan is repaid in full and of course everyone wants a bit of profit on the back-end.
Some are first charge and some are second – what does this mean?
A first charge mortgage is similar to your traditional mortgages – it’s just when the lender takes full rights to the property. A second charge is when another lender comes in and sits behind the first charge lender.
Typically, you would use a second charge to bridge a gap – perhaps for a shortfall of deposit. But you can also do what’s called a cross charge – you can cross charge assets to help fund a new purchase. A lot of people may have heard the phrase ‘100% finance’ – typically that is what a second charge can be potentially used for.
How long does it take to arrange a bridging loan?
It takes between four to six weeks. We’ve done some in the past that have completed within five working days – but that is very much dependent on having a very good solicitor and all the documents and information ready to hand.
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Everyone’s different. You might be self-employed. You might have some credit history issues – whatever your situation, we will find the most suitable product available to you from across the whole market.
What if I have bad credit? How does that affect getting a bridging loan?
So each circumstance is different. With bridging being asset-based lending, bad credit is not necessarily an issue. There would be more focus on the exit strategy to ensure that you’re able to repay the loan in full.
What do bridging loans cost?
Every bridging loan is different – it depends on the asset, the experience of the borrower and the loan to value. Typically you would pay around 1% per month and a 2% arrangement fee.
How do you apply for a bridging loan?
I would always suggest speaking with a broker. They can best advise you on suitable exit strategies and also ensure that a bridging loan is right for you.
What are the alternatives to a bridging loan?
Clients may have the cash available to transact the purchase – that would be a cheaper, more cost effective way compared to a bridging loan. Potentially private finance is another option. A lot of people have access to friends and family that may have cash available – that could be a cheaper alternative to bridging.
What else do we need to consider with Bridging Loans?
I think we’ve covered most things. It’s always best to speak to a broker. When it comes to bridging, there are a lot of horror stories out there. But if it’s used in the correct way then it definitely could be the right solution for you.
Have you got any examples where you’ve delivered a successful bridging loan?
At the start I mentioned below market value transactions and 100% finance. Traditionally, the only way that can work is through a bridging loan. A lender will lend against the market value of a property, and that way some people are able to use the equity within the property as a deposit.
One of our clients has taken advantage of this. He was able to buy two properties at auction with the same bridging loan. The lender was happy to lend against both at market value.
When the surveyor went out they valued the properties at £850,000 – but the purchase price was £600,000. The client was able to use that £250,000 in equity as their deposit. This essentially meant they put no money down – it was a 100% funded scheme.