All About Bridging Finance in UK by Masutes Group

Bridging loan for property development

So what is bridging finance and how does it work? Bridging finance works as a short-term loan to provide finance for the purchase of a property or for business purposes.

A bridging loan can be particularly useful if you are looking to complete the purchase of the new property while you are selling your existing property. A bridging loan can also provide finance for renovation work or to build a new home while you live in your current home. If you are interested in applying for a bridging loan for property development or need expert advice on commercial mortgages, you may find the following useful to help you find which are the best financial solution providers in UK.

Which is the best financial solution provider?

If you need expert advice on bridging finance or want to know how bridging finance works in more detail, first speak with your bank or an independent bridging loan broker. A bridging loan broker will look into your full credit score and your circumstances, go through a full fact find and make sure that you’re ready for a bridging loan for property development.

How to get the right bridging loan

To make sure you’re choosing the right kind of bridging loan with a bridging loan broker, here’s what you need to consider:

Is this a first charge loan or second charge loan?

A second charge loan applies if you already have a loan secured against a property that already has an outstanding mortgage. So, for improvements such as extensions, you’d need to take out a second charge bridging loan. The distinction lets the lender know who has priority in the repayment if you can’t pay off the loan by the end of the term. If, however you’re taking out a new loan secured against the property, you’d qualify for the first charge loan.

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What can bridging finance be used for?

Now that we’ve seen how does bridging finance works, let’s examine what a bridging loan can be used for. The main advantage of bridging loans is that they are a highly flexible source of funding. 

 

In terms of residential property purchasing, bridging finance can assist with both downsizing and upsizing, providing finance for UK and foreign property purchase, buy to let, HMO and other investments. Bridging finance can also help fund property developments, from light refurbishment loans for unmortgageable properties to heavy refurbishment loans such as change of use, extensions, basement digs, loft conversions, commercial to residential and commercial developments. Bridging finance can also be used as short-term finance for UK expats to secure a residential or investment property back in the UK.

 

How much does bridging finance cost?

So now you know what is bridging finance and how does it work, let’s look at likely costs of a bridging loan. Bridging loan costs typically include arrangement fees and these usually amount to a percentage of the loan. Around 2% is standard, but some lenders may drop to 1% if you take out a particularly large sum. Other lenders may waive this fee entirely, but this is rare.

 

How much deposit do you need for a bridging loan?

As a borrower, you will be expected to provide around 25-30% of the deposit yourself. 

Bridging loans usually come with a max LTV of 75% of the gross loan (that is, the loan amount with all of the fees and interest added). So, for example, if your property was valued at £400k, the maximum loan would be £150k.

 

Where can you get a bridging loan? 

Banks that offer bridging loans include NatWest, HSBC, Bank of Scotland, Barclays, Halifax, Lloyds, RBS and Santander. You can also approach mortgage brokers and specialist lenders which provide bridging loans. If you require bridging finance, usually your current lender is best placed to assist. These loans are not always easy to get, so you will need to discuss your situation directly with your bank and set out exactly what’s being offered in a deal. If your lender does not offer bridging loans, you may need to find a new lender. In this instance, the new lender may insist on taking on any existing loans, which means paying out your existing lender.

 

What are the risks of bridging loans?

There is an inherent risk associated with using bridging loans. For instance, if you are using a bridging loan to help fund a property purchase before you have sold your current hoouse, as the bridging loan interest is capitalised monthly on the home loan, the longer it takes for you to sell the property, the more in interest you’ll pay. In addition, you may end up selling your property for less than you expected, which will leave you with a higher home loan balance than you initially planned.

 

So while bridging finance has its uses, if you don’t have a realistic exit strategy, such as a buyer lined up for your own property, bridging finance is extremely risky and should be avoided at all costs. Lenders will want to know how you intend to “exit” the loan, that is, how will you eventually repay it.

 

Masutes Group bridging loan services

In this short overview of bridging finance, we have looked at what is bridging finance & how does it work, how much does bridging finance cost and some of the risks associated with bridging finance. So how can Masutes Group help?

 

Is this a first charge loan or second charge loan?

A second charge loan applies if you already have a loan secured against a property that already has an outstanding mortgage. So, for improvements such as extensions, you’d need to take out a second charge bridging loan. The distinction lets the lender know who has priority in the repayment if you can’t pay off the loan by the end of the term. If, however you’re taking out a new loan secured against the property, you’d qualify for the first charge loan.

 

Are you paying fixed or variable rates?

You can choose a fixed or a variable rate on a bridging loan. A fixed rate gives you the security of knowing exactly how much interest you will pay on the loan, but fixed rates tend to be slightly higher than the variable rates on offer. With a variable interest rate the rate can change from month to month.

 

What are the criteria for a bridging loan for property development?

Bridging lenders typically require collateral in the form of property. Loans can be secured on the value of one property for several combined properties. The lender and borrower will enter into an agreement whereby the service provider takes ownership of the property in the event that the loan is not repaid as agreed.

 

How much does bridging finance cost?

The costs of a bridging loan for property development include an arrangement fee and the interest costs of the loan. There may also be a fee for using a broker to organise your bridging loan. Arrangement fees are usually around 2% and monthly interest rates start from 0.40% up to 1.50%.

 

How is bridging interest calculated?

Bridging lenders typically charge a 2% arrangement fee, which is calculated on either the gross or net loan amount. These fees will lower proportionately to the amount of money you’re borrowing so that a larger bridge, of say 1 million, might see only an arrangement fee of 0.5 %.

 

How much deposit do I need for a bridging loan?

The amount you will need to pay as deposit depends on the amount you want to borrow, the value of the property you are looking to purchase and the LTV (which is dictated by your lender). Your deposit will be at least 20% to 25%, as the LTV available on a bridging loan is 70% LTV or 75% LTV unregulated.

 

Advantages and disadvantages of a bridging loan

A good bridging loan broker will outline the pros and cons when opting for a bridging loan for high-cost transactions. First, there are a number of advantages:

  • You’ll receive your money quickly
  • You can borrow a large amount of money
  • Flexible borrowing might apply

The drawbacks to bridging loans include:

  • The loan is secured against your property, so you risk losing ownership if you can’t repay
  • The high interest rates that come with the loan – this is because you pay for the flexibility and swift payment
  • You’ll be charged a number of fees so it’s a costly option.

 

What is the alternative to a bridging loan?

Both asset refinancing and invoice finance can be put in place quickly and can provide a cheaper alternative to bridging finance. Other alternatives include development finance, commercial loans, secured loans, commercial mortgages and asset loans.

 

At Masutes Group, you’ll be talking to an expert advisor on a bridging loan for property development. They will give you all the advice you need to secure the financial package that’s right for you.

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If you are interested in finding out more about bridging loans and market leading rates from our whole of market options, contact Masutes Group on 0333 335 5658, email contact@masutesgroup.com. We look forward to assisting you!

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