What is bridging finance?
Bridging finance or a bridging loan works as a short-term loan used to finance the purchase of a property or for business purposes.
If you are looking to purchase a property, a bridging loan provides finance 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.
Using a bridging loan for business purposes can be a good option, for instance if you are buying something to make a profit. But do remember to factor in the cost of funds into your profit figure
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?
As an independent, whole of market broker, Masutes Group provides a specialist bridging finance service. We provide access to market leading bridging loans from £50,000 to £25m with finance up to 90% of purchase price or 70% of open market value and LTVs up to 80% (more depending on availability of other assets). We will help you assess your financial position, plan and then deliver a suitable exit strategy for you. And you’ll find our fees are very competitive!
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If you are interested in finding out more about bridging loans and market leading rates from our whole market options, contact Masutes Group on 0333 335 5658, email email@example.com. We look forward to assisting you!
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