A bridging loan is generally aimed at landlords and amateur property developers as a short-term solution between a debt becoming due and a main line of credit coming in. In essence, the high-interest loan is a stop-gap between a loss and influx of money, typically used as a short-term emergency.
This type of loan is especially useful in certain situations, especially if you work in the commercial property business.
There Are Two Types of Bridging Loan
Not all bridging loans are created equally. Whilst all of them are interest-only, high interest loans, there are two distinct types: an ‘open’ bridging loan and a ‘closed’ one.
A ‘closed’ bridge is a bridging loan where an exit is guaranteed due to long-term funding be arranged. However, since property sales and mortgages can fall apart at the last minute, these are not common.
An ‘open’ bridge is the more common bridging loan, meaning there isn’t a definite exit date for the lender, so the loan runs via a specific period. Typically, it runs for 6-9 months or so. The advantages of an ‘open’ bridge are that you can have influence over the regularity of interest payments, including paying interest when you pay the whole loan in one go.
You Can Use Bridging Loans to Cover VAT
Interestingly, you can incorporate VAT savings in bridging loans. Ordinarily, you do not have to pay VAT on a residential property purchase, but you do when buying several commercial buildings. Essentially, when bulk-buying property, landlords can see an increased property price of 20%.
This is required for new (new meaning less than three years old) freehold commercial property, which makes it more difficult for people to cut ‘deals’ when offloading property. VAT is owed because of the negative impact on the UK housing market, as it’d favour those with lots of holdings.
A bridging loan can provide a top-up in funds for this VAT before it is reclaimed. There are specialist VAT bridgers, in fact, which are designed around this requirement alone.
They Are Fast and Short-Term
Typically, a bridging loan can be completed in less than 14 days, sometimes less than 24 hours, making them the ideal short-term solution. The reason for their speed is their comparatively high interest rate, as well as the fact they are often used in property dealings, which can move incredibly fast in business terms.
The amount of money offered and the speed is dependent on the type of property deal in place, with more complicated ones taking a little longer to finalise.
Bridging Loans Can Help to Fund Auctions
Bridging loans are essential at auctions, with a significant portion of purchases and bids being made with a bridging loan in mind. Auctions, obviously, need quick decisions and exchanges, making them the perfect financial niche for a bridging loan.
Usually, the finances need to be sorted within 28 days. A bridging loan helps eliminate any financial stress around the auction, instead allowing finances to focus on planning tenancies, renovations and niggly contract issues. In essence, a bridging loan offers peace of mind, at a price.
The Value Varies Depending on the Property
The value of a bridging loan will depend on two factors: the value and type of property you are using to secure the finance. If you’re applying for a loan that you intend to secure against your main place of residence, then you will typically receive a bridge finance of up to 70%. If you do not live in the property, then the LTV will be between 75% and 80%. These figures are based on the gross loan amount, with the net loan amount coming in at roughly 5%-10% lower.
If you wish to have a bridging loan of up to 100% of the property’s open market value, then you need to provide additional security on top of your application. In terms of interest, it is normally owed at the end of the loan term, effectively translating to a loan whose interest increases with time. In general, the original loan worth repayable will be 5-10% higher.
Overall, bridging loans, while expensive, fill a niche in property finance. Landlords and property developers will be no strangers to this type of loan, but newbie house-buyers and wannabe real estate tycoons may fare well with this option, too.
About the Author: This post has been written by Pure Commercial Finance; expert finance brokers in Cardiff who specialise in bridging loans, commercial mortgages and development finance.