If you have encountered this article, you are likely strongly considering applying for a bridging loan. At Bridging Finance Solutions, we believe in full transparency with all our clients.
Bridging loans offer an effective solution for those needing a short-term financial gap. It can seem complicated compared to a standard loan, but that is far from the truth.
They may seem complicated simply because they are less popular than other loans, but as the world of property development evolves, they continue to grow in popularity.
Before taking out a bridging loan, it is important to understand what to expect. Here is everything you need to know:
What is a Bridging Loan?
A bridging loan is a solution for bridging a short financial gap. It is a great solution in circumstances where you need quick access to funds. Some of the reasons you may require a bridging loan include:
- Purchasing a property while waiting for the sale of another.
- Financing urgent renovations or developing new projects.
- Covering temporary cash flow gaps.
Fast bridging loans are becoming increasingly popular for a good reason: they offer a quick way to secure funding when you need it most. Unlike traditional property loans that can take weeks or months to confirm, bridging loans are often approved in as little as 72 hours – assuming your situation meets the established requirements.
How Does a Bridging Loan Work?
One of the most popular bridging loans frequently asked questions is: how does a bridging loan work?
If you are used to a typical loan or mortgage, the prospect of taking out a bridging loan may seem intimidating, but acquiring a bridging loan is often much more straightforward than you might think.
At Bridging Finance Solutions, we have approved loans in as little as 5 days, making a bridging loan a brilliant solution for a quick cash injection.
These loans are designed to provide a short-term financial solution for those needing immediate funds. They are commonly used in situations such as purchasing a new property, funding renovations, or securing a property at auction.
Because these loans are needed for urgent situations, they can be released quickly once approved. A planned repayment schedule, often referred to as an exit strategy, is finalised.
It is important to understand the terms of your loan clearly and ensure that you are making your repayment dates, as additional fees could result.
What Fees Can You Expect From a Bridging Loan?
You should consider the potential fees before taking out a bridging loan. A common misconception is that you will only have to pay the cost of missing payments, but that is not the case.
Here are some fees you can expect from a bridging loan:
Interest Rates
Bridging loans can be a quick financial lifeline, but they often come with a catch: their interest rates tend to be higher than those of traditional loans or mortgages. This is often the case because these loans are designed for the short term and are considered higher-risk.
You can expect rates typically ranging from 0.5% to 2% per month, which translates to an annual percentage rate anywhere from 6% to 24%. If you’re exploring your financing options, be sure to weigh these rates against your needs and circumstances.
Arrangement Fees
It is not uncommon for lenders to charge a fee to cover the administrative costs associated with a bridging loan. This fee is often determined by calculating the cost of the loan and applying a percentage of 1-2%.
This can differ depending on the lender.
Valuation Fees
To take out a loan on the property you use as collateral, you will need to have it evaluated. Depending on the location and value of the property, this valuation cost can range from £350 to £1,500. (higher valuation fees apply if the loan is for a development opportunity)
Legal Fees
Legal fees may be incurred during the contract drafting process, especially when a loan is secured against a property. Depending on the complexity of the loan, you could be expected to pay anywhere from £500 to £2,000.
Remember, legal fees can vary depending on circumstances.
Exit Fees
Many lenders impose an exit fee upon the repayment of a bridging loan, whether in full or in part. This fee can be structured as either a flat amount or a percentage of the loan value, typically around 1%. You will usually settle this fee when the loan is paid off, either through the sale of the property or via refinancing.
Administration Fees
It is not uncommon for some lenders to charge monthly fees to cover the administrative cost of your bridging loan. These costs can either be a set amount, or priced as a small percentage of the overall loan amount. BFS do not charge administrative fees.
Early Repayment Fees (Prepayment Penalties)
When you repay a loan ahead of schedule, it’s important to be aware that many lenders impose a penalty. These fees are designed to compensate the lender for the interest income they miss out on. Typically, the penalty is a percentage of the loan amount, and its specifics can vary depending on the lender. BFS do not charge early repayment fees.
Broker Fees
If you choose to arrange your loan with the assistance of a broker, you will be expected to pay broker fees. This is often a flat fee, but some brokers may charge you a percentage of the loan.
What is a Bridging Loan Used For?
Some of the common uses of a bridging loan include:
- Property purchase
- Property development and renovation
- Business purposes
- Avoiding financial delays
- Unlocking property potential
- Probate finance
- Divorce settlements
Though these are often the most common applications for bridging loans, there are plenty of other effective uses too. To find out how bridging loans may be able to assist your next project, get in touch with our expert team for further advice.
Who Can Apply For a Bridging Loan?
Many people are shocked to hear just how accessible bridging loans can be. They are accessible to many individuals, making them a brilliant financial solution.
Some of the people who may apply for a bridging loan include:
- Homeowners
- Property Investors
- Businesses looking to develop property
- Small property enterprises
- Companies and partnerships
Though these types of individuals can apply for a bridging loan, some eligibility factors are considered, such as whether the person has assets to secure the loan or can agree on a clear repayment strategy.
Your credit score is reviewed, as it is essential that exiting the loan is practically possible, either by sale or refinancing. Poor credit isn’t always a barrier against obtaining finance. Speak to our team and they can assist.
What Are The Risks of a Bridging Loan?
One primary concern is the limited repayment period, which typically spans from several months to one year. If the borrower’s anticipated exit strategy, such as selling a property or acquiring long-term financing, does not materialise as planned, there may be significant challenges in meeting the loan repayment obligations.
Something to consider is that bridging loans often have higher interest rates and fees than traditional loans, making them an expensive option if not managed properly. To mitigate these risks, borrowers should carefully evaluate their repayment plan and ensure the loan aligns with their financial goals.
Why Choose Bridging Finance Solutions?
We hope that this blog has helped you gain a deeper understanding of bridging loans and answered any questions you may have about whether or not one is right for you.
If you would like to learn more about what to expect from a bridging loan or determine whether you are eligible for the application process, be sure to contact our team.
Alternatively, you can complete our application form, and a member of our team will contact you as soon as they can.
BFS can make it happen.
