A bridging loan or bridging finance is a short term loan provided by a bank or lender to take you from one phase to another, or to enable you to buy a property when you’ve not yet sold another. Bridging loans are used mainly in property transactions and can be what’s called open or closed.
So, scenario A: John wants to sell his property for £300k and buy another for £240k.
He has already set his sights on the second property but has not yet sold the first. John could get an open bridging loan of £240k to buy the second property and then when the first property sells, he clears off the bridging loan. The loan is “open” because there is no guaranteed end date, nor has the first property been sold yet. As you may imagine, this kind of bridging is not cheap. It’s not cheap as there are risks involved for the lender.
The risks are that the first property doesn’t sell or that it takes a lot longer than anticipated to sell. The lender will only usually advance up to a maximum of 80% of the value of the first property, hence the £240k loan against a property valued at £300k. Notice I said “valued at” £300k not “worth” £300k. There can often be a disconnect between what you think a property is worth versus what it values at.
In the majority of cases that I’ve dealt with, the value of a particular property is usually below what someone thinks it’s worth. This is of course simple a snapshot of an open bridging loan.
The actual mechanics will be more like this:
£240k needed for 6 months at (say) 1.2% per month would be £17,280 in interest (£2,880 per calendar month x 6) Plus arrangement fees which could be £2,500, legal fees and a survey might add up to a further £2,000. So a bridging lender would advance you £240k less the interest and fees.
Important Question to the lender:
How much money will I actually receive in the bank as a result of this bridging loan?
The Loan to Value (LTV) is also an important factor. Some lenders will only go to a maximum of 60% LTV on open bridging and others will take a view on the type and location of the property before making a decision.
Some lenders may roll up the interest to the end, so you only pay it once your first property has sold, but you must check well in advance. When you apply for a bridging loan you will be given a decision in principle (DiP). Then you will sign their terms and conditions or agree to the DiP to allow the lender to do their Due Diligence (DD). Once they have done their DD they will give you Terms in writing. The terms will outline all the interest charges and other costs and will show you exactly the amount you will receive. Once you agree the Terms in writing you will be able to proceed. Taking out a bridging loan will require security in the form of a formal charge over the property you are planning to sell. You will be expected to pay the costs of this.
Scenario B: David has sold his house but the new purchaser wants to settle in 4 months.
David can now apply for a closed bridge to a value of up to 80%. The closed bridge will involve your solicitor who will need to give the lender an undertaking that the agreed proceeds of the sale will be sent to the lender to clear off the bridging loan. Once the loan has been cleared, the lender will release the charge. For a closed bridge it’s much easier to roll up the costs ( similr to or less than listed above) to the end as there is effectively a guarantee that the lender will get paid.
At the time of writing, May 2018, there are approx 90 lenders in the UK that will offer bridging loans. That’s up by a massive 400% on the last 5 years. That’s great news for a borrower as they are all fighting for the same market.
Interest rates in the UK right now are low, 0.5%. That means that there are institutional lenders out there that can borrow hundreds of millions at rates as low as 2% pa That means that they can lend that money out at 4% pa. Now they won’t do that for everyone, but that shows you how low they could go.
What will affect the rates you get will be the risk factor and whether your request is open or closed.