BRIDGING loans continue to surge in popularity as a quick way to get a property without having to wait for a mortgage to clear.
There are around 50 bridging lenders in the UK, hundreds of brokers and the industry reached a peak of £4billion in 2016.
They are a short-term form of lending which are usually arranged far quicker than a traditional buy-to-let mortgage. The turnaround time with a bridging loan is typically around 28 days, however it can be even quicker than this depending on the lender and their policy.
What are bridging loans used for?
Bridging loans can actually be used for a variety of purposes. These include to:
- Purchase stock
- Purchase inhabitable property
- Finance property purchase at auction
- Purchase machinery or It equipment
- Purchase land for future development
- Finance renovation work
Bridging Loan Rates
Borrowers can normally expect to borrow up to 75 per cent of the loan value on a bridging loan and the rates often start from 0.49 per cent.
However, the rates can vary quite widely from lender to lender, depending on factors such as the purpose of the loan and the projected income from the renting out of the property. This will be established by a valuer.
If the loan is being taken out in order to complete renovation work, then the lender might use this, what they perceive to be, heavier work as a greater risk. Therefore, they may see it more of a risk to lend out for knocking down walls or a building conversion than they would something like a kitchen renovation. Therefore, the rate may be higher in the former of that example.
Have an exit strategy
When you take out a bridging loan, it is vital that you have an exit strategy.
This could be through the sale of an existing, alternative, property, by buying, renovating and selling at a higher price than the debt is worth, or simply transitioning to a buy-to-let or commercial mortgage when possible.
Another form of redemption, if the bridging loan is taken out by a business rather than an individual, is to pay it off at a later time through operating cash flows.
If a business has a short-term cash problem because, for example, an invoice has not been paid on time, then a bridging loan could be utilised to help keep the business running in paying off the bills and the staff’s wages. Once the outstanding invoice has been received by the business, they can pay off their bridging loan.