Bridging Finance: Frequently Asked Questions
What Terms should you recommend and why?
The interest on bridging loans is calculated daily, so the less time the customer has the bridging loan, the cheaper the loan will be. Bridging loans are normally offered for 3, 6 or 12 months. Non-regulated bridging loans can last for a maximum of 24 months.
We usually recommend that a client takes out a bridging loan for 12 months to protect the customer if they face delays. For example, if a 3 month term was recommended and the customer needed to extend this by another 2 months then the funder may refuse, resulting in the bridge needing to be refinanced through another lender, or the lender may charge a fee to extend the loan. Both of these options would result in the customer paying additional fees which could be costly.
If a 12 month term is recommended but the customer redeemed after 95 days, then they will only be charged for the 95 days because most (but not all) bridging lenders do not charge exit fees or early redemption charges. Some lenders may insist that the bridging loan lasts for 3 months. Our Bridging Specialists will talk you through the options in detail.
In general, we recommend the maximum term possible.
Understanding gross and net LTVs
Some lenders quote the maximum gross loan to value in their criteria guides. This is the loan amount the client needs, plus the total interest applicable to the full term and fees (if added to the loan). However, other lenders quote the maximum net loan to value, which is the maximum they will lend to the client excluding interest and fees. So, what is the difference?
From a marketing perspective, lenders who quote the gross loan to value, may attract more business by stating that they’d accept a higher loan to value, even though they may only offer the same net loan to value as a competitor.
We normally advise arranging a bridging loan for the maximum term possible, usually 12 months. However, due to the interest for the full term being added to the loan when calculating the loan to value, it can sometimes be beneficial to recommend a shorter term to achieve higher borrowing or a lower interest rate.
For example, if your customer needs a bridging loan of £250,000 to purchase a £400,000 property, then the net LTV would be 62.5%. A term of 12 months was recommended and the bridging lender calculated that the interest and fees would cost £25,000. The customer agreed to pay all of the fees on redemption, except the Commitment Fee and Valuation Fee which was required upfront. The bridging lender would, therefore, calculate the gross loan to value as 68.75%, taking the customer over the 65% LTV bracket.
What do funders look for when assessing a case?
Exit Strategy: Funders want to ensure that the customer has a strong repayment strategy in place before lending funds. Repayment of a bridging loan is normally through the sale of property or refinancing the loan onto a long-term mortgage.
Loan to value: Most bridging lenders steer clear of deals where the loan to value is above 60-70% because short-term loans are deemed high risk so the lender likes to see that the customer has a large amount of equity. Some lenders, like True Bridging, will consider lending up to 80% loan to value or 100% with additional equity because they spend longer at the outset taking the time to individually underwrite the deal to ensure they are comfortable with the security and understand the customer’s ambition.
Purpose of the loan: Straightforward chain-break deals or loans for refurbishment purposes are favourable with most lenders. Funders are more cautious when loans are required for the change of property use e.g. converting a commercial property to a residential or vice versa. This is largely because projects which contain a lot of development work are more likely to be subject to complications along the line which incur additional costs that the customer may not have budgeted for.
Customer’s credit history: If your customer has a less than perfect credit history, then there are only a handful of bridging lenders who will consider them because short-term funding is high risk and therefore lenders want to ensure the customer has a strong history of meeting their obligations. Some lenders, like True Bridging, will consider customers who have CCJs, missed mortgage payments or unsecured arrears. They will want to see a strong exit strategy in place and get under the skin of the customer’s ambitions before agreeing to lend.
How can interest be repaid?
Lenders allow customers to repay interest on bridging loans in three ways:
Rolled up interest: Bridging loans with rolled up interest means all of the interest from the loan will be paid on completion as a lump sum. The interest is calculated at the outset and added to the loan.
Loans with rolled up interest are a popular option for customers who cannot afford the monthly interest repayments, do not have regular cash flow or a clear exit strategy in place which would repay the loan and interest. For example, sale of property.
Serviced interest: Bridging loans with serviced interest work like an interest-only mortgage. The customer pays the interest on a monthly basis which means only the original loan is payable on redemption.
Retained interest: Bridging loans with retained interest are similar to rolled up interest in that the interest is calculated at the outset and added to the loan. With retained interest the customer pays the interest on top of the interest already added to the loan, making the loan far more expensive.
Closed bridge or open bridge?
A closed bridge is arranged when the customer already has a set date when they know the bridge will be redeemed. For example, if they have a set completion date for a mortgage and they only need the funds from the bridge to tide them over in-between then a closed bridge may be recommended. This type of bridge is recommended for most bridging loans because most lenders like to have a fixed date when a loan will need to be repaid.
An open bridge has no set end date.
What fees can be added to the loan?
Ingard allows all fees to be added to the loan except the Valuation Fee and Commitment Fee. This means the customer can add the Lender/ Arrangement Fee, Legal Fee and Broker Fee to the loan. If fees are added to the loan, most lenders will require them to still fall below their maximum loan to value.
How much can be borrowed?
Customers can borrow between £25,000 – £10 million plus. The maximum loan they will be offered is dependent on a number of factors, including:
- Property type
- Property condition
- Customer profile
- Exit strategy
Here to help
For more information, call our Specialist Team on 01702 538 800 or arrange a call back.
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This guide was produced in association with True Bridging.