According to the ASTL (Association of Short Term Lending), in the 12 months preceding September 30th, 2018, bridging lending totalled £3.98 billion in the UK. This is a significant 21% increase from what was experienced in the 12 months preceding September 2017.
Why are more people choosing bridging loans?
Bridging loans can be described as a short-term loan. Compared to most forms of loan, such as buy to let mortgages, they take less time to arrange and typically have a turnaround time of 28 days.
A borrower can seek a bridging loan for a variety of financial reasons. Some of the most popular of said reasons include:
- To finance buying a property at auction
- Finance a property renovation
- To buy land or uninhabitable property
- Buy stocks, equipment, or machinery
The two most common reasons for seeking bridging finance are property auctions and renovation work.
If purchasing property at an auction, there will typically be a 28-day timeframe to complete the sale. Trying to arrange for a mortgage loan within that timeframe is nigh impossible but very possible with a bridging loan.
Through a bridging loan, individuals can access as much as 75% loan to value to borrow, and rates can be as low as 0.49%.
Naturally, the terms of a bridging loan will vary from lender to lender, and will also be influenced by the unique circumstances of the borrower such as the purpose of the loan and report provided by a valuer.
Because of the unique nature of a bridging loan, landlords have an opportunity to buy property, renovate it, and pay off the bridging loan with a buy to let mortgage.
As more people are seduced by the idea of a bridging loan, it is important that they keep in mind the importance of having an Exit Strategy (how to pay off the loan) when pursuing such a financing option.
The exit strategy can come in form of selling an existing property. Alternatively, the property bought with the bridging loan can be renovated and sold at a price higher than the debt. If the bridging loan is taken by a business, it can be redeemed on a later date through operating cash flows. Clearly, the most suitable option will depend on the property type and unique circumstances of the borrower.
First and second charge bridging loans
It is possible to apply for more than one type of borrowing when borrowing against the value of a property. This is possible as long as the borrower is within the loan to value limits.
Where the borrower has an existing buy to let mortgage rate on the property that is favourable, he/she can raise funds without having to remortgage. This is due to the fact that other products will not be as competitive and can put the borrower at a disadvantage.
If this is the case, the mortgage lender will possess ‘first charge’ on the property. This means that when time comes to pay back debts, the mortgage lender will be first in line to be paid. Depending on the circumstances of the borrower, another line of borrowing can be opened to raise the finances needed to settle the debt.
In a circumstance where a borrower is renovating a property or simply needs access to quick cash, it is possible to open a second charge bridging loan. Whether are not it is a good idea to pursue this option will depend on the unique circumstances of the borrower. But it is important to remember that when cost of the first charge is costlier than that of the second charge that is been considered, a second charge will likely be a bad idea and the borrower will likely be better off simply getting the needed finances through a remortgage.
But if it so happens that the second charge is costlier than the first charge, then a second charge solution can be a viable option.
As can be seen, property investors and homeowners have several reasons why they are falling in love with the idea of a bridging loan. But before you consider applying for one, be sure to verify that you have more to gain than lose by opting for this finance option.
And if you were previously unaware of the existence of bridging loans, well now you know.