Bridging loans differ from mortgages in that the entire balance repayment (plus any additional charges) can be deferred until the end of the loan term – which means you won’t have to pay back on a monthly basis. However, whilst the loan amount remains the same throughout the term, the interest will still accumulates each month and the total amount of interest repayable on the date that the initial loan advance is expected to be repaid is known as compound, or compounded, interest. For example, if you borrow £100,000 and the monthly interest rate is 1.5%, you will owe £101,500 by the time the second month has arrived. On the third month, you will owe £101,500, plus an additional 1.5% in interest, and so on.
First Charge Bridging Loans
A first charge lender is any party that owns the charge on the land registry on behalf of a borrower’s property. If you apply for a bridging loan and give the right of first charge to a lender, then that lender is fully entitled to sell your property should you default on repayments or find yourself unable to sell the full outstanding amount by the agreed repayment date. Once the loan is repaid, the charge will then be lifted.
Gross Bridging Loan
When you add the net bridging loan amount to all the other borrowing costs, the figure you arrive it is what is known as the gross bridging loan.
An example of the breakdown of costs might be:
Net Bridge Loan amount: £75,000
Brokers fee: £0
Arranger’s fee (typical 2%): £1,500
Assessment cost: £295
Transfer fee: £35
12 months interest (at 0.6%): XX
Gross Bridging Loan: XX
In contrast, the Net Bridging Loan is simply the amount borrowed without any additional costs or fees added.
Heavy Refurbishment Bridging Loans
Heavy refurbishment bridging loans are short-term, secured borrowing products that are provided for those intent on carrying out extensive works and/or repurposing on a property that is to serve as collateral for the lender. Owing to the additional works required, and therefore the increased level of risk from the investor’s viewpoint, the borrowing rates are typically higher on this type of product.
If a borrower is paying back an interest only product then they are only repaying the interest on the sum borrowed and not the capital itself. However, this is similar to bridging loan products, in that the interest is charged on bridging finance is calculated on a monthly basis without the borrower ever having to make a repayment towards the total outstanding balance until the entire loan term has elapsed. This means that the amount of interest charged will actually increase each month whilst the net bridging worth of loan remains the same.
Now, compare this to a mortgage or some other long-term secured financial product, where the borrower is typically expected to make monthly repayments which reduce the net worth of the product along with the interest repayments themselves. As the loan progresses, the amount of interest repaid each month is reduced significantly whilst more of the capital borrowed is repaid with each payment.
Bridging loan applicants are not required to make monthly repayments. Instead, they are expected to pay back the net bridging loan amount plus any additional costs, such as interest charges and arrangement fees, at the end of the loan term, and in full. Although each lender is slightly different in the way that they calculate their borrowing costs, most use retained interest as means of working out the total amount repayable. Once the loan is approved and completed, the applicant will receive the net loan amount by means of bank transfer – with any extra borrowing costs deferred until the time when repayment is expected. If the loan term is fixed at 12 months, and the borrower repays the loan early, then interest will only be paid for the time that the loan is outstanding – typically without any expensive exit fees.
Standard Bridging / Light Refurbishment Bridging
Standard and light refurbishment bridging loans are typically the most expensive type of bridge finance available. This finance is normally used for houses that are in excellent condition and only requiring slight, cosmetic upgrades such as redecorating or new bathrooms and kitchen installations.
Unregulated Bridging Loan
If you are looking to secure finance against a property you do not live in, or in which none of your family reside, then you will typically only require an unregulated bridging loan. FCA regulated bridging finance is only relevant when a borrower or their family live in less than 40% of the floor space in a property.
Asset turnover is the term used to describe just how quickly and efficiently any given asset or assets can be used to generate a profit in relation to the cost of the assets themselves – and therefore just how valuable the assets are in actuality.
Bridging loans are fast and flexible, short-term borrowing products that are typically secured against some type of property asset and repaid within 6 to 12 months. Bridging loans are one of the quickest types of finance available in terms of how quickly they can be applied for and approved, and they provide near instantaneous access to urgently required funds in a matter of days. They can be used to bridge the gap between two property transactions, or simply to bridge the gap until more permanent finance can be secured.
Bridging Loan Calculator
A bridging loan calculator is a simple tool, which is usually provided as part of a lender’s website or some other online resource, in order to help a borrower work out the cost of a given loan product over a required length of time. As a leading bridging provider, we provide a streamlined online bridge loan calculator that can also work out the cost of borrowing when the lender’s fee is charged as a percentage.
Commercial Bridging Loans
If you run a business that is experiencing short-term cash-flow problems then a commercial bridging loan could help solve all your problems. Commercial bridging loans are available for any business owner with suitable assets and they can be arranged quickly with flexible repayment terms and charges that can be deferred until the full balance is due. If you are looking to secure a commercial bridging loan secured against your residential property then you should look to work with a provider that is FCA regulated and approved. Commercial bridging loans can be used for all manner of reasons, including the payment of urgent bills, the expanding of operations or the payment of wages whilst waiting for an invoice to clear or some other type of finance to arrive.
Current assets are assets that can be turned into cash in less than 12 months. This could be machinery, real estate, a trademark or any kind of stock that may quickly be sold. The total current asset figure is the net worth of all of the assets owned by a company with a year in order to settle an outstanding debt amount.
A goodwill payment refers to any funds that are forwarded towards the purchase of a company that exceed the value of that company and the net worth of its assets.
Typically used by propery developers, mezzanine finance is a type of loan product that is used to finance an urgent gap in funding. For example, if a property developer has £250,000 of their own money, and they can only access a further £500,000 through their main provider towards the end cost of a project worth £1,000,000 upon completion, the remaining £250,000 could be raised by means of mezzanine finance.
Secured loans are long-term borrowing products that are secured against some type of asset that a borrower has – such as the equity in their home. As the lender has security in the form or real estate or some other asset of significant value, they will typically advance greater sums of money to the borrower whilst simultaneously offering lower interest rates and prolonged repayment terms. The main disadvantage of this type of finance is that the lender can repossess and sell your home if you default on repayments – although this is almost always the worst case scenario.
National House Building Council
The NHBC is the UK’s largest home warranty provider and it is their aim to improve the standard of construction across all new build homes. If you are a first time buyer or a property owner who is looking to move home, and you purchase a house with the NHBC buildmark then you can rest assured that the property has been built to the highest achievable standards by fully regulated and authorized NHBC registered builders.
An NHBC certificate is an official document that shows your property is covered for at least a full ten years against any type of fault or damage that you would not expect to occur if the property had been built in line with the national House Building Council’s standards. Details of any cover provided, along with any limitations and exclusions, are provided in the policy document that you will receive upon purchasing your home.
Before a lender offers you credit, they will want to inspect your credit file as a means of determining whether you are a financial risk or not. If you have ever fallen behind on your bills or received a court summons or CCJ (County Court Judgment), or you have ever been declared insolvent or bankrupt, your credit rating will reflect this and you might find it difficult to get credit without security. The information on a borrower’s credit file is usually stored for a 6 year period.
If you are applying for finance and you are only looking for a quotation in order to help make up your mind, then the type of credit check that will be carried out will usually be a soft search. This can be carried out without affecting your credit file and will not leave a footprint on your record. If you apply for credit multiple times and have been refused repeatedly, this can be used against you and is often detrimental towards your chance of approval.
This refers to the fact that all lenders are now required to advise borrowers of the total APR in order to show applicants the total cost of borrowing over a year. As well as the interest, the click also includes additions costs such as broker fees and arrangement costs. This makes it much easier for a borrower to compare the cost of one product against another.
Certificate of Good Standing (Certificate of existence)
This is a certificate that is issued by Companies House in order to confirm that a company currently exists and is in good order. A business owner will only be issued this certificate if their company accounts and returns are up to date.
Country Court Judgment
A County Court Judgment or CCJ is a penalty issued by a court when a borrower fails to repay a debt. CCJs remain on a credit file for a period of 6 years and they have a negative impact on a borrower’s credit score and ability to secure finance.
Different lenders have different ways of looking at a borrower’s ability to repay a debt and the likelihood of them doing so. One of the quickest and most accurate ways of determining creditworthiness is by means of a credit reference or credit rating and this information is readily available by means of credit scoring agencies. If you are applying for finance, a lender will use this information to assess whether or not you should be offered a loan, and just how much interest they should charge in line with how much of a potential risk you pose.
Credit Reference Agency
A credit reference agency is a specialist company that holds current information on a borrower’s credit history. The three main credit reference agencies are Experian, Equifax and Callcredit – and each time you are late with a bill payment or loan installment, the information is recorded with these agencies and made available to other creditors that you may approach in the future.
Debt consolidation is a term that is applied whenever a borrower condenses a number of different borrowing products, typically with high interest rates and complicated repayment arrangements, into a single loan product with a singular, more manageable repayment with lower rates. Most debt consolidation loans are secured borrowing products which offer longer repayment terms and significantly more affordable interest charges.
Early Repayment Charge (ERC)
Some lenders may charge an additional fee if you decide to settle a loan early in order to save money. This is known as an early repayment charge.
If you are looking to take advantage of the low borrowing cost and increased repayment terms available with a secured loan product, yet you have no equity or assets of your own to offer as security, a guarantor loan might be an option. This is where someone else offers his or her property as security for a loan that you take out.
An indemnity policy is an insurance document that covers a property against any costs that may be incurred as a direct result of some defect that is referred to in the property’s title. For example, some older properties sometimes have a covenant that states no further developments should be made without permission from the original builder. However, if the original document is 75 years older or more, the chances of that builder being alive – and therefore granting permission – are practically nil. Now, if the builder’s relatives raised a legal objection to any further works being undertaken on the property, the indemnity policy would cover the costs. An indemnity policy is usually paid off as a one off premium – and they typically stand regardless of how many times a property changes hands – meaning a single policy can be used for the entire lifetime of a building.
A personal loan is an unsecured product that is typically only made available to those with a good credit score. This type of finance does not require you to be a homeowner or to offer any other kind of asset as collateral, although you will only be able to borrow a limited amount and the interest charges are typically quite costly.
Self Invested Personal Pension (SIPP)
A Self Invested Personal Pension is a government approved pension plan that enables the policy holder to choose exactly where their funds are to be invested. The available investment products have all been approved by HMRC, although there are limits on how much you can pay in on an annual basis.
A prohibition notice is a document served by a Local Authority on a property that is in a dangerous condition that poses a threat to the health and safety of passersby and local residents. This type of notice can be served with immediate effect and with serious consequences if ignored.
If you are applying for finance in order to fund the acquisition of a property, or solve a temporary cash flow problem, the lender will normally offer a secured borrowing product with a net amount totalling between 70% and 75% of the equity owned in the collateral you are providing as security. However, some borrowers may require funds up to 100% of the property’s open market value and in these instances some type of additional security must be offered in the form of a supplementary property asset (or multiple real estate assets). If you are unable to provide this additional security, it may still be possible to get the finance you need – although you may need to ask a relative or business associate to act as a guarantor on the loan.
An asset is any item of value that can be used as security against loan repayments in case the borrower defaults. In the vast majority of cases, borrowers will need to provide some form of property asset as security, such as their home or a commercial building. However, other assets are sometimes used to secure bridging finance and these include luxury vehicles, expensive machinery, valuable antiques and land or building materials.
When you purchase a property using a mortgage product, the details entered into the land registry database will entitle your mortgage provider to sell the property in order to recoup their funds should you find yourself unable to honour the debt. When a third party has permission to sell your home in such circumstances, we refer to this as the lender having a charge over the property. If you are looking to take out additional finance secured against your home, your new lender will also expect a percentage of the proceeds if your home needs to be sold in order to pay off any outstanding debt. We call this a second charge. Consequently, many homeowner loans are also referred to as second or third charge borrowing products.
Closed Bridging Loans
A closed bridging loan is a short-term, secured finance product that is specifically aimed at borrowers who have a clearly defined exit route, i.e. a reliable means of repaying the debt by an agreed date. For example, if you are using a bridging loan as a means of purchasing a property, and you have already exchanged contracts on a house you are selling in the meantime and you intend to use the money raised in order to pay off the loan, a lender will consider this to be an acceptable exit strategy. Closed bridging loans are the most common type of bridge finance available. If you do not have a clear exit strategy in place, you will need to apply for an open bridging loan instead. However, open bridging finance requires a higher credit score and, in some cases, additional security or a guarantor.
Daily Interest Rate
Most loan products use annual interest rates as a means of calculating and comparing the cost of borrowing. However, bridging finance is a slightly different beast in that the interest is charged on a monthly basis (for the first 30 days) and then on a daily basis. The obvious advantage of daily interest is that the borrower will only be charged interest whilst being indebted to the lender, which means that the loan amount can be settled early without the borrower having to pay unnecessary interest charges until the end of the current month. or until the expected loan term is reached.
Development finance is a specific type of short-term borrowing product that is intended for property developers who require appropriate funds in order to proceed with new builds and redevelopment projects. Typically available with terms ranging from one to three years, development finance is often released in planned stages as the building work progresses. This is possible because most development projects undergo a significant increase in value as the completion stage draws nearer.
When you take out a mortgage or some other secured borrowing product, the lender will obviously expect regular monthly repayments until the debt is fully repaid. However, with bridging finance, the borrower can defer the repayment of the full loan amount, plus any additional costs and borrowing fees, until the end of the fixed term. The exit route, or exit strategy, simply refers to the plan of action you have in place in order to settle the debt. An acceptable exit route would be if you were a property developer and you needed to borrow funds in order to finance a refurbishment project, and you had a buyer in place who was waiting for the work to be completed before purchasing the property.
FCA Regulated Bridging Loan
The Financial Conduct Authority is a regulatory body that ensures UK consumers and corporate borrowers are treated fairly by lenders and brokers without being misled or taken advantage of. If you are a homeowner and you are looking to take out a product secured against your home then it would be in your best interests to apply for an FCA regulated bridging loan in order to ensure you are adequately protected.
The FCA has guidelines in place that ensure:
* Consumers are treated fairly and their borrowing options are explained clearly
* Your lender acts responsibly and within your best interests, as opposed to simply trying to make money from you.
Not all bridging loans and bridging finance providers are FCA authorised or regulated, so it is essential that you carry out a little background research before committing to a broker and the products they are offering.
Owing to the fact that bridging loans are typically repaid in full at the end of the borrowing term, the interested generated is calculated on a monthly basis for the first 4 weeks and then on a daily basis until the loan amount is settled. If you take out a bridging loan over a 6-month borrowing term, the interest will accumulate at around 1% to 1.5% per month, depending on your agreement, and will be added to the gross bridge loan amount.
Loan to Value, or LTV
Loan to Value is the ratio of the amount you borrow against the market value of the property used as collateral. For example, if you purchase a new home that costs £200,000, and you need to borrow £150,000 to fund the acquisition of this new property then the LTV ratio will be 75% (as £150,000 is 75% of £200,000).
Net Bridging Loan
If you need to borrow a cash sum of £100,000 then this is known as the net bridging loan amount. The net value of a bridge loan is the capital borrowed before any additional costs are added, such as the arrangement fee or the generated interest. Once the additional costs of borrowing are added, the new amount is referred to as the gross bridging loan amount.
Open Bridging Loan
An open bridging loan is a short-term financing product that is loaned to a borrower who does not have a clear exit strategy in place. For example, if you were looking to borrow £150,000 in order to purchase a new property whilst relying a buyer to show up so that you could sell another property in order to repay the loan, you would typically need to apply for an open bridging finance product. Open bridging loans are not as common as closed bridging loans and they are usually more difficult to obtain, unless you are able to provide additional security and have a good credit score.
Second or Additional Charge Bridging Loans
Second charge bridging loans or additional charge bridge loans are short-term borrowing products that are secured on a property (or properties) that are already mortgaged. If you find yourself unable to pay your mortgage and you do not have an appropriate insurance policy in place then your original finance provider will have first charge on your home, which means that they are entitled to sell the property in order to recoup their losses. Once they receive the allocated funds, the next portion of available funds will go to the second charge loan provider, and so on.
If you are applying for a second charge or an additional charge bridging loan then you will usually require permission from your original lender, or whoever holds first charge over the property. Most homeowner loans are second charge products and they are useful when the original mortgage has an expensive exit fee or early repayment charge, which can make other types of refinancing such as remortgaging an unrealistic option.
If you want to borrow a considerable sum of money (over £25,000) and you are looking to spread the repayments over an extended number of years, you will typically need to offer some form of collateral as security against the loan. Most bridging loan providers will consider any type of property as security for a borrowing product, including residential dwellings, commercial buildings, mixed-use real estate and/or development land.
The borrowing term is the amount of time needed to repay the loan. Whereas most mortgages and secured homeowner loans have repayment terms lasting from 10 to 25 years, bridging loan terms are available from 1 month to 2 years, depending on the type of finance required and the agreed exit strategy. Some bridging loans are available with open-ended terms and these are useful when a borrower does not have a clear exit route in place.