It is fair to say that buying property since 2013 has become more of a sellers’ market. Open houses and block bookings for viewings are the chosen tactics for estate agents on Saturday mornings. If you have been in this scenario recently, you will recall the anguish of telephone tennis between offers being rejected and other interested parties increasing their bids, making the process of securing a property much more difficult. This makes the prospect of investing in property with this much competition slightly terrifying. Time is of the essence when offering an advantage against first-time buyers with no chain. The eager purchasers are at the mercy of their chosen lender to package, offer, and raise funds in a process that can vary between 8 and 12 weeks. Mortgage lenders in most cases are often large organisations, and with the amount of transactions going through, the process can sometimes take time, with the average decision from the underwriters taking 7 working days. Brokers up and down the country have been listening to their clients concerns and have pulled rank to diversify their offerings with a quiet revolution in property finance.
Bridging is a term that surrounds a lot of mystery to most buyers. It is difficult to ignore bridging loans because the number of customers taking up the products has more than doubled. You can put into Google ‘what is a bridging loan?’ but you will still be left none the wiser. This article hopes to debunk the jargon on bridging, adding another string to the bow when competing for property investments.
Firstly, it would be best to address what a bridging loan means. They are short-term loans for larger amounts of money needed quickly. You wouldn’t want a bridging loan for longer than 12 months because they have a higher annual rate of interest than the high street. If speed is what motivates you, then this type of finance can be packaged in as little as 24 hours.
Bridging loans can be used in a variety of scenarios, including:
- Buying a property without having sold your own.
- Helping in between pension payments in lump sums.
- Looking to refurbish a property to sell on for profit.
There are several types of bridging finance to consider because there are so many different uses. Selecting the right loan type can determine interest, loan value, and the security raised.
Understanding the difference between an open and closed bridging loan is essential when selecting the right bridging finance:
- A closed loan is when a deadline is given with an exact date to repay the loan and the lender knows how you intend to repay; this is known as an exit strategy. The lender will need evidence that you can repay the loan within the time limit. Typically, lower interest rates are available with closed bridging loans in contrast to open loans due to a lower-risk exit strategy.
- An open-bridging loan, on the other hand, is ideal if you don’t have a clear exit strategy. The loan, like a closed bridge, will still need to be paid back by the deadline but won’t have a clear proposition for repayment. Naturally, open bridging finance is deemed more risky, so to compensate the lender, the interest rates are higher than for a closed bridging loan.
The minimum you can borrow with bridging finance is £10,000 with no maximum limit, but some lenders set their own restraints on how much they are prepared to lend.
Interest rates are not just dependent on the type of loan taken but also the loan-to-value ratio. Loan-to-value (LTV) is the ratio of the amount of the loan to the value of the asset purchased. Most bridging loan specialists will have a calculator on their websites to work out the average cost of interest and fees. This will make shopping around slightly more informative for the savvy borrower. As a guideline, the monthly rates can start at 0.44% and reach 1.5%, but remember that this will ultimately change based on your circumstances and requirements.
Whether it’s a regular mortgage or specialist financing options that suit the current project, the ability to tailor borrowing has never been more versatile. If you’re interested in learning more about the choices readily accessible, please contact our consultants at UK Property Finance.