6 Important Aspects of Bridging Finance You Should Know About Before Applying
If you are new to bridging finance, it can be difficult for you to comprehend its distinct features. However, if you are planning to take out a bridging loan, it is crucial to understand what sets them apart from other forms of loan. In this post, we will cover the six most significant aspects of the bridging finance UK, so you can gain a full understanding of this type of specialist finance.
What is Bridging Finance?
Bridging finance refers to a short-term financing solution that borrowers use to fill their short-term funding gap until a stable form of financing is available. In other words, a bridging loan gives you temporary access to the funds you need when there is an immediate requirement, but you don’t have any permanent form of finance available yet. It serves as a bridge between the two financial situations.
Just like any other type of loan, bridging loans come with an interest rate that is charged monthly. Since it is a short-term loan, it is usually taken for 12 to 24 months, and the loan amount is repaid along with the interest and associated fees after the term ends.
6 Important Aspects of Bridging Finance That You Should Know Before Applying
#1 Bridging loan is a short-term loan
Before taking out a bridging loan, the borrower must bear in mind that this is a short-term loan, and must be repaid when the term ends. It is used in overcoming short-term financial obligations, such as buying a property at auction, undertaking property refurbishment work with an intention to sell it for a higher price, meeting transaction deadlines, buying a new home while waiting for the sale of the existing home, expanding property portfolios, etc.
Bridging finance can be used for one month and can go as long as 24 months. The borrower must have a strong exit strategy in place before applying for bridging finance. That is because failing to repay the loan when the term ends can result in the repossessing of the properties by the lender.
#2 Bridging loan is a secured loan
Most loan types in the UK are secured. Lenders today are very cautious when it comes to investing in the bridging loan market and take extreme care to avoid bad loans. Hence, they ask for loan security from the borrower as the condition of the loan agreement to protect their investment. The loan amount you can access through bridging finance usually depends on the value of your collateral. It directly impacts how much you can borrow.
Usually, lenders agree to offer 70% to 80% Loan-to-Value (LTV) ratio. However, in some cases, a 100% LTV bridging loan is also possible. It is important to keep in mind that if you fail to repay the loan, the lenders have full rights to repossess your properties or assets, and sell them to compensate for their loss.
#3 Bridging loan is easy to access
Getting a traditional loan from the bank can be a time-consuming process. You might have to prepare a whole bunch of documents and visit the bank multiple times. Even after providing all the documents, there is no guarantee that your loan will be approved, making it more difficult and challenging to secure. As a result, when the time is essence and you need instant access to money, traditional loans may not help you.
Since bridging loans are essentially made to fill the short-term funding gaps, they can be accessed more quickly than standard loans. They can be secured in a matter of days and repaid when a permanent form of financing is available. The short-term nature of the loan is the reason bridging finance has become more common in the UK.
#4 Bridging loans can offer large amounts
Bridging loans are temporary borrowing solutions that let you borrow large amounts in a matter of days. However, the amount you can borrow will depend on several factors, such as the value of the property used as security, your credit history and your exit strategy. With bridging loans, you can raise anywhere from £25,000 to up to £25m, while some lenders may be willing to offer beyond this amount.
This large amount can be used for several purposes, especially to secure time-sensitive opportunities. However, borrower must have a solid exit strategy in place otherwise they risk their properties being repossessed by the lender. Bridging loans are often perceived as small loans that are not profitable for high-street banks. But, the truth is banks refrain from providing bridging finance because of the high risk of defaults on large amounts.
#5 Collateral security serves as the loan’s security
A bridging loan London is secured against property or assets used as collateral. Typically, real estate is used as security, but any valuable asset can be used as collateral. The lender just wants to make sure their investment is protected against assets that can sustain its value.
Many bridging loan lenders in the UK accept assets, such as properties, bonds, jewellery, debentures, etc., as securities. The value of these securities directly influences the LTV ratio and the interest rate. Therefore, it is important to speak with your lender regarding the availability of collateral before applying for the loan.
#6 Bridging loan can be used for multiple purposes
Bridging finance is often believed to be used only for property-related requirements. While bridging loans are associated with property, they are not limited to it. Bridging loans are extensively used by property developers, homeowners and business owners to fill their short-term funding gaps. As such, bridging loans encompass various industries and a group of people.
Fast bridging loans in the UK have expanded to several areas now and can be used for various purposes, such as a homeowner looking to purchase a new house before selling his existing home, a business owner looking to expand their offerings, a property developer looking to undertake a development or refurbishment project. It is important to understand the purpose of the loan before applying, as there are certain lenders who offer specific deals designed to fulfil particular requirements.
Bridging loans are a unique way to get quick access to large amounts of money for a short time. Knowing these crucial aspects of bridging finance UK will help you understand how the loan works and differentiate it from other types of financing. Its short-term nature, easy to obtain and large amounts makes it ideal for many businesses and individuals in the UK. It is also important to understand that bridging loans have monthly interest rates, and based on the collateral offered, they can range anywhere from 0.75% to 2% per month. Just like any other financial decision, it is advisable to consult a specialist bridging loan broker if you are considering applying for bridging finance for the first time.