Discuss mortgages around the dinner table and probably everyone will understand the concept of what type of finance this involves. Start talking about bridging loans and the conversation is likely to become a little more confused. Bridging loans are one of the most misunderstood financial products, with many people thinking they are too expensive, risky and come with a heap of complications and headaches.
How wrong they are.
Lenders have worked hard to transform the sector into a more professional market that provides tailored financing designed to give investors more opportunities and options.
Let’s take a look at some of the most common myths that surround bridging loans.
- Bridging Finance Costs the Earth
- Bridging loans are risky
- You Can Only Use Bridging Loans To Buy Property
Many people have shied away from bridging loans in the past, as they assumed they were expensive and risky. In reality, modern bridging loans offer realistic and competitively priced funding solutions that make them an attractive proposition to potential borrowers over a short time.
The bridging loan market has grown in response to traditional funding streams becoming more risk-averse as a result of the financial crash in 2008. With more lenders and products available, the market has become more competitive, which has driven rates down in recent times.
Bridging loans are by nature short-term finance, whereas traditional loans tend to have long terms of up to 25 years. Although the interest rates for bridging loans are higher than long term loans, they are charged over a much shorter period, which ensures there is a cap on the overall spend.
Bridging loans also do not tend to have too many charges attached to them, whereas mortgages come with various charges and fees. Fees and charges can include an arrangement fee, a booking fee, a valuation fee, a telegraphic transfer fee (a charge for transferring the money to your solicitor), a mortgage account fee, missed payment charges if your account goes into arrears, mortgage broker fees if using a broker or getting advice, higher lending charge (not always applicable but pays insurance to the lender if the deposit is small and there is a risk of default), fees for arranging own building insurance (again, not always applicable), early repayment fees, and closure fees. There are also other costs such as survey and legal fees.
All of these can add thousands to the cost of arranging long-term finance. The fees associated with bridging loans tend to be more straightforward and include survey and legal fees, an arrangement fee, interest charges and broker fees. Interest rates will depend on the individual circumstances and risks to the lender; the lower the risk the lower the interest will be.
Bridging loans are not as costly as you may originally think. When used properly for the right type of project they provide a quick funding stream that allows investors to create a profitable portfolio that might not have been available to them otherwise.
As with all matters financial, calculate how much the loan will cost prior to undertaking it. You can use Novellus’ bridging loan calculator to give you a deeper understanding of exactly what is involved and the overall costs.
As mentioned above, lenders seek to offer the best experience to their customers, which has given rise to a more professional industry. The ethics and criteria of the underwriters are now very high, leading to responsible funding solutions that not only puts the needs and requirements of the borrower first but ensures suitable terms are put in place to minimise risk for both lender and borrower.
These include an exit strategy that is manageable, realistic and has been carefully considered for its suitability. Repayment methods are considered thoroughly before approval is given; these can include any long-term financial source, such as selling a property; long-term financing options such as remortgaging; maturity of investments or bonds; basically, any long-term funding that has not yet been received but is due before the end of the bridging loan term.
There are always risks involved in finance, especially with Bridging. However, bridging lenders are becoming much more discerning. Novellus will only lend when they feel the risk profile is minimal to both borrower and lender. Novellus ensures that the emphasis is on helping the borrower achieve the right source of funding for their needs and every application is considered on a case-by-case basis with this in mind.
The most common use of a bridging loan is to purchase property but it is not the only use of this type of funding. These include:
Covering short term cash flow issues
Most businesses hit cash flow issues at some point. Whatever the reason for the cash crisis, having access to quick short term funding can be the difference between a business surviving or going bust. Company-owned assets are generally used to secure the loan and the speed of the application is an attractive aspect of a Bridging loan. This then allows a business the time needed to recover from any financial issues.
Funding for startups
Starting a business is an exciting time but it does not normally generate huge amounts of cash in the early stages. Instead, the business needs injections of money to finance all the necessary overheads and commitments. Bridging loans can also be useful during periods of growth, when funds may be needed for investment purposes. As long as there is evidence that the business will be in a position to meet the exit strategy, bridging loans can help businesses build, grow and develop.
Alternative property purchases
Buying a property with a bridging loan is not restricted to traditional purchase; in fact, the reasons for using a bridging loan are usually very different from using a mortgage. A common situation could be when the buyer wants to buy and sell quickly.
A mortgage is a long term solution that can take months to organise; also, if it is paid off early, extra fees are incurred which adds to the cost of borrowing. A bridging loan provides quick finance and Novellus have no early repayment fees.
Auction purchases are a well-known use of bridging loans, as speed is of the essence. Bridging loans can be arranged very quickly, whereas a mortgage can take some time to be approved. Sometimes a seller may offer a discount for speedy completion as well, in which case a bridging loan can be the solution.
Bridging loans are also a good choice when the property does not qualify for a traditional mortgage. To get a mortgage the house has to be habitable, so if you are looking at a dilapidated building, with holes in the roof, no running water, no kitchen and no services, it will not satisfy the criteria for a mortgage.
A bridging loan allows the buyer breathing space to complete renovations to make the property habitable, at which time the property can be sold or long term finance can be acquired.
Other types of assets and situations that may need Bridging loans for short term finance are, Buy-to-lets, commercial properties that need to be completed fast, buying a property before the sale has been completed on another property, being at risk of repossession or development or investment funding; all of these can be achieved with bridging loans.
Land (with or without planning) can be purchased with bridging finance. Traditional funding is not always available for land without planning or existing utilities or access in place. Bridging, however, is much more flexible and open to these types of purchases. Land is often purchased quickly, particularly in areas of prime development. Bridging finance offers an option to secure cash and allow developers to buy the land quickly. Once purchased, there is then time to make the necessary changes or acquire planning before securing long term finance.
One of the reasons many people turn to bridging loans is because they are so easy and quick to arrange. When reviewing applications, lenders put more importance on the borrower’s ability to pay off the loan, rather than their credit history or current income. Although lenders do check credit history, they give less weighting to this than traditional mortgage lenders do when making their decision.
Instead, bridging loan lenders look closely at the security options and the repayment method. If the borrower is intending to refurbish or develop the property and sell it on quickly, the sale will be used as the exit strategy and is one of the most important aspects of the application. If the exit strategy is solid, this makes the process more likely to be approved quickly.
The result is that the application process tends to be straightforward and fast. Novellus’ lending solutions, for example, do not have any set criteria to adhere to or third-party restrictions or credit committee, so all enquiries go directly to the key decision-makers, rather than through various channels. This helps to ensure arranging bridging loans are anything but difficult.
It’s worth bearing in mind that how the loan is secured can have an impact on the speed at which the loan is approved. The majority of loans are secured against the property being purchased, there are occasions however, when two or more assets are used for security. Each asset has to be valued to ensure there is enough equity in full to cover the loan, which tends to take more time than if there is just one asset requiring a valuation. However, despite this, bridging loans on average only ever really take a matter of a few weeks to finalise.
Over the last decade, the growth of the bridging loan market has led to a rise in standards and reputation among its lenders. Customer service has improved dramatically and prices have become more competitive. This has led to bridging loans no longer being used solely for property purchase but for a wide range of purposes. Borrowers also find bridging loans very flexible as lenders can design products to suit the borrowers needs.
No longer seen as the last resort financing option when all else has failed, bridging loans can be the first choice for property investors who are looking to move quickly on their purchase. The myths discussed above are being given less weighting as people understand and appreciate the benefits of using bridging finance.
If you are looking for more information on the right bridging loan for your needs, contact Novellus today here.