Important Things to Consider Before Taking out a Bridging Loan

By Holly Andrews – Managing Director at KIS Finance

There are many benefits to taking out a bridging loan. To name a few, bridging loans are quick to arrange (sometimes as little as 48 hours), they are a cheap option if you need a large sum of money for a short period of time, bridging lenders have a far more flexible lending criteria than traditional highstreet banks (proof of income is often not required), and they can be secured on unconventional property types.

A bridging loan could be a very good option if you need a short term loan. Bridging loans are traditionally used to ‘bridge’ a temporary gap in finances that can occur when properties are being bought and sold but completion dates can’t be arranged for the same time.

However, there are a few important factors to take into consideration before you decide to take out a bridging loan to ensure you are using it to its full potential.

Having a secure exit strategy

As bridging loans are a specialist finance facility that are only intended for short-term borrowing, it is important to have a secure and viable exit strategy in place before you think about taking one out. Bridging loans tend to have a higher monthly interest rate than longer term loans so you don’t want to borrow for longer than is necessary. Some bridging lenders may also charge renewal fees if you go over the agreed term.

Your exit strategy must be a certain decision, and sometimes it may be worth having a back-up option too.

Property Sale

One of the most common methods used as a bridging loan exit strategy is the sale of a property. If this is your plan, it is important to do your homework first to find out what price you can realistically expect for your property – you can do this by looking at how much similar properties in your area have recently sold for, and by having a valuation carried out. It would also be worth looking into how much your property could achieve if it needed to be sold quickly.

Re-financing

Another popular exit strategy is through re-financing. This could be used in a situation where you use the bridging loan to purchase a derelict property and carry out refurbishments which would then make the property qualify for a standard mortgage product, which can be used to repay the bridge.

If this is your intended exit strategy, it is important to ensure first, before purchasing the property, that you will be able to obtain the required finance facility. With this, remember that since the credit crunch lending criteria has tightened up and lenders have become more selective with who they lend to. If you are unable to obtain a suitable mortgage product, your back up could be purchase, renovate and sell the property for a higher price.

Buying and Selling a Bargain Property

You may have come across a property which is being sold for an absolute bargain price for genuine reasons and you want to purchase it then sell it on for a quick profit.

If this is what you want to do, you need to ensure that it is definitely a bargain and there is nothing being hidden which has reduced the value of the property. If this is the case, you may find that you have to spend extra money on it to raise the value, or you may end up not being able to sell it for a profit, or at all.

You need to make sure you also take consideration for the ‘6 month rule’. Many lenders operate a rule where they won’t lend on a property which hasn’t been owned by the current owner for at least six months. This means you may not be able to sell the property for at least six months, due to buyers not being able to secure a mortgage on it.

Total loan cost

There are a few costs to consider when taking out a bridging loan – the most important being the interest. This will be expressed as a monthly rate and, when compared to other finance options, will seem high which is why bridging should only be considered as a short-term option.

The interest can be paid on a monthly basis if you would prefer, but for most bridging facilities the interest is ‘rolled up’ which means no monthly repayments are required and the interest is paid in full at the end of the term with the capital.

Other costs that need to be taken into consideration include:

• Facility/Arrangement fee – Charged by the lender and typically costs 0 to 2% of the amount being borrowed. This can be added to the loan facility.
• Legal costs – You will need a solicitor when arranging a bridging loan, and you will also be required to pay the lender’s legal costs for setting up the facility. This costs can vary depending on the lender.
• Valuation fees – In the absence of a suitable valuation report for the security property or land, one will need to be arranged. The surveyor or lender will take the payment for the valuation and this is usually the only upfront cost as it needs to be done before the loan is completed.
• Administration fee – This is also charged by the lender, but is usually included in their arrangement or facility fee.
• Broker fees – If you decide to have your bridging loan arranged through a broker and not directly through the lender, be aware that some brokers will charge a fee.
• Exit fee – Some bridging lenders will charge an exit fee when the loan is redeemed.

Are there any alternatives to consider?

Although bridging provides a very good option in terms of cost and speed, if you are unsure of your exit strategy, then it may be worth considering other options. If you are purchasing an investment property, for example, it is possible in some cases to have a buy to let mortgage arranged in as little as two weeks. Or a secured loan may be a good option if you want to renovate your home as the payments can be spread across a much longer amount of time.