How to get a cheap bridging loan

Categories: bridging loans | guides

Compared to mortgages, a bridging loan is more expensive per month because they pose a higher risk to the lender than a mortgage. Interest is calculated monthly, not annually, so whilst on the face of it rates look lower, it is important to recognise this difference.

Bridging loans are only ever intended to be a short-term borrowing solution, because of the higher cost.

Naturally, if you need one, say to buy property at auction, to flip property, to buy a property below market value or simply to renovate a property, you will want to know how to get a cheap bridging loan, to minimise your costs.

In this article, we outline the costs and guide you on how to secure cheap bridging loans.

What is a bridging loan?

A bridging loan is a short-term loan designed to 'bridge' the gap when you need fast access to funds in a property transaction. They are also a great option when a property is not fit for human habitation, but you want to buy to renovate it.

These loans are available to a wide range of borrowers and have flexible repayment terms.

When to apply

Bridging finance is a great solution in various situations, here are a few examples where it is useful to apply for this type of loan:

• Auction purchases: Winning bidders at a property auction are usually required to complete the purchase within 28 days. A bridging loan is one way of securing the necessary funds within a short period of time.
• Property chain delays: If you are near completion of a renovation project, and a potential future project property comes up for sale, a bridging loan can help you finance the purchase before selling your existing property.
• Renovation and development projects: Bridging finance can provide the quick, short-term funds you need to get your renovation or development project off the ground.
• Uninhabitable properties: Uninhabitable properties are not eligible for a mortgage based on unliveable conditions. In this case, you can use a short-term bridging loan to purchase the property.

Can I apply for a bridging loan?

Here is the eligibility criteria for applying for a bridging loan:

Age

You must be 18 years old, or older, to apply for a bridging loan in the UK. Businesses and individuals can use these loans to secure funding for a property purchase.

Deposit

Lenders need a deposit of typically 25% of the property value. The exact amount will depend on the specific lender’s criteria.

Security

Bridging finance needs property as security. This can be the property you are purchasing with the loan or a property you currently own.

Exit strategy

Lenders need you to have an exit strategy, which is your plan on how you will repay the loan. Your exit strategy could be the sale of a property or refinancing the loan with a mortgage.

Income

You may need to provide proof of income for your bridging loan approval. This can include property, pension, and employment income. You can get a short-term loan if you are self-employed, or retired, by proving your financial status.

Credit history

Some lenders will work with applicants who have credit issues, where others do not. This means you could still get a bridging loan with bad credit.

Property

Lenders will consider the type, condition, planned use, and location of the property you plan to buy. Certain lenders may have specific property criteria for their loans.

Bridging loan costs

The interest rates and costs make a bridging loan more expensive than a mortgage, which is why they are intended to be used for specific purposes and only over a short period of time.

Here we explain the bridging loan costs:

Interest

Bridging loan interest rates are charged monthly, rather than annually as with a mortgage.

To determine the interest costs of a short-term loan, you can use a bridging loan calculator. Loan calculators use current interest rates to provide an estimated payment. The actual rate you can achieve will depend on the nature of your case and which lender’s criteria it fits with.

The following factors influence bridging loan interest costs:

Short-term nature

Bridging loans are short-term solutions, usually lasting from 3 months to 18 months. The lender has a shorter amount of time to make a return on their investment than a mortgage, which is influential in the cost associated with them.

Risk factor

These loans can carry a higher level of risk for the lender. This is because they are often used for property purchases that a traditional mortgage lender might consider too risky, such as uninhabitable properties or properties that need work. The interest charged helps to offset this risk.

Deposit

You will need to provide at least 25% of the value of the property as a deposit, as security against the loan. The deposit you put down will impact the loan- to- value (LTV) ratio, which will impact the deals you can access. Generally speaking, the more you put down as a deposit, the lower the interest rates that are available to you.

Product fee

Lenders will charge a product fee, also called an arrangement fee, to set up the loan. Product fees usually range from 1-2% of the total loan amount, but this will depend on the specific lender. The product fee is either added to the loan amount, or charged upfront.

Valuation fee

Lenders use a property valuation to determine the current market value of the property. You will have to pay for the valuation.

The cost of the valuation will depend on the value of the property. In certain cases, lenders will accept a desktop valuation, which can reduce the valuation cost.

Solicitor fee

Solicitors complete the legal work for the transfer of the funds and ownership of the property. The solicitor fee will depend on the complexity of the transaction, and the value of the loan.

Broker fee

If you use a broker, they may charge a fee for their services. The rates and terms of the broker fee will depend on the broker you are working with.

The value of a broker is that they can take enormous amounts of work away from you, and they have expertise that can make a huge difference in finding an appropriate deal for you. Ultimately, a broker could save you money as well as time.

Administrative charge on repayment

Some lenders charge a nominal administrative charge when you repay your loan.

How to get cheap bridging loans

What you consider to be a cheap bridging loan is subjective, but there are ways to get the most cost effective outcome for your circumstances, to make this type of loan an affordable financing solution.

Here are the steps to get cheap bridging loans in the UK:

Compare loans

The most effective way to secure a ‘cheap’ loan is to compare different loan offers. You will need to consider the interest rate that various lenders offer. You should also compare the fees, to have a clear idea of the total cost of the loan.

A broker can help you do this. You could speak direct to lenders, however, each lender can only discuss the products they offer, so you may not come across the deal that offers you the cheapest bridging loan you could get.

Here are extra factors to consider when comparing loans:

Repayment

Understanding the lender repayment options can help you select the most cost-effective loan for your situation.

You usually have these two flexible repayment options:

• Serviced interest: With this option, you make payments each month. On a like-for-like loan you can borrow more in total than with retained interest.
• Retained interest: With retained interest, you will get a lower net loan, because lenders calculate the interest for the entire loan term upfront and then add it to the total loan amount. This means you don't have to make monthly payments. This can be helpful if you don’t have regular income during the loan term.

Lender reputation

Consider the reputation of the lenders when choosing a bridging loan. This can be difficult as a consumer, as you may not be familiar with the industry. Assessing lender reputation can also be difficult given this type of lending is not regulated by the Financial Conduct Authority (FCA).

This is where a broker can help. A broker will have relationships with a range of lenders, based on working with them on a daily basis. They will know what their turnaround times and service standards are like as well as being aware if a lender is a trusted operator in the market.

Work with bridging loan brokers

It can be difficult to compare loans and negotiate with lenders. Working with a bridging loan broker can make the process easier and help you secure a cheaper loan suited to your needs.

Here is how working with a broker can be beneficial:

• Market knowledge: Brokers understand the current trends, interest rates, and lending criteria of a wide range of lenders. This knowledge allows them to guide you towards the most cost-effective loan options.
• Access to a wide range of lenders: Brokers have access to a network of lenders, including those that don't deal directly with the public. This can broaden the cheap loans available to you.
• Bespoke service: A broker will take the time to understand your unique situation and needs. They can then recommend the most suitable and cost effective loan.
• Time and effort: Researching, comparing, and applying for loans can be time-consuming. A broker can manage this process for you, freeing up your time and reducing the stress associated with securing a loan.

Working with a broker can include a broker fee. While this is an extra cost, you will have easier access to cheap loans. A broker can also provide valuable support throughout the loan process to ensure it is fast and suited to your needs.

Get cheap bridging loans with Commercial Trust

Commercial Trust is a specialist broker that can help you secure cheap bridging loans.

We work with a range of lenders to provide you with an affordable deal. Our expert advisors will provide advice to help you make the best decision based on your needs.

Get in touch to discuss how we can secure you a cheap short-term loan.

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