How much can be borrowed?
The amount that can be borrowed depends entirely on the lender and the borrower’s circumstances.
The minimum loan size will typically be £25,000 and the maximum for most lenders is £10,000,000, but this can vary from one provider to another with some lenders offering to provide loans significantly in excess of £10,000,000. Depending on the project and security, the sky really is the limit.
Over how long can the money be repaid?
Lenders will typically expect a bridging loan to be paid back within 12 months.
As bridging loans have higher rates of interest than standard mortgages, it is practical to have a shorter time frame for borrowers to repay the loan. What’s more, bridging loans are typically used to bridge a gap between finances, so the loan is often only required for a short period of time, where borrowers pay it back when their next stage of funding becomes available.
A person can normally choose to pay off a loan at any time within the 12 month time period, if they are able to gain access to the next level of financing that they require. It is important when taking out a bridging loan not to simply look at the interest rate being charged but at the overall cost including all fees.
Bridging loan payments and interest rates
Some bridging loans are structured so that the borrower pays interest each month and repays the loan at the end of the term. This arrangement suits those who have access to a regular cash flow for the duration of the loan, and who will be able to meet the monthly interest payments. Other options are rolled up interest or retained interest.
The actual rate paid by the borrower will depend on a number of circumstances, including:
- The lender
- Whether it is an open or closed bridging loan
- The size of the loan in comparison with the property value - the loan to value (LTV)
- The type of security provided by the borrower
- The credit score of the borrower
Typically the following will apply to bridging loans:
- 0.5%–1% interest rate per month
- 1%–2% arrangement fee/broker fee
- 70%-75% loan to value
The interest rates on bridging loans are typically higher than standard/normal mortgages as they often carry more risk to the lender.
Borrowers can sometimes choose to have interest rolled up. This means that they do not have to pay interest every month but instead pay the rolled up interest at the end of the term.
This is suited to borrowers unable to make monthly interest payments. In these circumstances, interest is typically compounded. So, while a borrower will not pay interest monthly, the repayment at the end of the term will be larger.
To assist in meeting monthly interest payments, borrowers can sometimes choose to retain from the loan an amount representing a number of monthly interest payments. The borrower can choose the number of months (if affordability criteria can be satisfied). The retained interest is still part of the capital sum of the loan, so interest will be charged on this amount. The total loan must fit within the loan to value. If there is any retained interest which is not utilised by the time of redemption of the loan, most lenders will normally provide a credit for this amount
Will my client need a solicitor?
It is recommended that borrowers get independent legal advice prior to signing any legal documents and entering into a bridging loan. The process provides protection for both the borrower and the lender.
Bridging loans are becoming increasingly recognised as useful and valuable by individuals and businesses looking for quick, short-term funding solutions.
Fast and flexible, it provides people with the finances that they need in order to remedy a cash flow issue or take advantage of an opportunity, which they otherwise may have not been able to secure.
For anyone looking into obtaining a bridging loan, it is important to take the time to find a reputable lender with the following accreditations:
- A Member of The Council of Mortgage Lenders
- Authorised and regulated by the Financial Conduct Authority
- Proven track record
- Experienced in working on projects similar to yours
By choosing an experienced, trustworthy bridging loan packager, you can make sure that the funds that you need will be provided in the timescale required and in a professional manner.