Bridging finance is a common concept in the property market. Unfortunately, it is also a concept that has many misconceptions because of previous financers’ behaviors. However, it is more important to get the facts before deciding if it is viable for my property transactions.
I would describe bridging loans as a form of a short-term mortgage. By this, I mean it has several similarities with normal mortgages, only that its main difference is the period I need to pay it. Some of these similarities include the bank using the property’s value to determine the amount to loan; the property is the security, and I pay the interests monthly and the loan at the end.
As I outlined before, the main difference is the payment time. Mortgages can go as long as 25 years, while bridging is often a year or less. The other difference that follows closely is the interest rates, where mortgages are around 5% while bridging loans can spike to 20%. This should be my main focus point when I am weighing the two options.
However, some other differences are still substantial. I can arrange for a bridging loan as fast as a week, whereas mortgage loans could take months. Two, whatever I choose to do with the property is not a concern to the lender, and many times, the condition of the property also doesn’t matter. One last difference is that bridging loan lenders only focus on the property and not always on the borrower’s income. Therefore, even if I have a low income, I could still secure a bridging loan.
In the bridging loan process, I can choose to have a first and second charge. Since the lender is taking charge of the property, we use these two terms to describe the lender’s position. A first charge lender is the first in line to claim ownership of a property if a sale falls through, and I have to sell the property to pay back the bridging loan.
A second charge can come when I need additional funds from the property, and my equity leaves room to do so. Take that I received the first loan and have a 55-45% ratio agreement with the first lender, I could decide to take another bridge against the same property and add a second charge. This will mean the second charge could agree to, say, 15% of the proceeds. Together they will receive 70% of the income from the house sale.
Unfortunately, most first charge lenders do not agree to a second charge since this complicates the entire transaction, yet they have to permit it before the second comes on board.
To get this right, I first need to understand how loan-to-value operates as bridging loan lenders use a similar concept with mortgages. Loan-to-value is a mortgage policy where the LTV is the percentage the loan will stand for in relation to the amount I pay for the property. This could be 75% of a $1m purchase in the traditional mortgage loan, making it $700,000.
The difference between an LTV for mortgages and bridging loans is that a lender in the latter could decide to use the current market value instead of my purchase price. Some also use the gross development value.
Although bridging loans takes a short time to arrange, lenders are still particular about who to finance. They will want to find out if I can pay the loan before or during the stipulated time, what other assets I have and if I can manage such a property transaction. Any other non-property consideration could come up depending on the risks at hand and the type of lender.