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What Can Bridging Loans Be Used For?

Bridging Loan Uses

Sometimes you might need to access money quickly to buy a property and you cannot wait for the lengthy process of a mortgage application or a house sale, so you look for alternative finance options. One solution could be to borrow money from someone you know but if that is not an option, the next consideration is usually to apply for a Bridging Loan.

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What is a Bridging Loan?

A Bridging Loan is a short-term finance loan that can be used for a number of different reasons. It is commonly used to buy a property while an existing property is in the process of being sold but will not go through in time for the money to be available. It could also be used when someone buys a house at auction and they do not have the time to get a mortgage as they need to pay the seller quickly.

Another reason someone might choose to apply for a bridging loan is if they want to pay for urgent renovation work while they wait for a remortgage application to go through. Bridging Loans are frequently used by Property Investors but people who are not investors can also use it if they are in a situation that requires quick finance.

Types of Bridging Loans

There are two types of Bridging Loan:

Closed Bridging Loans

Closed Bridging Loans have a fixed date for the loan to be repaid. Typically, this will be used if you have exchanged contracts and are waiting for your property sale to complete. It may be that there has been a delay that means your mortgage loan is not ready yet. With this type of bridging loan, the lender will want to know exactly how you are going to repay the loan, for example, through sale of your property.

Open Bridging Loans

With an Open Bridging Loan there is no set date for repayment but most lenders would require it to be paid within a year, as it is only ever intended to be a short term finance solution. When you take out a bridging loan, you do not have to have a specific exit plan, such as the sale of a property.

Bridging Loans will usually have higher interest rates that standard loans, due to the quick solution that they provide. They are often referred to as gap financing because they are filling the gap until another finance option is available.

Who can use Bridging Loans?

Bridging Loans can be used by individuals or by businesses, provided that they meet the required criteria. Some Bridging Loans will require the applicant to have some type of collateral as part of the loan agreement, such as property.

How Businesses use Bridging Loans

Businesses often use Bridging Loans for reasons other than buying commercial property via a Commercial Bridging Loan. They sometimes use it to cover costs such as paying tax bills while waiting for another finance solution. Some business owners use a bridging loan to purchase another business in a takeover, or they might cover the costs of a development project.

Bridge Loans for Property

In some situations, a homebuyer may need to take out a bridging loan to pay for their new property while they wait for their existing property sale to go through. If there is a delay in the sale, to avoid their purchase falling through, they can arrange bridging finance to ensure it goes through.

There are fairly strict lending criteria for this type of bridging loan use and the applicant would have to have excellent credit ratings as well as a low debt-to-income ratio. Another part of the criteria that lenders usually require is that the bridge loan is only up to 80% of the combined value of the two properties, which means that the applicant must have a large amount of equity in their property.

If the applicant does have a bridging loan approved in this type of scenario, the mortgages for the two houses are rolled together.

Property investors and Bridging Loans

Many property investors use Bridging Loans to enable them to build up their property portfolio. When they are buying property at an auction, a quick way to finance the purchase is through a bridging loan but they also use bridging finance to buy properties on the market too. Often, property investors will need property purchases to go through as quickly as possible so that they can get tenants into rented property.

Another way that property investors sometimes use Bridging Loans is if they want to buy a property and refurb it and then sell it on for a higher value than they bought it for. This process is called flipping and a short-term loan is ideal as once the property is purchased, they will spend a few months on the refurbishment and then quickly sell the property on.

Experienced property investors are usually quite likely to get approved for a bridging loan because they will have accumulated a lot of collateral in their property portfolio.

How does a Bridging Loan work?

The way that a bridging loan usually works is that a ‘charge’ is placed on your property. This ‘charge’ is a legal agreement that determines which lenders would get paid first if you were to miss payments on your loan and fall into arrears. If you own your property, then the bridging loan would be your first charge but if you still had a mortgage on your property, the loan would be a second charge.

If you are unable to make the payments on your bridging loan, your property could be sold to pay the loan back to the lender.

Is a Bridging Loan expensive?

Generally, a bridging loan will cost more than a standard mortgage because it is a short-term arrangement and the lenders will want to make enough money from the short period of interest to make it profitable for them.

The fees are usually charged on a monthly basis, rather than an annual basis due to the loans usually only running for a number of months. A monthly fee might be somewhere between 0.5% and 1.5% per month, costing considerably more over a year than an average mortgage interest rate.

When you take out a bridging loan, you will also need to consider that there will be a set-up fee for the product, which will be around 2% of the loan, which can obviously end up being a very high amount if you are taking out a large bridging loan.

How much could I borrow with a Bridging Loan?

This varies massively depending on the applicant’s financial circumstances and amount of collateral. The criteria will also differ depending on the lender but a large number of lenders will only lend up to 75% loan-to-value of the applicant’s property. In certain circumstances, if the client has sufficient equity in other properties, then a 100% bridging finance can be provided.

If you are able to take out a first charge loan, because you have no outstanding mortgage on your property, you will usually be able to borrow more than if you are taking out a second charge loan.

Is a Bridging Loan the right option for me?

A bridging loan can be the ideal solution for many people but there are disadvantages to consider too. These are the main pros and cons to be aware of:

Pros and Cons of Bridging Loans

The main Pros of taking out a Bridging Loan include:

  • Fast access to money
  • Able to borrow a large sum of money
  • Protect property chains
  • Enable projects to go-ahead which otherwise wouldn’t
  • Flexible

The main Cons of Bridging Loans are:

  • The interest rates are usually high
  • You will usually pay a large fee for the set-up of the loan
  • By securing the loan against your property, your property is at risk

When you are deciding whether a Bridging Loan is the right option for your circumstances, you should review all of the different options that are available. For example, if you are buying a new property before your existing property sells, you might be able to take out a Buy-to-Let mortgage instead.

However, if you are looking for an option that enables you to have access to money straight away, either to purchase a property, pay tax bills or pay for property renovations, then a bridging loan may be a better option.

Many property investors and property developers use Bridging Loans as a way to get started and then once they have made enough capital, they can stop using Bridging Loans to avoid paying the higher interest rates that typically come with this type of finance solution.

It is a good idea to get financial advice from an expert before you consider taking out any type of financial product. At Commercial Finance Network, as the UK’s leading Bridging Finance Broker, we can provide free expert guidance and advice on Bridging Loans and can help you to find the right type of finance to suit your needs. As a truly independent Bridging Finance Broker, we also have access to all of the UK’s Bridging Finance Lenders, so we can most certainly secure you the best deal and rates available in the market.

If you are interested in any our Bridging Finance services or you want to know how our services could potentially assist in moving your project forward to the next step, speak with one of our Specialist Bridging Brokers today on 03303 112 646 or else request a callback via our Quick Enquiry form below.

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90% of brokers believe bridge-to-let can assist BTL clients

An estimated 90% of brokers believe that bridge-to-let can help overcome concerns about bridging finance for buy-to-let (BTL) clients, according a poll conducted in partnership between Castle Trust Bank and Knowledge Bank.

Brokers discussed the benefits of bridging as a way of helping buy-to-let clients access new opportunities, but more than a quarter (28%) said their clients had concerns about short-term finance.

However, participants were almost unanimous in their agreement that bridge-to-let offered a way to overcome client concerns.

Brokers also agreed that buy-to-let is a growing market, with 64% saying that they have seen an increase in BTL and holiday let enquiries in the last three months.

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Rob Oliver said: “Bridging finance often enables investors to access opportunities that they wouldn’t be able to fund with a mortgage at the outset.

“But some clients are hesitant when it comes to short term lending as they worry about the uncertainty and unknown costs if they are unable to secure a suitable exit in their anticipated timeframe.

“Bridge-to-let tackles these concerns head on, with a pre-agreed exit onto a buy-to-let mortgage, including the price, at the outset.

“It’s one application process that offers speed, efficiency, budget planning and peace of mind, so no wonder 90% of brokers agree it’s a great way to beat client concerns.”

Matthew Corker added: “There’s strong demand from property investors at the moment, and many are looking at more specialist types of investment, such as HMOs, holiday lets and multi-units, which offer the potential for greater returns.

“Fortunately, there are lots of innovative options, like bridge-to-let, which enable investors to make the most of new opportunities, whilst also managing their own risk.”

By Jake Carter

Source: SFI

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Bridging applications climb but completions dip, new data has revealed

Bridging lenders experienced a ‘busy’ Q1 with new applications soaring by 25.5% compared to the same quarter in 2020 to hit £7.49 billion, new data has revealed.

The value of new bridging applications in Q1 2021 was 12% higher than in Q4 2020 and 17.9% higher on the previous year in the 12-month period ending 31 March 2021, according to the data provided by members of the Association of Short-Term Lenders (ASTL).

The information, compiled by auditors, reflected feedback from the market demonstrating increased demand from customers, the ASTL said.

The statistics also revealed completions in Q1 2021 fell by 1.9% on Q4 2020 but were up by 10.7% on the same period last year.

In the 12 months up to 31 March 2021, completions were down by 24.1% on the previous year, reflecting the period of low activity during last year’s lockdowns.

Meanwhile, the value of bridging loan books dropped to £4.40 billion at the end of Q1 2021, a slight decrease of 1.7% on the previous quarter but down by 3.5% on the same period last year.

There was positive news regarding defaults. Indeed, the value of loans in default showed a decrease of 4.5% compared to December 2020. The value of loans in default is now just 2.2% higher than March 2020.

Vic Jannels, CEO of the ASTL said: “The Q1 lending figures reflect the story we are hearing from the market, that everyone is busy with new business applications.

“In fact, the value of applications in the first quarter of 2021 was more than a quarter higher than the same period in 2021, which was mostly unaffected by the Covid pandemic.

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“The value of completions remains relatively steady, which means we are seeing an increasing number of bridging loan applications that are not progressing through to completions.

“This is likely to be a combination of more rigorous underwriting by lenders, brokers hedging their bets by submitting multiple applications to multiple lenders and some cases where bridging is no longer required by the time of the completion date.

“We should keep a watchful eye on this trend as a decreasing conversion rate for loans benefits nobody in the process.

“On a more positive note, the value of defaults decreased on last quarter and is only a little higher than it was at the start of the pandemic.

“This reflects the hard work of all of our members in working with their existing customers over the last year and, with positive signs for the economy ahead, we have reason to believe that this trend can continue.”

Source: Mortgage Finance Gazette

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Bridging could assist with rush to complete before new SDLT deadline

The extended stamp duty deadline is expected to galvanise additional interest in bridging, according to Vic Jannels, chief executive of The Association of Short Term Lenders.

The average time it takes to sell a property has now risen to 295 days, as outlined by GetAgent.

As a result, it is believed bridging will help to ease the pressure on mainstream lenders and allow people to complete transactions ahead of the extended deadline.

Jannels said: “There are likely to be customers, who were unable to meet the first deadline, who will look to bridging to help ensure they hit the next one.

“Generally, a number of the term mortgage lenders are running well behind on service, while most of bridging lenders are still able to move quickly as long as their clients deliver the obligatory documentation in a timely manner.”

Jannels went on to say that while there have been stories of the average time to reach a bridging completion increasing, he does not believe this should distract intermediaries from the fact that, bridging lending can complete in just a matter of days.

This is provided that supporting information is supplied upfront and valuations and conveyancing are lined up correctly.

Chris Oatway, also believes that due to the increased transaction levels, he expects more bridging finance to be required.

However, Oatway said: “I am not sure to what level this will be directly linked to the deadline date.

“If it looks like a transaction will take longer to complete, I think it is more likely that a purchaser will try to negotiate on the purchase price rather than switch their funding strategy to bridging finance due to the additional costs.”

Jannels went on to say that at the ASTL, they have worked together with other trade associations to call for a change to the hard deadline that was originally scheduled for 31 March.

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He added: “It has been clear for some time the number of transactions being processed through the system has put every business involved in the process under immense pressure and that many transactions would not hit the original deadline.”

The consequence of this would have been many transactions falling through and many customers liable to bigger tax bills than they had planned for.

Jannels outlined that the extension of the full relief until the end of June will be positive news for transactions currently in the system and the inclusion of partial relief until the end of September will prevent a significant cliff edge as we faced in March.

Although Jannels noted that the maximum potential saving drop from £15,000 to £2,500 at the start of July, therefore he outlined the risk of a second another rush to beat the deadline at the end of June.

Looking to the rising use of bridging, Oatway explained that there is a “buzz” within the market at the moment and transaction levels have begun to increase.

He said: “With a renewed appetite to lend and a positive outlook in regard to the economy and liquidity remains as high as ever, I can only see the industry going from strength to strength.

“Property will always be a great inflation hedge – as well as being free from capital gains tax – and so, with the overall increased desire for outside space, we continue to expect transaction levels to remain high for the year ahead.”

By Jake Carter

Source: Mortgage Introducer

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Bridging Completions Fell But The Value Of Applications Increased

Bridging completions were £2.88bn in 2020 having fallen 27.9% from £3.99bn in 2019, according to the Association of Short-Term Lenders (ASTL).

The data also outlined that bridging loan books dropped to £4.48bn, a decrease of 2.5% on the previous year.

However the value of applications in 2020 increased to £25.82bn which is up from £23.19bn in 2019, representing an 11% rise.

According to the ASTL, the surge in applications in Q3 last year was accountable for the 34.9% increase in completions in Q4, totalling £918m of completions.

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Applications in Q4 2020 were at £6.69bn, a quarterly decrease of 12.7%, however they were still up by 22.9% on the same quarter in 2019.

Meanwhile, average LTVs fell slightly in Q4 and have now dropped to below 59%.

The value of loans in default in Q4 2020 increased by 13.9% on Q3, and was 23.8% higher than Q4 2019.

Vic Jannels, chief executive of the ASTL, said: “The Q4 lending figures give us an opportunity to review the performance of 2020 as a whole.

“Bridging completions were down on the previous year, which is to be expected given the periods of national lockdown.

“However, applications were actually higher than in 2019, which reflects the enormous potential the bridging market has to provide customers with a funding solution through these difficult times.

“We must, however, remain cautious.

“The effects of economic slowdown are starting to be reflected by the value of loans in default and, while the roll out of the vaccine for COVID-19 continues at pace, a return to normal levels of economic activity seems unlikely before the summer, so these trends may persist for several months.”

By Jake Carter

Source: Mortgage Introducer

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Bridging market showing encouraging signs of activity

The bridging market is showing encouraging signs of activity as investors look to add value or yield, according to the latest Bridging Market Bulletin from Shawbrook Bank.

The bulletin delivers a snapshot of the latest trends and outlook for the UK bridging finance market.

This optimistic picture is reinforced by recent state of the market data from the ASTL which showed bridging applications hit their highest ever level in Q3 2020, and completions rose by more than 40% as the market bounced back following the first lockdown.

In an analysis of the market, Shawbrook observed the trends driving demand which included a buoyant auction market, an uptick in heavy refurbishment projects and investors capitalising on the stamp duty holiday.

Emma Cox, sales director at Shawbrook Bank, said: “It’s been a difficult time for the property market, and of course the current landscape has left many facing challenges – especially within the bridging space, where some lenders had to halt business in this area for a period of time during the height of the pandemic.

“It is positive to see many of these lenders recently return to market, and as our report shows, to see that the housing market is moving again.

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“Whilst some of this activity in the bridging market will no doubt be down to the releasing of pent up demand – something that Rishi Sunak’s stamp-duty holiday will support further – we are also seeing an uptick in investors looking at alternative strategies to sure up investments.

“The use of bridging to carry out refurbishments and conversions, as well as to aid chain breaks due to elongated sales processes, is an essential funding option that can support lucrative investment opportunities.

“We recently announced revised pricing across our bridging range, with rates now starting at 0.5% for both regulated and unregulated products, in order to show our continued appetite to aid brokers in making the most of these opportunities.

“The bridging market has demonstrated remarkable resilience throughout this year and, as much as we may face more challenges towards the end of 2020 and into the early parts of 2021, we believe this adversity may create opportunities for investors, and brokers, which Shawbrook plans to continue to support as much as possible”.

By Jessica Nangle

Source: SFI

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ASTL: Bridging applications leap to record levels in Q3

Activity in the bridging market reached record levels in Q3 with completions rising by over 40% and applications hitting an all-time high, the Association of Short-Term Lenders (ASTL) has revealed.

The latest figures from its members show applications totalled £7.6 billion in Q3 2020, representing an increase of 39.1% over the previous quarter and an increase of 25.7% on the same period in 2019.

Completions in Q3 2020 were £680 million, which was an increase of 44.8% on Q2, although still down by 27.6% on the same period last year. This reflected the influence of the first national lockdown on the previous quarter’s originations activity, the ASTL said.

Loan books showed a small increase of 0.6% on the previous quarter and 5% on the same period last year – remaining at around £4.5 billion. While average LTVs increased slightly since Q2, but continue to remain at sub-60%

The value of loans in default showed a small increase of 3.3% over Q2 2020 but were 23.1% higher than the same period last year, as borrowers continued to feel the financial impact of the pandemic.

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Vic Jannels, CEO of the ASTL says: “The Q3 lending figures from the ASTL reflect feedback from the market demonstrating that this has been a hugely busy period for bridging lending.

“Applications over the quarter totalled £7.6 billion, which is the highest figure we have ever recorded. Completions also bounced back on the previous quarter but remain down on last year as an overhang of the first national lockdown.

“We’re unlikely to see this overhang again as the market remained open during the second lockdown – but we must still remain cautious about the future, as the road ahead remains full of economic uncertainty.

“That said, if the recent positive news about vaccines come to fruition and lenders continue to underwrite loans sensibly, whilst taking a proactive and collaborative approach to customers in default, then there is no reason why this quarter’s figures should not prove a strong foundation for a robust and sustainable recovery.”

Source: Mortgage Finance Gazette

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Bridging volumes rise in ‘buoyant’ short term loan market

There has been a 46% increase in gross bridging loan volumes in Q3 2020, as the sector recovers from the Covid-19 lockdown.

According to the latest Bridging Trends reports regulated transactions continued to dominate the sector while the average interest rate fell in line with pre-Covid-19 levels.

There was also a rise in demand for regulated refinance, according to the quarterly report produced by short-term finance lender, MT Finance.

The report revealed contributor lending transactions totalled £115.52 million in the third quarter of 2020.

Although lending figures were 35% below the pre Covid-19 levels of £180.94 million, they had risen significantly (46%) from the £79.4 million of bridging loans transacted in the previous quarter. This highlighted the impact of Covid-19 restrictions being eased.

MT Finance’s report showed regulated bridging lending continued to dominate the sector in Q3 at an average of 53% of all lending, compared to 47% of unregulated transactions.

It said the average weighted monthly interest rate in Q3 decreased to 0.78% from 0.85% in Q2. This fell back in line with rates offered before the Covid-19 outbreak (0.75%).

Meanwhile, average LTV levels in the third quarter increased to 51.7%, from 48.8% in Q2. This was likely attributed to borrowers turning to bridging finance as mainstream lenders continued to tighten their maximum LTV restrictions.

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Demand for second charge lending dropped significantly, accounting for an average of 17.7% of total market volume in Q3 – down from 26.1% in Q2.

For the eighth consecutive quarter, the average term of a bridging loan remained at 12 months while typical completion time increased from 50 to 52. This could be attributed to operational capacity issues, the report said.

The most popular use of a bridging loan remained the same as the previous six reports – to purchase investment property.

Gareth Lewis, commercial director at MT Finance, said: “The stamp duty holiday and rising house prices has ensured that the market remains busy and it has been well publicised that the mortgage market is currently feeling the strain when it comes to delivering acceptable processing turnaround times, which can add to an already stressful experience.

“Luckily, bridging finance is a useful tool for brokers to help unlock a transaction for a client allowing them to meet deadlines.

“Given the stress on a chain, presented by the slow processing times, it is unsurprising to see more clients turning to regulated bridging finance to support their purchases.”

Craig Hardiman-Scott, senior associate at Sirius Property Finance, said: “Customer demand is extremely high, so it comes as no surprise that the short-term loan market continues to be very buoyant from developer exits through to business capital injections to name but a few.

“Those with competitive rates, products, and service that have been able to adapt their offerings throughout the pandemic are well placed to continue seeing the benefits.”

By Kate Saines

Source: Mortgage Finance Gazette

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ASTL: Bridging market is open for business

The bridging market is still open for business but communication is key to help customers identify the best options for their borrowing situation, according to the Association of Short Term Lenders (ASTL).

Vic Jannels (pictured), CEO of the ASTL, said: “It’s at times like these when the resilience and innovation of the short-term lending sector comes to the fore.

“We have seen lenders introducing new technology and processes to ensure they are able to continue to deliver vital funds for customers, and even received new membership enquiries for the ASTL.

“At the same time, lenders have been working proactively to engage with their existing customers to identify the most appropriate course of action for their circumstances.

“There will certainly be some customers who are experiencing financial distress as a result of the COVID-19 crisis, and our immediate guidance for these customers is to speak to their lender as soon as possible, so that you can work together towards a solution.

“Notwithstanding the above, it is important for all borrowing customers to remember that they have a contractual responsibility in relation to the interest payments due, subject to the terms of the loan, and to redeem their loans at the appropriate time.

“Lenders will always be willing to have a conversation with their customers and look to be supportive whenever possible. The current pandemic, however, is no reason to simply ignore your obligations and stop making payments or refuse to communicate with your lender.

“Bridging lenders work tirelessly to engage with customers in genuine difficulty but they, in turn, have their investors and funders to consider and, in turn, do not want to be in breach of their commitments.

“So, our guidance for all customers is to talk immediately to your lender if you are experiencing financial distress. There are often sensible options and ways forward, but these can only be identified by working together.”

By Ryan Fowler

Source: Mortgage Introducer

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Bridging lending up by nearly 20% in 2019

Bridging loan books grew to £4.5 billion in 2019, an increase of 19.7% compared to 2018, according to figures compiled by auditors from data provided by members of the Association of Short-Term Lenders (ASTL).

Completions in Q4 2019 reached £1.068 billion – an increase of 13.7% on Q3, while average LTVs continued to remain below 60%.

However, applications in the final quarter of 2019 fell by 10.7% on the record-breaking previous quarter.

The value of loans in default grew by 13.2% in Q4 2019 from the previous quarter.

Vic Jannels, CEO of the ASTL, commented: “The value of outstanding bridging loan books jumped significantly last year driven by both an increase in new business and a trend for borrowers to take bridging finance over longer terms.

“We did see a fall in applications in the final quarter of 2019 compared to the record breaking Q3, but in the context of both a December General Election and Christmas, this is perhaps unsurprising.

“There is, however, reason to be cautious. The value of loans in default has continued to rise, and there is some evidence that repossessions are also increasing, so it is important that lenders maintain responsible underwriting and collections practices alongside their appetite to continue to grow their lending.”

By Joanne Atkin

Source: Mortgage Finance Gazette