Bridging loans, also known as “swing loans” or “gap financing,” are short-term loans that help people and businesses get quick access to capital during times of financial stress. They are typically used when a person wants to buy a new property before selling their existing one, or when they need fast cash for a business opportunity. In the UK, there was a 19.6% increase in bridging loan volumes during Q2 2020 compared to Q1 2020, indicating a growing reliance on this form of financing. At the end of 2023, the bridging loan market in the UK was worth around £12.6 billion, making it an essential part of the country’s financial landscape.
Understand the Costs
It’s essential to understand all the costs involved before opting for this type of financing. These costs may include interest rates, arrangement fees, valuation fees, legal fees, and exit fees. Depending on the lender and the loan terms, there may be additional hidden costs that need to be taken into consideration. It’s crucial to get a clear picture of all these costs and evaluate whether taking out a bridging loan is financially viable. For example, if you opt for Welsh bridging loans, you will need to understand the associated costs and fees specific to that region. On the other hand, costs like legal fees and valuation fees are generally the same across the UK. The costs and fees associated with bridging loans can add up quickly, so it’s essential to have a clear understanding of them before making any commitments.
Have a Clear Exit Strategy
You must have a clear plan on how you will repay the loan, typically through the sale of your existing property or securing long-term funding. Lenders will require you to have a solid exit strategy in place, and they may even consider your credit history and financial stability before approving the loan. Having multiple exit strategies will increase your chances of securing a bridging loan and ease any potential risks associated with the financing. Even if your plans don’t pan out as expected, having a backup exit strategy can help you avoid defaulting on the loan. From the lender’s perspective, having a clear exit strategy reduces their risk and increases the chance of recovering their money. Furthermore, having a clear plan in place can help you avoid any financial stress or pressure when it’s time to repay the loan.
Consider the Loan-to-Value (LTV)
Most lenders offer bridging loans up to a certain percentage of the property’s value – usually between 60% to 75%. Ensure that the loan amount you need falls within this range. If you require a higher loan amount, you may have to pay higher interest rates or provide additional collateral. Additionally, some lenders may offer lower Loan-To-Value ratios for certain types of properties, such as non-standard construction or commercial properties. For this reason, it’s crucial to research and compare different lenders and their LTVs before deciding on one. Many lenders also base their interest rates on the LTV, so choosing a lower LTV can help you secure a more competitive rate. On average, bridging loans in the UK have an interest rate of around 0.5%-1.5% per month.
Check the Speed of Funding
Confirm the lender’s timeline for disbursement to ensure it aligns with your needs. Bridging loans are known for their quick turnaround times, often providing funding within a week. However, this may vary depending on the lender, and some may take longer to disburse funds. For urgent situations, it’s crucial to work with a lender who can provide fast access to capital. Furthermore, some lenders may offer partial funding rather than the full amount, so it’s essential to clarify this beforehand. Many lenders also offer same-day funding options for an additional fee, which may be worth considering in certain situations. Funding speed is a crucial factor to consider, especially if you need the loan for time-sensitive opportunities.
Use a Trusted Adviser
Due to the complex nature of bridging loans, it’s advisable to consult with a financial adviser or a specialist broker. They can help you navigate the market and find the best deal. Since they work with multiple lenders, they can also help secure competitive rates and negotiate terms on your behalf. Furthermore, they can provide expert advice on loan options based on your unique needs and financial situation. Ultimately, using a trusted adviser can save you time, effort, and potentially money in the long run. A trusted advisor can also provide valuable insights into the current market conditions and help you make an informed decision about whether a bridging loan is the right choice for you.
Bridging loans are an excellent financing option for individuals and businesses who need quick access to capital. However, they require careful consideration and planning before leaping. By understanding the costs involved, having a clear exit strategy, considering the loan-to-value ratio, checking the speed of funding, and using a trusted adviser, you can make an informed decision about whether bridging loans are right for your financial needs. With proper research and guidance, bridging loans can be a useful tool in achieving your financial goals.
Published by HOLR Magazine.