Bridging Finance was initially introduced as a specialist product but today they are more frequently used. Bridging loans are obtained for various purposes which includes refinancing a property or buying one, or debt consolidation, business expansion or auction purchase of a commercial or residential property.
But these loans are given only for a short period of time, usually up to 12 months.
As per the circumstances, the amount borrowed in a bridging loan varies according to the value of the security given by the borrower. If required a borrower may provide more than one property as security that can be combined in order to avail a higher loan amount.
In general, the loan amount can start from approximately £10000. On the basis of the value of a given property the maximum loan amount can go up to 70% of the property’s valuation.
However, for an unregulated bridging loan the amount can go up to 75% to 80% of the value of the property given as security. This percentage shows the gross value of the loan which includes the interests and all relevant fees involved in the transaction.
The net amount would be somewhere between 5 or 10% less than the given percentage. If the requirements of the borrower cannot be met by the amount given on the basis of the value of one property, the borrower may use additional security to obtain a higher loan amount.
Short term loans are also obtained on different properties such as commercial, residential, investments or a combination of different types of property. Quite a few applicants find it difficult to comprehend all the costs involved in a bridging loan.
The interests in a bridging finance loan are broadly divided into three types; the Serviced Interest, Rolled up Interest and Retained Interest. These rates can either be fixed or variable depending on current conditions and the risks involved for the lender. These rates are calculated based on various factors very similar to a traditional mortgage loan.
Other than the interest rates, the borrower will need to incur a few other costs as well. One such cost is the total lender fee which comes up to about 2% of the total loan amount.
However, this cost would vary depending on the lender. The other fee is the broker fee if a broker is involved in the transaction. Once the application is submitted with the relevant documents the lending institution will require a property valuation report.
The cost of the report will be borne by the borrower. A solicitor fee is also taken care of by the borrower. All together these costs are involved in a bridging loan finance which the borrower has to incur.
For a borrower to obtain a loan of 1 million a few necessary steps are required to be followed. The lenders need to be clear about the purpose of the loan in order to suggest the most suitable package for the borrower.
The information provided to the lender has to be verified and lenders may check credit ratings of the borrower’s past loan and repayment history.