A bridging loan is a type of borrowing that covers a shortfall in funds for a brief period of time. Secured against an asset, typically a property, a bridging loan can help to cover temporary but logistical difficulties with cash-flow.
By its very definition, a bridging loan is intended to span the period from the point of purchase to when funds become available. This is known as the exit point and the strategy in place to repay the bridging loan is key to acceptance.
Bridging loans are not the cheapest type of finance, particularly when the weeks or months start to tick past, but in certain scenarios they offer a solution. Interested to learn just how much you could borrow? Keep reading to find out more.
Can I get a bridging loan?
Bridging loan lenders recognise that the funds may be required for a diverse range of purposes. For this reason, bridging finance can be provided to both individuals and businesses. It’s not uncommon for those commercially involved with property to use a bridging loan; this could be property landlords, developers or property investors.
A bridging loan can enable a rapid purchase at an auction, for example. It can also enable a house purchase if the sale of an existing property has been delayed.
There are many reasons why a bridging loan may be considered; all of these are short-term and involve a clear point at which funds to pay off the loan will become available. This is known as an exit strategy and if a lender cannot see how you will be raising the money to clear the debt, a bridging loan will not be offered.
So, how much can I have?
Unlike other types of loans, there is often no upper limit for bridging loans as they’re tied directly to the amount of cash needed to complete the project. The lender wants the assurance that the loan will be repaid, and for that to happen there has to be sufficient cash to achieve the necessary, such as finishing the renovation or development.
Bridging loans typically start from around £25,000 but some lenders only offer larger sums. In many cases there’s no strict upper limit and some bridging loans may run into millions of pounds. Lenders may stipulate a cap of around £10 million but it’s flexible.
Of course, just because a lender supplies bridging loans for enormous sums doesn’t mean that you’ll automatically qualify for the same. When you apply, your circumstances will be assessed and the lender will let you know how much you are able to borrow.
The limit they set on your borrowing will depend on a number of factors, not just your credit rating. Although it’s a factor, it’s only part of the overall assessment for a bridging loan.
The lender will limit the loan to the security that you’re able to offer. The larger the security, the more you will potentially be able to borrow. Your exit strategy will be key too. Having a strong exit strategy will make the lender more confident in offering a higher value loan.
Points to bear in mind
A bridging loan is high-cost finance compared to other types of borrowing such as a mortgage. In some cases a high LTV mortgage combined with a short tie-in period may be more suitable. Just like a mortgage, a bridging loan is secured on the property so if your exit strategy fails you could lose the asset.
Not every type of bridging loan has monthly repayments; some roll up the charges and add them to the debt when you’re ready to settle up.
Remember that whatever asset you plan on using as an exit strategy, the value will need to be sufficient to clear not only the amount of the original bridging loan but the interest which has accrued, plus charges. These can be significant so be clear from the outset how the balance will be calculated and what charges will apply.
To get more information about a bridging loan or to apply, talk to Loans Warehouse today on 01923 678 870.