Bridging loans are debts provided to a borrower to purchase a property/product before the borrower receives cash inflow from sale of a different asset such as a property.
For instance, in the property markets, bridge loans are taken by individuals who use the loan funds to purchase a property before they can conclude sale of another property, usually, when they are relocating from one place to another.
Bridging loans require the borrower to provide a collateral before the loan deal is finalised. Collateral for bridging loans must be assets with high values such as real estate.
Other Applications of Bridge Loans
Bridging loans can be used to finance a myriad of transactions. They include:
Construction and Property Development
Acquisition of Commercial Properties for Leasing
Settlement of Tax Bills
Bridging loans are also utilised when property developers want to purchase a property (for development) in an auction. Usually, a property sale in an auction requires payment of an initial deposit at short notice, for the buyer to secure the property rights.
Bridging Loans in Property Development
Bridging loans may be used by property owners and property developers when they need to fund construction/renovation/land development projects before they can quickly sell off the properties. The proceeds from the sale of property pays back the loan and the interest due.
Residential Bridge Loans
Bridging loans have become popular among people who are relocating from one house to another.
Types of Bridging Loans
The two main types of bridging loans are Open bridge and Closed bridge loans.
Open Bridge Loans
Open bridge loans do not have a specific end date, meaning the borrower can make repayments whenever the funds are available. Typically, open bridge loans have a maturity period of one year or more.
Closed Bridge Loans
Closed commercial bridge loans have a specific end date determined by when the borrower will have the money to pay back the outstanding debt amount. Usually, closed bridge loans last for a few weeks or months.
Open bridge loans generally have higher interests than bridge loans because they have flexible loan terms and requirements. Nonetheless, both type of loans require the borrower to have a sound repayment strategy to retire the bridge loan on time.
How to Choose the Best Bridge Loan
Before a potential borrower can compare the loan terms of the different bridging loans products in the market, there are several factors to consider. They include:
The amount of money they need to borrow: The lender may be willing to lend the borrower any amount of money from £5,000 up to £10 million and above.
The value of their property: The market value of the property (collateral) determines how much the borrower can qualify for, and the bridge loan terms the borrower will receive.
The time the borrower needs to repay the loan: The lender can provide a bridge loan that can last from one month to two years.
If there is mortgage burden on the property: The existing mortgage debt on a property affects the amount of money a borrower can secure in a bridge loan. It also affects a borrower’s capacity to be listed in a first or second charge debts.
First Charge or Second Charge Loan?
Typically, a lender registers a charge against the title of the property the borrower uses as collateral to secure a bridge loan. In the event the borrower is unable to repay their debts, the charges registered against the property determine the priority of debts i.e. senior debt and junior debt.
In case the property is seized and sold to pay creditors because or loan non-performance/liquidation, the first charge loan has to be fully amortised before the second charge is paid back.
In bridge loans, the first charge loan represents a situation where the bridge loan is the first or the only loan secured by the property. Usually, mortgages form the first charge loans. However, if there is no outstanding mortgage secured by the property, bridge loans, or another type of loan, will occupy the first charge loan position.
On the other hand, second charge loans are found where there is an existing loan or mortgage already secured by the property. Second charge lenders need to seek permission from the first charge lender before they are allowed to charge the property. In most cases, the first and second lenders interact under some form of an inter-lender agreement.
There is no definitive/limited number of charges that can be listed on a property.