If mainstream mortgage funding is either unavailable or impractical for the purchase or renovation of a commercial property, then an unregulated bridging loan is often appropriate. You may, for instance, only require finance in the short term; or perhaps you need to carry out a degree of refurbishment work in order to increase the value of the property and then sell it on or refinance on a buy-to-let mortgage.Regulated bridging loans for residential property
are more typical if you or a close member of your family has lived or plans to live in the property. A regulated bridging loan is also often used to bridge any gap between buying a new home and selling your current home.Regulated bridging loans are typically only granted for 12 months. You will normally be required to show evidence of a mortgage DIP/AIP to repay the bridging loan balance before you receive a formal offer of the loan. You should note that only brokers that are authorised and regulated by the Financial Conduct Authority (FCA), such as Tiger Financial, can arrange a regulated bridging loan to buy property for residential purposes.
One of the common myths surrounding bridging loans is that they are unnecessarily expensive. However, this is simply not accurate. Bridging loans are used when normal mortgage funding cannot be used, so a direct comparison is not appropriate. Bridging can be used when a property is uninhabitable or if you need to carry out a heavy refurbishment or repositioning of the asset, i.e., by splitting the title or changing the class of use; none of which are possible with a mortgage but which carry a lot more risk, hence why the pricing is different. Nonetheless, a good broker such as Tiger Financial will be completely upfront about the costs involved to ensure you are making an informed decision before committing yourself.
In the vast majority of cases, lenders do not charge any upfront fees. That is not to say, though, that you will not need to budget for any upfront costs. One of the terms and conditions may include a valuation by an RICS qualified surveyor. The fee for this can be anything from a few hundred pounds for a small residential property or new home, right up to several thousand pounds if the property being used for security constitutes a high-value commercial asset. Provided the valuation is all in order when complete, and the security property is an acceptable one that falls within the relevant lending criteria, the legal process can then commence.
You will be liable for the costs of both your own legal fees and those of your lender. Again, the sums involved can vary depending on the bridging loan work required and whether any investigation is needed into how the loan will be repaid. If the transaction and settlement of the loan are not to be by means of a straightforward sale, your lender will need to understand the nature and detail of your exit strategy. For this, you may be required to provide evidence, which can also result in an increase in costs.
As well as any valuation fees and the legal fees involved, you may also be required to foot the bill for any associated professional fees. These may arise if there are any structural issues, asbestos, Japanese Knotweed, damp, contamination, and/ or subsidence, for instance, that may require a specialist assessment. If you are taking out a bridging loan in order to renovate or develop a property, you may additionally be required to pay for an initial quantity surveyor report, as well as the ongoing monitoring surveyor costs.
In most cases, the lender will charge you an administration fee and arrangement fee/ facility fee, which will typically amount to 2% of the gross bridging loan borrowed. You will not normally have to pay any exit fees unless your case is particularly difficult or the assets are unusual. The monthly interest rate you will be expected to pay could vary depending on the strength of the underlying asset, your level of experience as a borrower, and for closed bridging loans, the strength of your exit strategy or the means by which you intend to repay the loan. Your credit profile will also play a part, with bridging finance at the highest loan to value and cheapest rates only available to borrowers who have impeccable credit records.
The arrangement fees are deducted from the gross loan, leaving the borrower with a net figure. If you are applying for a straightforward residential bridging finance transaction, you won’t always have to pay your broker’s fees, but where these are charged, i.e., with complex commercial cases, they typically amount to 1% of the gross loan.
The interest rate you are charged will vary depending on the asset class you are using as collateral, your strategy or exit route for repayment of the loan, the amount of equity you as the borrower are putting down, the perceived risks associated with the transaction, and your general creditworthiness and experience. Broadly speaking, the higher the LTV, the higher the percentage interest rate the bridge loan will attract.