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How Much Deposit do I Need for a Bridging Loan?

When you enter a bridging loan, you will usually need to put down a deposit. This is a lump sum paid upfront. The amount you will need to pay as deposit depends on the amount you want to borrow, the value of the property you are looking to purchase and the LTV (which is dictated by your lender). Your deposit will be at least 20% to 25%, as the LTV available on a bridging loan is 70% LTV or 75% LTV unregulated. The deposit represents the proportion of the property you own outright, the LTV is the rest of the property which you pay off with a bridging loan.

What is LTV?

LTV stands for loan to value; this is the ratio lenders use that shows how much you may be able to borrow versus the value of the asset you want to borrow against.

For example, if you wanted to purchase a property worth £100,000 and wanted to borrow £75,000, the LTV of the loan would be 75%. Your deposit would be the other 25% which would be £25,000.

What is the difference between regulated and unregulated LTV?

Currently only part of the bridging loan industry is regulated by the FCA. The FCA are the Financial Conduct Authority, which regulate financial services firms in the UK with the goal of protecting consumers and ensuring the integrity of the UK financial industry.

A regulated bridging loan would be one which falls under the protection of the FCA, these are usually residential ones. Regulated bridging loans aim to offer consumers a heightened level of protection and peace of mind.

At this time, all commercial bridging finance is unregulated, meaning the FCA does not supervise this area of the industry. If you’re securing a loan for an investment property, a commercial building, or for a buy-to-let it will not be regulated, meaning you VTL will be 75%.

Can I get a bridging loan with no deposit?

Bridging finance - is your provider regulated? | Business Law DonutYes, you can get a bridging loan without putting down a deposit. However, you may need to look at different types of products such as mezzanine finance. Mezzanine finance allows companies to give up some of their equity to secure a loan. You can find out more about mezzanine finance here.


What is a Bridging Loan Used For?

A bridging loan can be a quickly and easy way to get a loan in the short term. In contrast to getting a mortgage which could take months, a bridging loan can be in your account in between 2 to 4 weeks.  Generally, bridging loans are used by property owners, developers or investors, often when they are urgently looking to complete on a property and a traditional mortgage would take too long.

Bridging loans allow you to borrow anywhere from £50,000 to £25 million and receive the lump sum in 2 to 4 weeks, sometimes sooner. Finding a bridging loan can be difficult but by using a broker like Octagon Capital you will have an advisor to ensure you get the best rates and terms for your unique situation.

How does it work?

To secure a bridging loan you will need to agree the terms and rates with the lender, usually through a broker, and put down a deposit. The money that you borrow will be held against the property. A bridging loan is only designed to be used as a short-term measure, which is why the interest rates are generally higher than something like a mortgage. find out more about the cost of a bridging loan here.

What are the advantages of a bridging loan?

One of the big advantages to a bridging loan is the speed with which it can be processed. A bridging loan takes an average of 2-4 weeks for the money to be in your account as a lump sum, which is considerably quicker than something like a mortgage.

Another big advantage to a bridging loan is that all credit scores are considered. Unlike a mortgage, your credit score isn’t a barrier to you borrowing money when you use a bridging loan.

Common reasons for bridging loans

Scenario 1: moving to a new house

One common use for a bridging loan is to the ‘bridge the financial gap’ between one property and another. When you’re moving house it’s not always possible to sell immediately and if you’ve found a property you love a bridging loan could give you the finances you need to secure the purchase of that property while you wait for your current property to sell.Attractive Woman Moving House and Stock Footage Video (100 ...

For example, client A is looking to move home, they’re currently living in a property worth around £300,000 and are looking to downsize. They can’t sell their house straight away but they’ve found a property that’s perfect for them which is on the market for £200,000. They are waiting for their current their property to sell and need to use the equity in the property. They take out a bridging loan for £200,000 with an interest rate of 1% to purchase the new property. Their property sells three months later, and they can pay off their bridging loan in full. The bridging loan has cost them £6,000 in total interest and they have save themselves the hassle of taking out a mortgage which would have slowed them down causing them to miss out on the property they wanted. In a scenario like this, a bridging loan is a perfect option to secure the purchase of a property quickly without having already agreed a sale on a property you currently own.

 

Scenario 2: flipping a property

For anyone looking to purchase a property and renovate to resell, a bridging loan can be a quick and easy way to secure the funds you need to purchase and renovate the property.Flipping a House That Is Your Primary Residence

For example, client B is looking to refurbish a property which is on the market for £150,000 and then resell. The property needs £60,000 of refurbishments and it will take around 8 months to complete. He agrees in principle a bridging loan of £210,000 at an interest rate of 1% per month. With a bridging loan he becomes a cash buyer and is able to negotiate the property down to £125,000, so he now takes a bridging loan of £185,000. This loan will be enough to cover the purchase of the property and all the renovations he needs to do. Every month he will pay £1,850 in interest, so the loan will cost him £14,800 in total interest while he spends the 8 months renovating the property. Now that the house is renovated, he sells for £275,000. Now he can pay the loan back in full and he has still made a profit of £75,200 on the property.

 

Scenario 3: buying at auction

For those who are looking to purchase a property at auction a bridging loan can be a good option. When you buy a property at auction you are required to pay a 10% deposit on the day and sign a legally binding contract to pay the remaining 90% within a 28-day period.

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Because of this 28-day window to purchase the property in full, a bridging loan can be the perfect way to quickly acquire the funds you need. Although a bridging loan is usually quick to acquire there are ways to speed it up. It is a good idea to get a loan in principle before you look to buy at auction. Being approved in principle by your lender means that the lender will provide you with a statement saying that they will lend a certain amount to you before you have purchased the property at auction. Not only will this speed up the process of getting your bridging loan, but it also means you have some peace of mind that you are likely to get your loan. Bridging loans should only ever be a short-term measure, so if you’re buying at auction you should have a clear exit strategy for how you intend to pay off your loan.

 

Scenario 4: construction finance

You can also use a bridging loan to fund a construction project, whether that be a property or otherwise. With Construction finance loans you can borrow up to £2 million towards a construction project of your choice.

For example, client C is looking to build a house to sell. They agree a bridging loan of £1.5 million at 0.7% interest to fund the project, which takes them a year to finish and then another month to sell. They borrow the money for a total of 13 months, meaning they will pay £10,500 every month for a total interest payment of £136,500. Once their project is complete, they sell for £2.5 million and pay off their loan in full. After their bridging loan has been paid off, they have made a profit of £863,500.


How Much Does a Bridging Loan Cost?

Bridging loans can be a quick and easy way to get the finances you need to secure the purchase of a property, avoiding the often lengthy process of applying for a traditional mortgage.

Generally, bridging loans have a higher rate of interest than a traditional mortgage or loan, which can make them seem an expensive way to borrow money. However, the important thing to remember is that a bridging loan is only ever designed to be used as a short-term measure. Unlike a mortgage, a bridging loan is designed to be used for 3 to 24 months. The advantage of using a bridging loan is that you can receive your loan quickly in order to secure the purchase of a property.

How much does a bridging loan cost?

The interest on a bridging loan starts from just 0.44% per month. However, depending on level of risk associated with the loan or your credit status the interested may be higher.

For example:

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Client A is looking to refurbish a property which is on the market for £100,000 and then resell. The property needs £50,000 of refurbishments and it will take around 6 months to complete. He agrees in principle a bridging loan of £150,000 at an interest rate of 1% per month. With a bridging loan he becomes a cash buyer and is able to negotiate the property down to £90,000, so he now takes a bridging loan of £140,000. Every month he will pay £1,400 in interest, so the loan will cost him £8,400 in total interest while he renovates the property. Now that the house is renovated he sells for £190,000. Now he can pay the loan back in full and he has made a profit of £41,600 on the property.

It is worth noting that other fees such as the lender fee (2%), the broker fee (1%) and any additional solicitor and valuation fees you incur are payable on top of your interest.

How does this compare to the price of a mortgage?

There are a lot of factors that can affect the rates of a bridging loan and a mortgage, but generally a bridging loan will have a higher rate of interests. This does not mean that bridging loans are always the more expensive option. Bridging loans are only used for between 3 to 24 months, where as interest on a mortgage is usually paid for around 25 years.

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A mortgage is a good option for anyone looking to borrow money long term, paying off the purchase of a fist property for example. Whereas a bridging loan offers a quicker way for property investors or owners to bridge the gap between one property and another.

For example:

Client B wants to downsize from a £500,000 property to a smaller £350,000 property.  Instead of selling and then having to rent in the interim or apply for a mortgage and risk missing out on the house they want, they choose a bridging loan. They take out a loan of £350,000 to buy the new property, knowing that they will pay it off in full once the original property is sold. They borrow at an interest rate of 1% for 3 months, until the first property is sold. Their total interest payment is £10,500.

There are lots of factors that can affect the rates on a bridging loan and if you have questions the best thing to do is seek advice from a professional. By getting in contact with a bridging loan broker like Octagon Capital you can feel confident that you are getting the best possible terms and rates on your loan. Different lenders will offer different rates and terms, using a bridging loan broker means you can explore all these options and find the best loan.


How Quickly Can I Get a Bridging Loan?

A bridging loan can be a good option for anyone who needs a loan quickly and easily. There are many reasons why you might need a bridging loan, but a bridging loan can be a good option for anyone who wants to complete on a property quickly.

One of the big advantage of a bridging loan is the speed with which you can receive the money. The time it can take to be approved for a traditional loan can vary depending on the type of loan you need and the provider you are going with.

A standard mortgage approval process is supposed to take "between 18 and 40 days". However, there is no guarantee where you might fall on this widely-quoted timescale. If you look on finance forums you will find that “between 18 and 40 days” does not seem to cover peoples own experiences dealing with getting a mortgage. Applicants talk about the process taking 16 weeks or more.

 

How long will it take to get a bridging loan?

A relaxed beautiful woman looking at alarm clock on desk | FlickrWith a bridging loan receiving your money can be quick and easy. At Octagon Capital, the lenders we work with are able to send the entire funds to your bank account in one lump sum. This usually takes just 10 to 14 days after the loan has been approved.  There is an average of 2 to 4 weeks from the start of your application to completing and receiving your funds, although this can happen much sooner.

 

How can you speed it up?

A large part of how long your loan will take to get to you depends on the lender and broker. However, there are ways that you can speed up the process and ensure you get your loan as quickly as possible.

You can speed up the process of receiving your bridging loan if you already have a loan in principle from your loan provider. Being approved in principle by your lender means that the lender will provide you with a statement saying that they will lend a certain amount to you before you have finalised the purchase of a property. When you have a loan in principle much of the admin has already happened and you will have been approved on the initial terms of your loan, this means the process can be much quicker when the time comes to secure your loan.

Make sure you have you have your information ready. Once you’ve been approved for a new bridging loan in principle, your lender will let you know exactly what they need to progress to a full offer. Have your information ready to go to speed up the process, a lender will usually ask for documents such as confirmation of ID, confirmation of an exit strategy (how do you plan to pay the loan back), a property valuation etc.

Getting a property valuation can be a long process, so to make getting your bridging loan as quick as possible, make sure you have already got your property valuation. A property survey can take between 6 and 12 weeks, so if you wait to start until you have applied for a bridging loan this will definitely slow down your application.

Because there is no sure-fire way to get a bridging loan immediately, it’s always best to apply for your loan before going to auction or being ready to complete. This way you’ll be ready to complete or buy at auction with your bridging loan already secure as a posed to having to hold up your purchase because you’re still waiting for the funds to come through.

 

If you have any questions about getting a bridging loan get in contact with one of our advisors today and they can guide you towards the perfect bridging loan for you.