If you are considering taking out a bridging loan in Ireland for the first time for a property investment or development project, you may have some questions about how it all works and if it is the best option for your situation. Bridging loans are one of the most misunderstood products on the market, with many people choosing not to use them because they do not fully understand how they work or the benefits.
That being said, bridging loans in Ireland are set to be in high demand this year due to increased property prices, overseas buyers returning, and changes to stamp duty and interest rates.
Bridging loans are used to essentially bridge the gap between selling an existing property and purchasing a new one when you need to fund your new purchase before the sale of the current property goes through to avoid missing out on your dream investment property. We have put together this complete guide to answer several key questions about bridging loans, from exactly what a bridging loan is to how it works and what one can be used for. So read on to learn everything you need to know about getting a bridging loan in Ireland.
What is a bridging loan?
As we mentioned in our introduction, a bridging loan essentially bridges the financial gap in a property purchase. It is a short term finance solution, giving the buyer more time to sort out a long term funding solution, either as a result of the sale of another property, funding release or investment. In most cases, the monthly interest is incorporated into the loan, and no repayments are due until the loan is settled.
Bridging loans are secured loans that need to be secured against high-value assets such as property. The amount you can borrow is flexible and they are suitable for a wide range of products, from residential purchases to property development projects.
Typically, bridging loans have fewer and less stringent lending requirements than high street banks. This makes them ideal for anyone looking to purchase a property that doesn’t meet the standard mortgage lending requirements but will do by the time the developer has refurbished it to make it habitable. Bridging loans are perfect for a wide range of projects which allow the borrower to secure finance on more unusual sites than a standard mortgage would allow.
Bridging loan Example
So, for example, if you wanted to purchase an uninhabitable property at auction that required a full refurbishment, it can prove challenging to secure a buy-to-let mortgage or a residential mortgage on a property requiring vast amounts of work. A bridging loan taken out to buy a property in this manner means you can purchase the investment property at the auction price, renovate it and then either sell it on or secure finance with a mainstream lender.
How do bridging loans work?
Here is a basic summary of how a bridging loan would work:
- You find a property, but it is impossible to obtain a standard mortgage in the required timeframe.
- If you want to purchase a property worth €500,000 and have a €250,000 deposit, you will need an additional €250,000 to buy the property.
- So you take out a bridging loan of €250,000, allowing you to buy the property outright and bridge the financial gap.
- Once you have brought the property up to the standard required by a mainstream mortgage company, you can refinance with them or pay off the loan plus interest from the sale of the property once renovated.
Because bridging loans are usually quicker to secure, they are an excellent option for anyone that needs to finance a project fast. Anyone can apply for a bridging loan in Ireland, and one of the most common uses is to buy property at an auction.
Where the bridging loan is the first charge on the property, you can usually borrow between 70-75% of the property’s total value as long as there are no other mortgages attached to the property. Bridging loans are generally repayable within a year as the interest rates tend to be higher than standard mortgage products, making them unsuitable for long term use.
When taking out a bridging loan, it’s essential to have an exit strategy in place. An exit strategy is a solid plan covering how you intend to pay off the bridging loan at the end of the term.
Two types of bridging loans available
- Open Bridge Loans
Open bridge loans are the most common type of bridging loan we issue at Novellus. What it means is that a firm date for the bridging loan to end has not been set, commonly because the details of the financing have not been finalised at the point the bridging loan is issued.
- Closed Bridge Loans
Closed bridging loans are used when a dated exit strategy is in place. For example, if you are selling your property and have a buyer that has exchanged contracts but has not yet been completed. Once the sale is complete, the funds can then be used to pay off the bridging loan.
Regardless of which type of bridging loan you choose, the loan provider will need to see evidence of your exit strategy and confirmation the loan will be repaid within 12-18 months. Open-bridge and closed-bridge loans can be secured at both first and second charges on your property, depending on a few factors.
First Charge
For any property with a mortgage on it, the chances are the mortgage provider has the first charge on a property. This is because when a provider lends money to you for a mortgage, they will secure the loan against your property, known as a charge. Charges are legally binding and are registered with the land registry.
Bridging loans are also secured against properties as charges. So if a bridging lender secures the first charge on your property purchase, they’ll have first priority of repayment if you defaulted on your loan.
If you’re in the process of selling your property and haven’t yet sold but took a bridging loan to secure a new property, the loan would be secured on your new property as a first charge because there are no other charges against the property.
Second Charge
A second charge means that the property already has a lender who is the first priority when it comes to repayment on a loan. If a bridging lender is the second charge on a property, they have access to any remaining funds after the first charge lender has been repaid.
The lender who holds the first charge will usually need to provide consent for any other lending wanting to secure finance against the property.
Most bridging loans issued by Novellus are first charge loans. However, it is possible to secure a bridging loan as the second charge depending on your circumstances.
What are bridging loans used for
Bridging loans are ideal for several situations for both residential and commercial property purchases. Our clients range from those wanting to build a property development business to residential clients who simply want to buy and sell a property to live in. Here are some examples of what bridging loans can be used for:
- Purchases at auction. Auction houses usually require deals to be completed quickly. A bridging loan means you can secure a property whilst securing alternative finance.
- Buy to let investors use bridging loans to bridge the gap when they need to fund a new deal or bridge a gap in existing deals.
- Where a vendor is looking for a quick sale and is willing to offer the property at a reduced rate.
- Broken property chains. Buying and selling properties can result in long chains, and if the chain breaks, bridging loans can provide a quick solution.
- Downsizing to become mortgage-free. If you want to sell your property and purchase a smaller property to become mortgage-free, you can use a bridging loan to secure a new property while your other property sells.
- To purchase an uninhabitable investment property to renovate and refinance.
- For property developers to fund new build projects and purchase land.
Do I qualify for a bridging loan?
The lender will need to know what the loan will be used for to issue a bridging loan. You will also need to be able to provide a form of security. This is usually the property you are purchasing or one you already own. You’ll also need to provide and demonstrate a clear exit route for the bridging loan, that is, when and how the loan will be paid back at the end of the agreed term.
Typically, this would be from the proceeds of the sale of a property, from money owed to you, funds from an investment policy, or refinancing. If selling a property to repay the bridging loan, for which a sale has not yet been agreed, the lender will need to be satisfied that the asking price is realistic considering the current demand and location for the property type.
Like other forms of finance, you will need to undergo a credit check to obtain a bridging loan. However, we do not base our lending decisions on this with as much weighting as traditional lenders. We lend to people from all backgrounds, and if your credit hasn’t been perfect in the past, we do not believe this will dictate your future behaviour. Having a clear exit strategy carries much more weighing than your finances when making a lending decision.
Likewise, the value of the bridging loan issued will largely depend on the value of the property it will be secured against. Unlike mortgage lenders, bridging loan lenders don’t make assessments based solely on income.
How much does a bridging loan cost?
This will depend on the lender you choose and your agreement with them. Although generally, lenders charge a percentage of the total loan amount as an arrangement fee plus the monthly interest rate. Lenders sometimes also add a redemption fee. The amount you pay will depend on the risk profile, assets and loan period. If you are planning on refinancing at the end of the bridging loan term, it is possible to add these fees to your new mortgage to repay the loan. To get an idea of the costs involved, take a look at our bridging loan calculator.
Generally, bridging loans in Ireland come with a higher interest rate than traditional products because they are issued as a short-term financial solution. However, this extra cost is offset by the speed at which the loan can be obtained, allowing buyers and investors to secure the property they want.
How long does it take to get a bridging loan in Ireland?
One of the best features of a bridging loan is the speed at which it can be obtained. The initial arrangement just takes a few hours to organise, and in the best-case scenario, funds can be in the borrower’s bank within 72 hours. Timeframes of up to 14 days are standard for bridging loans.
The time it takes to get a bridging loan will be primarily down to the lender. Because Novellus uses its own capital to finance bridging loans, we can comfortably release funds for approved applications within this timeframe.
Traditional mortgages can take between 30 and 60 days to arrange, so it’s easy to see why bridging loans are so popular with individuals looking to finance projects fast.
Final thoughts
Bridging loans in Ireland are becoming increasingly popular for those that seek short-term finance to bridge the gap in their own financial situations. Bridging loans can be used for various purposes and can be the difference between securing a property and losing out in today’s fast-paced property market.
That being said, as with all financial decisions, you should consider your options carefully and speak to a financial advisor before making any significant borrowing decisions.
