Most people are familiar with the concept of mortgages to finance a property purchase. However, if you ask most people their thoughts on bridging loans, things become more confusing.
Bridging loans were once considered a niche product of last resort and not a standard financing option. In recent years they have become a more popular financing option for investors looking for short-term solutions when buying and selling property.
However, despite their growing popularity and benefits, there are still several myths surrounding these loans that can mislead potential borrowers. In this article, we will debunk the top five myths about bridging loans in the UK by providing accurate information so you can make informed decisions regarding your financial needs.
- Bridging loans are expensive
- Bridging loans are risky/dangerous
- Bridging loans are only for those with good/perfect credit
- Bridging loans take a lot of time to approve/slow
One of the most common misconceptions about bridging loans is that they are excessively expensive. While it is true that bridging loans typically have higher interest rates compared to traditional mortgages, it is essential to also consider the unique nature of these loans.
Bridging loans are designed to provide short-term funding solutions, typically around 12 months, and are often used to bridge the gap between the purchase of a new property and the sale of an existing one. Traditional long-term financing methods, such as mortgages, typically run for around 25 years. Although the interest rates for bridging loans are higher than long-term loans, they are charged over a much shorter period ensuring a cap on the overall spend.
Bridging loans offer quick access to funds which comes at a higher cost due to their convenience and speed. In addition, once you have completed the property transaction, you have the option to refinance with a mortgage provider or pay off the bridging loan at any time within the terms of the agreement without penalty.
However, it is crucial to note that bridging loan interest rates have become more competitive in recent years due to increased market competition. According to a report by Bridging Trends, the average interest rate on bridging loans in the UK decreased to 0.74% in the fourth quarter of 2022. However rates have increased in 2023, due to the successive increases in the Bank of England base rate. The rate you are offered will depend on your unique circumstances and bridging loan requirements.
Bridging loans also do not have too many charges attached to them, whereas mortgages come with various fees. Fees can include an arrangement fee, a booking fee, a valuation fee, a telegraphic transfer fee (a charge for transferring the money to your solicitor), a mortgage account fee, missed payment charges if your account goes into arrears, mortgage broker fees if you are using a broker or getting advice, higher lending charge (not always applicable but pays insurance to the lender if the deposit is small and there is a risk of default), fees for arranging own building insurance (again, not always applicable), early repayment fees and closure fees. There are also other costs such as survey and legal fees.
All of these can add thousands to the cost of arranging long-term finance. The fees associated with bridging loans are more straightforward and include survey and legal fees, an arrangement fee, interest charges and broker fees. Interest rates will depend on the individual circumstances and risks to the lender – the lower the risk, the lower the interest.
You can use Novellus’ bridging loan calculator to understand better what is involved and the overall costs.
Another prevalent myth about bridging loans is that they are risky or dangerous for borrowers. While bridging loans do carry a certain level of risk, they are not inherently dangerous if approached with proper planning and due diligence.
Bridging loans can be risky when borrowers fail to have a clear exit strategy or overestimate their ability to repay the loan. Lenders like Novellus will only approve an application for bridging finance when a clear exit strategy supports it. Therefore, it is crucial to have a well-defined plan for repaying the loan, whether it involves selling a property, securing long-term financing or any other viable strategy. By carefully assessing your financial situation and consulting with financial professionals as well as a reputable bridging loan provider, you can minimise the risks associated with bridging loans.
Contrary to popular belief, bridging loans are not exclusively reserved for individuals with excellent credit scores. While good credit can undoubtedly enhance your chances of getting approval and favourable terms, it is not the sole determining factor.
Bridging loan lenders assess applications based on various factors, including the value and marketability of the property used as collateral. The loan-to-value (LTV) ratio is a crucial consideration as it determines the risk involved for the lender. While some lenders may have strict credit requirements, lenders like Novellus will also consider applications from applicants with less-than-perfect credit.
It is important to note that lenders will still conduct thorough assessments to ensure the borrower’s ability to repay the loan. Therefore, while credit history plays a role, there are other deciding factors for bridging loan approval and having a clear exit strategy to pay off the bridging loan at the end of the term is key.
Another myth surrounding bridging loans is that they take a significant amount of time to approve. However, one of the primary advantages of bridging loans is their quick turnaround time compared to traditional mortgages. This is ideal for anyone who needs to act quickly to secure finance for a property purchase.
Bridging loan applications are typically processed more swiftly due to their shorter-term nature and the flexibility of the lending criteria. In addition, Novellus are a privately funded bridging loan provider which means all our lending decisions are made in-house. This allows us to accelerate the application and approval process. We can usually issue loan terms within 24 hours of the enquiry. After this, funds are typically paid out within 1-2 weeks from the initial enquiry, but this can be quicker if speed is of the essence.
To ensure a smooth and expedited process, it is crucial to gather all the necessary documentation and work with an experienced bridging loan broker who can navigate the process efficiently.
While bridging loans are commonly associated with property transactions, such as buying a new property before selling an existing one or property development projects, they are not limited to these purposes.
Bridging loans can also be used for various other purposes, such as refurbishments, renovations, auction purchases or purchasing land. Bridging loans can also cover short-term cash flow problems or provide funding for start-up businesses. The flexibility of bridging loans makes them suitable for both personal and commercial financing needs.
Bridging loans in the UK have been subject to several myths that have created misconceptions among potential borrowers. By debunking these myths, we hope to provide a clearer understanding of the reality surrounding bridging loans.
While bridging loans may have higher interest rates than traditional mortgages, they provide convenience and flexibility for short-term funding needs. Whilst bridging loans are not for every situation, they are not inherently dangerous. But they do require careful planning and a well-defined exit strategy. They are accessible to borrowers with varying credit histories and the approval process is often quick and efficient.
If you are interested in learning more about bridging finance from Novellus, contact us.
It is crucial for borrowers to approach bridging loans with accurate information and seek professional advice when considering their financial options. By understanding the truth behind these myths, borrowers can make informed decisions and utilise bridging loans effectively to meet their unique financial requirements.