Bridging loans are a type of short-term loans that are secured against property. They bridge the gap until long-term, or permanent financing is available. They are offered temporarily for 3 to 12 months at higher interest rates than a traditional loan.
There are some requirements for securing bridging finance. One of those requirements is putting down a deposit. If you are considering taking out bridging finance, you will usually need to put down a deposit. This deposit is an upfront amount paid in a lump sum. The deposit amount depends on the loan amount you intend to borrow, the Loan to Value (LTV) ratio, and the value of the property you are looking to purchase.
The deposit amount will be 30% to 35%, as the LTV available on a bridging loan UK is 70% LTV or 75% LTV unregulated. The deposit represents the proportion of the property you own outright; the Loan to Value is the remaining property proportion price you pay off with bridging finance.
LTV: Loan-to-Value (LTV) is the ratio that bridging finance providers use; it shows how much loan amount you can secure through a bridging loan versus the value of the asset you want to borrow against. There are some salient features of LTV that are as under:
- Borrow up to 75% LTV regulated.
- Borrow up to 100% LTV unregulated.
- No deposit bridging loans are available
- 100% LTV may require additional secured assets.
The loan-to-value ratio is usually the same for residential and commercial properties, providing a secure exit strategy and lower-risk deal. If the deal is higher risk, the Loan-to-Value ratio can drop to 60% or even 50%. What is considered high risk depends on the bridging lender; for instance, some lenders put LTV caps on specific commercial properties such as fuel stations or shops.
Regulated vs unregulated Loan-to-Value
The difference between regulated and unregulated bridging finance is as under:
Regulated Bridging Loan:
Regulated bridging loans are taken for residential purposes. Regulated loans fall under the protection of the FCA. The FCA is a Financial Conduct Authority in the UK; it regulates firms that are providing financial services in the UK. Financial Conduct Authority aims to protect borrowers and ensure the integrity of the UK financial industry.
The goal of regulated bridging loans is to offer borrowers heightened protection and peace of mind.
Unregulated Bridging Finance:
Unregulated bridging is commercial bridging finance. The Financial Conduct Authority does not supervise unregulated bridging finance. The bridging loan you are securing with the intent of property investment, a commercial building, or a buy-to-let will not be regulated, meaning your Loan to Value will be 75%.
Can you get approved for bridging finance without a deposit?
Bridging loans can be secured without putting down a deposit. There is a possibility of getting a 100% Loan to Value ratio, but you need to put additional assets/property as security in this case. There can be multiple securities, but if you fail to repay, all multiple securities will be repossessed. Additionally, you will have to pay valuation fees for each property/asset separately. There are different types of products you should look into, such as mezzanine finance. Mezzanine finance offers companies to give up some of their equity to secure a loan.
Seeking the help of a bridging broker.
If you consider taking out bridging finance, you should approach the bridging lender directly. As the lenders prefer to negotiate with the bridging finance brokers; also, approaching them directly is a tiresome process. Assuming you seek the help of an expert bridging broker, your chances of loan approval will be higher as they can guide you on the right track. They will help you get the best deals at affordable rates. Moreover, they will find a specialist bridging finance lender. Bridging brokers can present your case in front of the bridging lender in the best possible way and can negotiate on your behalf. They can also help you pinpoint the loopholes in your applications and make them error-free to increase loan approval chances. Therefore, it is recommended to secure a bridging loan deal with a bridging broker’s help.
Can a Bridging Loan be used for a Deposit?
Bridging finance can be used as a deposit on a property. Bridging is typically used to bridge the gap between purchasing a new property and selling an existing property. The borrowers who do not want to miss the opportunity to get their dream home by waiting to sell their existing home can use a bridging loan. They can pay a deposit for purchasing a new property with it. This bridging finance used as a deposit can be repaid once their existing house is sold. In this scenario, bridging finance offers a temporary solution. It enables the borrowers to secure their dream house and not miss out before their current house is sold.
Bridging loans are a category of brief-term loans that you can get against the property. They bridge the gap until you can receive long-term or permanent funding. The lender offers them temporarily for three to twelve months at greater interest rates than a traditional loan.