A guide to bridging finance: part 2

Can a bridging loan be serviced monthly?

Most borrowers prefer the interest to be retained but a bridging loan can be serviced monthly.  It is generally cheaper to service a loan rather than accruing interest on the retained amount and in this case, most borrowers will receive more money in terms of day one net advance.

How do you refinance a bridging loan?

At the moment there are a number of products on the market which would allow a bridging loan to be refinanced. It is very important however that the interest rate of the new loan is lower than the original bridge. Professional finance intermediaries can add a great deal of value into the refinancing process, as they are able to provide a menu of options. Unless the borrower is very experienced, and they have a clear exit/refinance strategy in place then it would be wise to use the service of a broker.

What is retained interest?

In cases when the borrower is not able to service a loan then the interest and arrangement fees can be retained by the lender. This means that the borrower will make a one-off balloon payment at redemption. In these cases, it is important for the borrower to distinguish between gross loan and net loan. The gross loan is the total loan amount including retained interest and arrangement fees which means that the borrower would normally receive the net advance at the completion of the loan.

What is the process of obtaining a bridging loan?

The bridging process is as follows:

  • Application form (although some lenders do not have a formal application process)
  • Formal term sheet issued and signed
  • Instruction of a valuation and provision of cost undertaking to lender’s solicitors
  • Due diligence performed by the lender

 

It is very important for the borrower to choose the right solicitor and make sure they have not set unrealistic expectations in terms of the market value of the property.

What is the role of the broker?

An experienced broker will provide a suite of finance options and will guide their clients through the funding process.

How can a professional broker help a borrower?

Brokers add value because they have a number of working relationships with lenders and can determine the best product in the market to suit a borrower’s needs. Furthermore, they are familiar with how lenders on their panel would perform their due diligence process which means that deals can be completed more efficiently.

Who pays for the valuation report?

The valuation report is instructed by the lender but it is paid for by the borrower.

Who pays for the legal fees?

Legal costs are also covered by the borrower. Normally the borrower would put their solicitor in funds after which they would provide a formal cost undertaking to the lender’s solicitor.

Are there any additional costs apart from the valuation and legal fees?

There are few other fees like CHAPS fees, registration fees, an administration fee and in some cases indemnity insurance.

What is an acceptance fee?

An acceptance fee is paid in advance together with the valuation fee and the legal fee. Although this should be funded in advance by the borrower it is not considered an additional cost as the borrower receives this back on the day of the loan completion.

Can you use a bridging loan to purchase a property?

Bridging loans are very often put towards the purchase of a property to allow time for alternative funding to be arranged or to allow time for planning consent to be obtained.

Can you refinance your existing bridging loan with a bridging loan?

It is not recommended to refinance a bridging loan with another bridging loan unless the latter would offer better terms with regards to the interest rate. Alternatively, you can refinance one bridge with another if value has been added to the property, which would lower the LTV to the existing loan.

 

In brief a bridging loan should be refinanced with another bridging loan only if the interest rate is lower if equity can be released while keeping the LTV at the same level or a combination of both. Borrowers sometimes do not understand the implications of obtaining a bridging loan or they are badly advised so they fall into financing options which are inefficient or expensive.

What is KYC (Know Your Customer)?

Practices are developed worldwide to prevent theft, financial fraud, money laundering and terrorist financing. The main KYC goal is for debt providers to know and better understand their borrowers, and therefore manage their risks appropriately.