A bridging loan is a short term loan designed to provide a temporary finance solution until long term finance can be put in place. Thus it provides a ‘bridge’ until a long term loan is arranged. Usually secured on property, loan terms can be anything from a few weeks up to 3 years. However, most bridging loans are usually under 12 months. Vitvo is a leading bridging loan lender; we aim to provide a borrower with a quick bridging loan solution that is tailored to the borrower’s specific funding needs and timetable.
It is used as an interim or gap financing solution pending sale of the security property; or the arrangement of longer term financing (typically mortgage finance), so providing a ‘bridge’ until the permanent financing is put in place.
Lenders accept freehold and long leasehold property as security. The property can be residential, commercial or semi-commercial (also known as ‘mixed use’). Thus, bridging loans are used by residential home movers, property developers, buy to let landlords and many other types of participants in the property markets.
A bridging loan is interest only; a single capital repayment is made by the borrower at the end of the loan term. Interest can be paid either: when the loan is initially disbursed so, in effect, reducing the absolute amount disbursed (known as a‘retained interest’); or by making periodic payments throughout the life of the loan (known as a ‘current interest’ or ‘serviced interest’ loan).
The vast majority of loans made by bridge lenders are of the retained interest type. However, if a borrower does want a loan with a current interest payment arrangement, a lender will usually make extra checks of the borrower to ensure the affordability of making periodic interest payments during the loan term.
Interest rates charged on bridging loans are usually higher than for conventional loans to compensate for the additional risk taken by the lender and the speed with which the loan facility is arranged. Bridging loan rates charged can be driven by a number of factors. The main ones are: the amount of the bridging loan required relative to the value of the property being offered as security by the borrower, usually referred to as the Loan To Value (“LTV”) Ratio; whether, the borrower is providing the lender with a first or second charge over the property being offered as security. A first charge can be offered if the security has no existing borrowings registered to it, or if an existing first charge is being replaced by the bridging loan. If the security already has a mortgage on it, the mortgage would be the first charge and the borrower would only be able to offer a second charge to the bridging loan lender.
Vitvo will lend up to a maximum of 60% LTV on a first charge and second charge (meaning, the sum of the existing first charge and Vitvo’s second charge loan do not exceed 60% of the value of the security property.)
The best bridging loan rates will usually be attained on first charge, low LTV property secured loans. Bridging lenders will also charge arrangement fees. These are typically deducted up front from the bridging loan amount agreed and are used to cover the costs incurred by the lender.
As banks’ lending criteria have tightened over the last few years, this type of short term secured loan is increasingly provided by a specialist bridge lender such as Vitvo rather than by a bank. Moreover, bridging loans are usually required quickly by borrowers and banks are relatively slow to make approvals compared to specialist bridge lenders. Vitvo aims to release funds to a successful applicant within 5-10 business days of application, and faster if we can.
A bridging loan can be regulated - meaning it is a regulated mortgage contract and therefore subject to regulation by the Financial Conduct Authority (‘FCA’) – or unregulated. From 21st March 2016, if a borrower is a ‘consumer’ and is applying for a loan where the security being offered is a first or second charge over a property in which the borrower or a person related to the borrower occupies most of the property (or intends to so occupy at some point in the future) then that loan is regulated by the Financial Conduct Authority as a regulated mortgage contract. A ‘consumer’ for these purposes is defined as someone acting outside of their trade, business or profession. Thus, broadly speaking, unregulated loans are ones that are used for commercial, business or investment purposes. Vitvo offers only unregulated bridging loans.
Investors interested in participating in the bridging finance market are becoming either direct funders of specialist bridge lenders or are becoming lenders in their own right via peer to peer lending platforms online. These platforms provide a mechanism for both lending and borrowing online.
Bridging loans are also known as bridging mortgages, swing loans or caveat loans. All of these terms describe similar types of arrangement.