Assetz Capital states that their bridging loans are secured loans, so borrowers will need high quality assets to purchase them
The bridging finance sector has changed a lot over the past 2 decades. Bridging has become mainstream and is growing all the time, according to an update from Assetz Capital.
UK-based Assetz Capital, a secured loan marketplace lending platform, notes that in the current economy following the 2008 financial crisis and post-Brexit uncertainty (fueled further by the COVID-19 outbreak), banking institutions are being told Raising capital rather than lending leaves many small businesses and property developers “faced with finding alternative financing solutions”.
This is where bridging finance comes in – “by offering borrowers flexible, fast, and short-term credit solutions,” said the Assetz Capital team.
Despite the dramatic growth of the bridging sector, the concept of bridging can create confusion for first-time or inexperienced borrowers because this type of transaction is “extremely fast-paced,” according to Assetz Capital’s blog.
As mentioned in the blog post, bridging is basically a “short term funding option”.
As the company notes, a bridging loan is a short-term, “interest-only” loan that is typically property-secured and used by individuals and companies “for purchases, refinancing or the release of equity for a permanent, long-term term” Financing can be used or their next level of financing becomes available or they are selling a property. “
They are typically “up to 75% of the property’s value and the loans can be taken out for a term of up to 24 months,” noted Assetz Capital, adding that financing for “all types of residential property such as HMO (apartment building), Vacation rentals as well as semi-commercial and commercial property types for development projects and property purchases. “
The Assetz Capital team added that bridging loans tend to be fairly quick, flexible and secured, which gives borrowers “a quick injection of liquidity that they may not have been able to secure elsewhere in a short timeframe”.
They also noted that bridging loans could come with fixed or variable interest rates. These tariffs are given “monthly instead of yearly, but do not always have to be billed monthly. Borrowers can repay interest in different ways depending on their needs, ”the company added.
Here are the main ways it can be charged. As noted by Assetz Capital, these are:
- Monthly – Borrowers “pay the interest monthly”. At Assetz Capital, borrowers are required to “provide proof of income and we do an affordability assessment to repay interest monthly”.
- Slid open or rolled up – Borrowers “pay all interest at the end of the bridging loan. There are no monthly interest payments. “
- Withheld – when the interest payments are “included in the credit facility and the borrower repays them in full at the end of the bridging loan”.
The flexibility in the interest rate could offer the borrower decisive advantages, said Assetz Capital. For example, a borrower may choose to “roll up” their interest because the property they are buying is not generating immediate income as repairs or renovations need to be done (so that they cannot earn monthly interest payments).
As noted by Assetz, bridging loans typically “incur various fees in addition to interest, which can affect the total cost of borrowers, clear to their customers. “At Assetz Capital, for example, there are” no early repayment penalties or minimum set-off periods, “the company clarified.
While the Assetz Capital team commented on why people might turn to bridging loans, the Assetz Capital team noted that bridging funding “is on the rise as more businesses and individuals use bridging loans to take advantage of opportunities,” including:
- Buy at auction – a time-sensitive transaction, “with normally 21-28 days to close from the date of the auction”
- To renovate and convert a property – when a property “needs some work to make it mortgage-worthy or when changes maximize value and rental income”
- To complete a development
- To buy a property that would “not secure a mortgage in its current condition with a mainstream lender”
- Building permit or change of use for safety is “required which allows investors to buy and exit the loan with no early settlement penalties”
- To bridge a funding gap between buying and selling real estate “when a sale is delayed or the chain has broken – bridging allows borrowers to continue buying (not missing out) while existing securities are being sold in the market or when the original sale has taken place collapsed “
- Urgent funding required – to “support cash flow or solve an emergency situation”
Please note that Assetz Capital does not offer any regulated mortgage contracts. “
Bridging finance gives borrowers a “respite” until they access other funds, sell a property, or “find alternative, long-term finance,” explained the Assetz Capital team, adding that one of the benefits of using bridging finance is “the quick fix.” “Is what it makes available to companies that need short-term funding.”
As noted by Assetz, here are the 2 types of bridging loans:
- Closed bridge:The borrower has “a predetermined time frame which has already been agreed by both parties and which is a fixed date for the repayment of the loan. And because there is a fixed date, “closed bridging loans are more likely to be accepted by lenders as they offer more security about the repayment of the loan”. For example, the borrower has “already traded for the sale of a property and the completion date has been set, so the sale of that property will repay the bridging loan, creating a high level of certainty that the loan will be repaid”.
- Open bridge:The borrower “puts a plausible plan on the project that suggests a realistic exit strategy to repay his loan, typically through sale or refinancing, but there is no set date for the loan to be settled at the beginning.” up to which the loan must be repaid and to ensure the security of their funds, most bridging companies deduct the loan interest from the loan prepayment ”. Because of the uncertainty surrounding loan repayment, “lenders may charge a higher rate of interest on this type of bridging loan”.
Closed bridging loans are usually suitable or ideal for buyers whose property chain may have “broken down” – perhaps their buyers pulled out while buying a new property, they can use a bridging loan to bridge the “gap” between buying and selling “, It says in the blog post by Assetz Capital.
They also mentioned that open bridging loans are usually preferred by borrowers who may not be sure when their expected funding will be “available”. These borrowers are typically landlords or property developers who “cannot guarantee schedules (although they still need to provide a work schedule) and who need the loan for a longer period of time”.
When explaining who can take advantage of a bridging loan, Assetz Capital’s blog post noted:
“Bridge financing can be used in both commercial and residential property transactions. Borrowers can be homeowners or homebuyers, landlords, property developers or investors – whether when buying a property, building a property or raising funds for a renovation project, they all have in common the need for fast and short-term secured financing for a property. “
In a comment on how it worked, the blog added:
“At Assetz Capital, bridging loans are always secured loans. This means that borrowers must have a good quality asset to get one, such as real estate or land. “
“A borrower needs funds to buy and refurbish a new investment property. The property needs some light repair work in order to maximize the value of the property and at the same time meet all legal requirements for the property to be rented. “
The Assetz Capital team also noted that the proposed work is “non-structural and does not require a building permit (which is typically less than 15% of current market value).”
After these renovations are made to the property to improve it, the borrower then intends to sell the property. A bridging loan, which can be brokered in just a few working days, would allow the borrower to buy the property, finance the renovation and “get out without penalty and actually offer any additional flexibility that the project might need in the event of an early completion.” which means that they get off earlier than they intended. “
As mentioned in the update:
“Bridging loans can be arranged quickly – at Assetz you can basically make a decision within 24 hours of submitting the application; Borrowers can take advantage of time-sensitive opportunities. “
There are also flexible credit criteria. It’s short-term – “Bridging loans are designed to temporarily bridge the gap when funding gaps exist,” the company added. They also found that borrowers could get access to “large sums of money backed up against property”. You can also have “a lot of flexibility when needed,” noted the Assetz team.
To learn more about choosing the right lender for you and more details from Assetz Capital, click here.