How do Bridging Loans in Scotland Work?

FAQ: Bridging loans in Scotland Frequently Asked Questions

 

How Do Bridging Loans Work?

 

In general terms, a bridging loan is a short-term loan secured on property or land, it could be used for a property you intend to purchase, a property you already own, or a combination of both. Similar to the rest of the UK, bridging finance in Scotland can have repayment terms that may range from three to twenty-four months.

 

What are Bridging Loans Used For?

 

A Bridging loan can be used for almost any purpose, such as property development projects, buying and selling properties or buying one property before selling another. An exit strategy should always be considered before applying for a bridging loan as this will be a requirement of any bridging lender, an experienced bridging loan broker can help you with this.

 

Why Are Bridging Loans in Scotland Popular?

 

When compared to traditional mortgages, bridging finance in Scotland can be completed quickly and can usually be repaid early without incurring any early repayment charges. They are popular among property developers, landlords and investors, due to the fact that completion can be fast and a percentage of the refurbishment costs can be included in the loan.

 

Are 100% Bridging Loans in Scotland Possible?

 

Yes, there are circumstances in which it is possible to borrow up to 100% of the cost of buying property or land.

 

Some of these circumstances are as follows,

 

1. When the property or land is purchased below market value.

 

2. When you offer an additional security property in order to borrow the full amount of the purchase price.

 

3. When the property or land you are buying has increased in value due to planning permission being granted, this is known as a planning gain.

 

How do I Apply for a Bridging Loan in Scotland?

 

Most bridging lenders generally require applicants to submit their applications through an experienced broker, with over 30 years experience and being based in Scotland with a complete understanding of the Scottish property finance market we are ideally positioned to guide you through the application process.

 

ABOUT BRIDGING LOANS

 

Bridging finance in Scotland is favoured by property developers, landlords and investors as it is fast, flexible, has many uses and can be arranged in a matter of weeks as opposed to a traditional mortgage which can take months,

 

The primary focus of Bridging lenders is on the value of the property being purchased and the viability of your exit route rather than your credit history.

 

This means that having a poor credit history or income that is difficult to prove won’t necessarily mean an automatic decline of your application.

 

A bridging loan in Scotland can be up to 75% of the value of the property or the purchase price, whichever is lower, this can be increased to 85% if you are planning to refurbish the property.

 

However, we can also offer Below market value bridging loans which allows borrowing up to 100% of the purchase price if the purchase price is below the actual open market value of the property or if you are offering an additional property as security.

 

BUYING RESIDENTIAL OR COMMERCIAL PROPERTY

 

If you are a property developer, landlord or investor and buying residential or commercial property in Scotland then having access to a fast bridging loan in Scotland is arguably the most important tool to have in your toolkit.

 

Knowing you can act quickly to secure the funding you need to complete your purchase can be imperative to securing your acquisition and puts you in a position that is similar to being a cash buyer due to the speed in which a bridging application can be completed.

 

One of the main advantages is that if you were to take a bridging loan over a 12 month term and found yourself in a position to repay the loan in 4 months then you would only pay the interest for 4 months plus you can settle it anytime with no Early Redemption Charges, this provides a level of comfort for any overruns you may encounter on your project.

 

HOW MUCH DOES A BRIDGING LOAN IN SCOTLAND COST?

 

As you compare bridging loan interest rates, it should be kept in mind that, unlike a traditional mortgage, bridging loans are priced on a monthly interest rate, as opposed to an annual interest rate. This is due to bridging loans being for the shorter term and having variable loan terms that are between 3 and 24 months in length.

 

HOW DO I REPAY THE INTEREST ON A BRIDGING LOAN?

 

There are 3 options as follows to choose from:

 

Monthly: Just like an interest only mortgage, the interest payment is paid monthly, however the downside to this option is that you have to prove affordability in the form of declared income and then like a traditional mortgage maintain the monthly interest payments.

 

Rolled up/deferred: Interest payments are added to the loan amount and rolls up, to be paid along with the capital loan amount when the loan comes to completion.

 

Retained: By far the most popular method of interest repayment for borrowers and lenders, this involves calculating the interest for the term of the loan and adding it to the loan amount, if you are in a position repay the loan early then any unused interest is rebated in your settlement figure.

 

HOW IS A BRIDGING LOAN IN SCOTLAND REPAID?

 

Again, there are generally three ways a bridge loan can be repaid, from the outset it is imperative that a pre-defined exit strategy is established, repayment can come from:

 

1. The re-sale of the property that is being purchased.

2. The sale of another property.

3. Or if your intention is to retain the project and rent it to a third party the loan can be repaid by refinancing the project to a longer term commercial mortgage.

 

As another alternative repayment option, development exit finance can be utilised while you are waiting for the sale to complete to allow you to repay your bridging loan and take your profit out of the project for re-investment in your next project.

 

THE DIFFERENCE BETWEEN OPEN AND CLOSED BRIDGING LOANS

 

Closed bridging loans are when you have an acceptable pre-defined exit route in place, this offers the lender a level of comfort and allows the lender to offer a better interest rate knowing that the loan will be repaid when it is due to be repaid. An acceptable pre-defined exit route could be the future sale of the property you are purchasing, the sale of another property or the refinance of the property you are purchasing to a longer-term mortgage.

 

Open bridging loans are when you don’t have a pre-defined exit route in place, this is not particularly attractive to bridging lenders as they don’t know when the loan will be repaid and because of this the interest rate charged will be higher due to the risk level being higher.

 

SOME BRIDGING FINANCE CRITERIA FACTORS

 

Loan to value (LTV): The LTV is calculated as percentage of the loan amount you require measured against the purchase price of the property you are buying, similar to a traditional mortgage, the lower the LTV is, the lower the bridging loan interest rate is.

 

The Property Type & Condition: Residential property purchase attracts the lowest interest rate as this carries the least risk, followed by Semi-Commercial and then Commercial.

 

Bridging Lenders break this down into the following categories with the interest rates and LTV’s being tiered for;

 

1. Residential Light Refurbishment.

2. Residential Heavy Refurbishment.

3. Semi-Commercial Light Refurbishment and

4. Semi-Commercial & Commercial Heavy Refurbishment.

 

Location, Location, Location: Bridging lenders will consider the location of the property being purchased. For example, if the property you are buying is in the highlands or islands of Scotland it may be deemed more difficult to sell and the interest rate may be a bit more expensive than the mainland to account for this.

 

POPULAR USES FOR BRIDGING LOANS