A bridge loan is a type of short-term loan, usually taken for a period of 2 weeks to 3 years while waiting for a larger or longer financing arrangement. It's usually called bridging loan in the UK, also known as "caveat loan," and is also known in some applications as a swing loan . In South African usage, the term bridging finance is more common, but is used in a more limited sense than is common elsewhere.
A bridge loan is a temporary finance for an individual or business until a permanent financing or subsequent financing stage is obtained. Money from new financing is generally used to "take" (ie pay back) bridge loans, as well as other capitalization needs.
The bridge loan is usually more expensive than conventional financing, to offset the additional risk. The bridge loans typically have higher interest rates, points (points essentially cost, 1 point equal to 1% of the loan amount), and other charges are amortized over a shorter period, and other fees and "sweeteners" (such as equity participation by lenders in some loans). Lenders may also require cross collateralization and lower loan-to-value ratios. On the other hand, they are usually set up quickly with relatively little documentation.
Video Bridge loan
Real estate
The bridge loan is often used for the purchase of commercial real estate to immediately cover the property, take the real estate from foreclosure, or take advantage of short-term opportunities to ensure long-term financing. The bridge loan on the property is usually paid back when the property is sold, refinanced by the traditional lender, the creditworthiness of the borrower increases, the property is upgraded or resolved, or there is an increase or special change that allows a round of permanent mortgages or subsequent financing occurs. Timing issues may arise from the project phase with different cash needs and risk profiles as much as the ability to secure funding.
The bridge loans are similar and overlap with hard money loans. Both are non-standard loans obtained due to short-term or unusual circumstances. The difference is that money is hard to refer to the source of the loan, usually an individual, a pool of investments, or a non-bank private company in the business of making high-risk and high-interest loans, while a bridge loan is a short-term loan that "bridges the gap" between long-term loans.
Characteristics
For general terms up to 12 months, 2-4 points may be charged. Loan-to-value (LTV) ratios generally do not exceed 65% for commercial property, or 80% for residential property, based on the assessed value.
The bridge loan can be closed, meaning it is available for a specified period of time, or is open because there is no fixed payment date (though there may be a payment required after a certain time).
The first cost bridging loan is generally available on higher LTV than the second bridging charge loan because of the lower risk rate involved, many UK lenders will avoid the second cost loan altogether.
Lower LTV may also attract lower rates, again representing lower levels of underwriting risk, although front-end costs, legal costs of lenders, and valuation payments may remain.
Example
- The bridge loan is often obtained by the developer to bring the project while permission approval is sought. Since there is no guarantee the project will occur, the loan may have high interest rates and from special loan sources that will accept the risk. Once the project is entirely entitled, it becomes eligible for loans from more conventional sources of low interest, for the long term, and in larger quantities. A construction loan will then be obtained to take out a bridge loan and project finance settlement.
- A consumer buys a new home and plans to pay a down payment with the proceeds from a house sale currently owned. The current owned house will not be closed until after the closing of the new residence. The bridge loan allows the buyer to take the equity from the current home and use it as a down payment on a new residence, in the hope that the current home will be closed within a short period of time and the bridge loan will be repaid.
- A transitional loan can be used by a business to ensure continuous operation continuity during a time when for example a senior colleague wants to leave while others want to continue business. Bridging loans can be made based on the value of the place where the company allows funds to be raised through other sources, such as incoming management purchases. A property can be offered at a discounted price if the buyer can finish quickly with a discount offset the cost of short-term bridging loans used to complete. In the purchase of auction property in which the buyer only has 14-28 days to complete a long-term loan such as purchase to let the mortgage may not be feasible in that time frame while the bridging loan will be.
Maps Bridge loan
Corporate finance
The bridge loan is used in venture capital and other corporate finance for several purposes:
- To inject a small amount of cash to take the company so that it does not run out of cash between large private equity financiers in a row
- To bring a depressed company while seeking an acquirer or a larger investor (in this case the lender often gets a substantial equity position with respect to the loan)
- As the final debt financing to take the company through the period immediately before the initial public offering or acquisition.
South Africa
In South Africa, non-transferable legal property is transferred through a registration system in a public list known as Deeds Offices. Given the delays resulting from the transfer process, many participants in property transactions require access to funds that otherwise will only be available on the day when transactions are registered at the relevant Deeds Office.
Bridging finance firms provide finance that creates a bridge between the needs of the participants' direct cash flows and ultimately the right to fund at registration at the Deeds Office. Bridging finances is usually not provided by banks.
Various forms of bridging financing are available, depending on the participants in property transactions that require finance. Property sellers can still bridge the proceeds of sale, real estate agents bridge the estate agent's commissions, and mortgors bridge the proceeds or divert the bonds. Financial bridging is also available for resolving exceptional property taxes or city accounts or paying transfer fees.
United Kingdom
History
Previously a specialist product, bridging loans have become more popular in the UK since the 2008-2009 global recession, with gross loans more than doubling from Ã, Â £ 0.8 billion in the year to March 2011 to Ã, Â £ 2, 2 billion in the year to June 2014. This coincided with a striking decline in mainstream mortgage lending in the same period, as banks and building societies grew more reluctant to provide home loans. The overall value of outstanding housing loans in Q1 2016 was Ã, Â £ 1,304.5 billion, up 1.0% compared to Q4 2015 and up 3.4% over the last four quarters.
As the popularity of bridging loans increases, so does the controversy surrounding them. In 2011, the Financial Services Authority (OJK) warned home buyers against using bailout loans in lieu of regular mortgages, expressing concerns that some mortgage brokers might misplace their suitability.
Since 2011, the bridging market has been monitored by the West Bridging Index, and has seen consistent increases in popularity and prevalence that coincide with consistent declines in average monthly interest rates.
Usage
In the UK, bailout loans are used in both business and real estate. In the former, they are usually used for free equity to increase cash flow. In the latter, they are used by home props to 'break' the property chain by providing short-term financial resources when there is a delay between the date of sale and completion, by the buyer bidding property at auction, and by landlords and property developers to secure renovation financing for a quick sale or to renew a property that is considered unfit for habitation before obtaining regular mortgage financing.
Characteristics
Bridging loans can be guaranteed as the first or second cost of real property, including commercial real estate, buy-to-let properties, dilapidated properties and land or building plots. Loan terms usually last up to 18 months, with compound interest charged every month; therefore, are often more expensive than other types of secure home loans.
The bridging loan is defined as 'opened' or 'closed'. The loan is closed if the borrower has a clear and credible repayment plan or exit strategy in place, such as the sale of loan security or long-term financing. Open bridging loans are riskier for borrowers and creditors because they are more likely to default.
Rule
Bridging a loan is secured at the first cost to the property in which the borrower or close family member will be considered a regulated mortgage contract, and is therefore regulated by the Financial Conduct Authority (FCA). Bridging loans sold to landlords and property developers is generally unregulated; however, if the occupant of the leased property under the loan guarantees is or will become a close family member of the borrower, FCA regulations will remain in effect.
The current exception exists in the case of a mixed-use property, in which the borrower or immediate family will occupy less than 40% of the property. In March 2016, however, the UK will be forced to bring legislation that is in line with Europe, under the pan-European Mortgage Credit Directive (MCD). Because the MCD does not recognize the usage threshold when determining the regulated contract, it is not currently clear whether the '40% rule 'will continue to apply.
See also
- The hard money lender
- Commercial lenders
- Loans do not match
- Gap financing
References
Source of the article : Wikipedia
0 Comments