Bad Credit Bridging Loans

Bad credit bridging loans explained

Bad credit bridging loans are specialised financial products designed for individuals with a poor credit score or less-than-ideal credit histories who need short-term funding, typically for property-related transactions. Unlike traditional loans, bridging loans are secured against property and are meant to ‘bridge’ the gap between a debt coming due and the main line of credit becoming available. This type of loan is particularly useful in real estate transactions, such as buying a new property before selling an existing one but whilst that was the orignal purpose of a bridging loan, they are probably the least used reason why people use bridging loans. For those with bad credit, these loans offer a lifeline, as they are less focused on credit history and more on the value and potential of the property being used as security. However, due to the increased risk to lenders, these loans often come with higher interest rates compared to standard bridging loans.

Key product features

• Term of Loan: Bridging loans are typically short-term, usually lasting from a few months up to 12 months, however lenders like us here at Breeze Capital can provide bridging loans over 24 months if required. This short duration is ideal for property developers or investors looking to quickly purchase, renovate and sell a property. Additionally, the term is long enough for a borrower to arrange what is known as long term finance such as a commercial mortgage.
• Interest Repayment: Unlike traditional loans, the interest on a bridging loan can often be ‘rolled up’ to be paid at the end of the term, rather than monthly. This feature is particularly beneficial for borrowers who may not have regular income during the loan term but expect a lump sum at the end, such as from the sale of a property. For example, a borrower takes a bridging loan of £750,000 over 12 months but pays nothing (zero) each month. Instead the lender is repaid at the end of the 12 month term by the borrower either selling the property or refinancing to a long term commercial mortgage.

Bad credit bridging finance lending criteria

Lenders of bad credit bridging finance primarily focus on the value and potential of the property used as security rather than the borrower’s credit history. However, they still have criteria to assess the risk. These criteria can include the type and condition of the property, the borrower’s exit strategy (how they plan to repay the loan), and the loan-to-value (LTV) ratio. Borrowers should be prepared to provide detailed plans and potentially higher security to offset the risk associated with their bad credit.

In terms of the types of property a bridging loan can be used on, you can borrow against auction property, land with planning, office or commercial properties as well as your more traditional residential investment properties.

How much can I borrow

The amount you can borrow with a bad credit bridging loan typically depends on the value of the property used as collateral and the loan-to-value ratio offered by the lender. Generally, lenders might offer up to 70-75% LTV, but this can vary. For those with bad credit, the LTV might be lower to mitigate the lender’s risk and 60% LTV is not uncommon in this sector of the market. The actual amount also depends on the borrower’s specific circumstances and the lender’s assessment of the project’s viability.

Do I need a valuation or will the lender do a desktop valuation

Whether a physical valuation is required or a desktop valuation is sufficient often depends on the lender’s policy and the specific circumstances of the loan. A physical valuation, conducted by a professional surveyor, provides a detailed assessment of the property’s value and condition. In contrast, a desktop valuation is less comprehensive and is done remotely. For higher-risk scenarios, such as bad credit bridging loans, lenders may prefer a physical valuation to accurately assess the risk.

Adverse credit bridging loan rates & fees

Adverse credit bridging loans, tailored for individuals with less-than-ideal credit histories, often carry higher interest rates compared to standard bridging loans. This is due to the increased risk perceived by lenders. Rates typically range from 1% to 2% per month, but can vary based on the loan amount, property value, and borrower’s credit profile. Additionally, borrowers should be aware of arrangement fees, usually about 1-2% of the loan amount. Legal and valuation fees are also common, required for property assessment and legal processing. It’s crucial for borrowers to thoroughly understand these costs, as they significantly impact the overall expense of the loan and importantly, the borrower pays for the lenders legal fees as well as their own, so that can really ramp up the cost.

What other costs are there when getting a bridging loan?

Beyond the basic interest rates and arrangement fees, bridging loans involve several other costs. Valuation fees are charged for assessing the property’s value, a critical factor in loan approval. Legal fees cover the cost of legal advice and documentation handling. Exit fees, although not always applicable, may be charged when repaying the loan. Additionally, borrowers should consider broker fees if they use a broker to arrange the loan. It’s essential to factor in these costs to understand the total financial commitment involved in securing a bridging loan.

Types of bridge loan for people with bad credit

For individuals with adverse credit, there are specific types of bridging loans available. First, closed bridging loans offer a clear repayment plan but require a strong exit strategy. Open bridging loans, on the other hand, are more flexible but typically have higher interest rates. Another option is the first charge bridging loan, which takes priority over other debts in case of default, potentially offering lower rates. Lastly, second charge loans are available if there’s already a mortgage or loan against the property, but these come with higher risks and rates. Each type has its own merits and risks, making it crucial to choose one that fits specifically with the borrower’s personal circumstances.

FAQs

1. Can I get a bridging loan with bad credit? Yes, bridging loans are available for individuals with bad credit, though terms and rates may vary.

2. How quickly can I secure a bridging loan? Bridging loans can be arranged relatively quickly, often within a few days to a couple of weeks, depending on the lender and the complexity of the loan. The average completion time of a bridging loan is currently 48 days so whilst not as quick as they used to be, they are a lot quicker than a traditional residential mortgage.

3. Is property required as security for a bridging loan? Yes, bridging loans are typically secured against property.

4. Can I repay a bridging loan early? Yes, most bridging loans can be repaid early, but check if there are any early repayment charges.

5. How is the interest charged on a bridging loan? Interest can be charged monthly, rolled up to be paid at the end of the term, or, in some cases, deducted from the loan at the outset (this is also known as retained interest).

6. Do I need proof of income for a bridging loan? Proof of income is not always necessary for a bridging loan, as the loan is typically secured against property. Lenders are more interested in the exit strategy – how you plan to repay the loan, which could be through selling the property or securing long-term financing.

7. Is a bridging loan based on income? Bridging loans are usually not based on income but on the value of the property used as security and the viability of the exit strategy. However, some lenders might consider income as part of their overall assessment, especially if the exit strategy involves refinancing to a longer-term loan.

8. How long does a bridging loan take to approve? The approval time for a bridging loan can vary, but it is generally quicker than traditional loans. It can take anywhere from a few days to a few weeks, depending on the lender, the complexity of the loan, and the borrower’s circumstances.

9. How much deposit do I need for a bridging loan? The deposit for a bridging loan, often referred to as the ‘loan to value’ (LTV) ratio, typically ranges from 25% to 40% of the property’s value. The exact amount can depend on the lender’s policies and the borrower’s circumstances.

10. How much can I borrow on a bridging loan? The amount you can borrow with a bridging loan usually depends on the value of the property used as security for the loan and the loan-to-value ratio offered by the lender. It can range from tens of thousands to millions of pounds, but most lenders cap the loan at a certain percentage of the property’s value.

11. How are bridging loans assessed? Bridging loans are assessed primarily on the value of the property used as security and the credibility of the exit strategy. Lenders also consider factors like the borrower’s credit history, the property’s location and condition, and market conditions.

12. What are the requirements for a bridging loan if I have bad credit? For borrowers with bad credit, the requirements for a bridging loan may include a lower loan-to-value ratio, a higher interest rate, and a solid exit strategy. Lenders might also require additional security or a guarantor. It’s crucial to present a strong case for how the loan will be repaid.

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