The easyMoney Guide to Bridging Loans
(Capital at risk - Past performance does not guarantee future results)
Here at easyMoney, making things as easy as possible is a key part of what we do.
Without a doubt, our expertise and experience are multi-layered – it has to be – but our mantra is to keep things simple. We want our communication with our investors, both current and future, to reflect our straightforward approach. So, further to our Glossary blogs part 1 and part 2, today the easyMoney team offers you another “useful things to know” piece, to help you make fully informed decisions about your investments.
We’d love you to become a part of the easyMoney family, so let’s cut through the financial products maze to support your IFISA knowledge.
Bridging loans. Perhaps you’ll be familiar with the term, and you may already have used one as part of a property purchase. But how are they relevant to easyMoney and importantly, to your investment in an IFISA from us?
An IFISA (innovative finance individual savings account) is an ISA that contains peer-to-peer loans.
It matches lenders to borrowers; that is, investors to individuals, businesses or, in the case of easyMoney, property developers. In general – although there are no risk-free investments – those who invest in an IFISA earn higher rates of interest than from traditional savings account, not least due to exceptionally low interest rates on savings at present.
You can invest your annual tax-free allowance of £20,000 this way, and the interest you earn is paid monthly, with nothing owed to HMRC.
At easyMoney, our focus on property means that bridging loans could often be a part of your IFISA portfolio. In brief, we enable you to lend to UK property developers, all of whom meet our stringent selection criteria.
It’s through our in-depth know-how in real estate, and in particular our Chief Executive Andrew de Candole, that we have never made a loss on any of our loans. In our opinion, you’re in safe hands with Andrew and his team.
A bridging (or bridge) loan is a short-term solution that “bridges the gap” between the time that a debt that needs to be paid and the funds being made available; often, it’s used to buy a property before the purchaser can secure a mortgage.
The amount of the loan, not least for residential properties can vary enormously. Which? Magazine suggests amounts between £25,000 to over £25 million.
Commercial Properties – the benefits are clear
For commercial properties involving large sums, a bridging loan can speed things up considerably: in the rapidly moving world of property development, securing an asset quickly is elemental. You must act fast. Express decisions can be made, with some bridging lenders (including easyMoney) making the funds available in less than a week. Not to mention decisions in principle being made on the day of the application – again we can do this.
Also, bridging loans can be a powerful way to cut through some of the “red tape” normally associated with mortgage approvals. For example, some properties may offer a bargain price – but why? Because they’ve seen better days, they’re uninhabitable, and therefore unmortgageable. The answer? A bridging loan. The developer can now not only buy the building but can also fund the costs of restoring it to a mortgageable condition.
This solution keeps the real estate sector buoyant, helping it to thrive.
So, short-term loans like these may sound very convenient. They most certainly seem to tick all the “suitable for purpose” boxes. Bridging loans can be flexible and adaptable. And, they available in short order.
However, they may not be suitable for all. There are some important things to know and understand. As careful lenders, here are the key facts we need you to know for you to build a full picture.
Normally between 3 and 12 months, although they’re normally kept as short as possible – see why below.
Flexibility and speed may come at a price.
Interest rates are, or can be, much higher than those of a mortgage. Correspondingly, typically the interest is charged monthly rather than annually. Thus, a 1.5% interest will add up to an eye-watering 18% after 12 months.
Further, there are set up fees to consider – normally around 2% of the loan value.
Hence why bridging loans should (at least in our view), be as short as possible. And, again in our opinion, why borrowers should have a strong exit strategy in place.
Open and Closed bridging loans offer further a further distinction: open loans come with no fixed repayment date, although payment is generally within a year. Self-evidently, therefore, closed loans have agreed payment dates attached and are the most common.
Also, it’s worth knowing that bridging loans don’t just happen.
Lenders, and easyMoney especially, will want to see evidence of a repayment strategy, plus an exit plan as mentioned; plus, of course, proof of the property to be purchased and its anticipated cost, as well as the actions being taken to sell the current property, if appropriate.
1st and 2nd (and 3rd) Charge Bridging Loans
Bridging loans are always secured against the assets of the borrower – called a “legal charge”. This prioritises – hence the numbers - the order in which lenders will be repaid, although we won’t go into detail here.
What Other Uses Are There for Bridging Loans?
Buying a property at an auction.
Buying a property as a buy-to-let option. A fast, flexible way for landlords to secure a property.
Divorce finance. Not a happy situation, but a possible solution to expedite matters when a marriage breaks down.
Chain breaking finance. Empowers homeowners to break the often-stressful property chain in the buying and selling process.
Freehold and lease extensions – to maintain a property’s value.
High value property bridging. Increasingly competitive, specialist bridging lenders can play a key role in bespoke financial solutions.
Inheritance Tax. A bridging loan can deal quickly and easily with a large bill from the government. The same concept could be used to settle probate.
Quick Purchase or Personal Bridging Loans. Perhaps to make a deal, or for other purposes.
In summary, therefore, there’s a price for pay for convenience.
But bridging loans can be the best solution for responsible borrowers ready and willing to absorb all the terms and conditions - and of course, careful lenders. At easyMoney, when it comes to bridging loans, we pride ourselves on flexibility and speed, yet we take a cautious, always considered approach. With decades of combined experienced, our lenders will take each case on its own merit.
We’re after a win-win solution and we’re here to help.
e-Money Capital Ltd trading as easyMoney is authorised and regulated by the FCA (FRN 231680). Instant access to your money can’t be guaranteed. The property industry is subject to market conditions and therefore your capital is at risk.
Peer-to-Peer Investments are not cash savings accounts so they are not covered by the Financial Services Compensation Scheme (FSCS). Past performance does not guarantee future results. Tax treatment is dependent on individual circumstances and subject to change.