Security or Collateral for Bridging Loans
The security for a bridging loan refers to the property or assets offered as security for the loan, which the lender may seize in case of default.
Securing a loan is of paramount importance to lenders. The lender needs to ensure that they will be able to recover their principal sum should a borrower default on their loan repayment terms.
Depending on the loan agreement, borrowers may be required to secure the loan against some form of collateral or provide a guarantee of other security to the lender.
Understanding the different types of security or collateral and how they are used is an important part of the process of obtaining a bridging loan.
The type of property used for security for a bridging loan is often the most important factor in determining whether a lender will offer the loan or not. The security – or collateral – must be substantial enough for a lender to feel sure that they can recoup any losses in case a borrower defaults on their loan.
Types of Security or Collateral
When taking out a bridging loan, lenders will usually require some form of security.
This means that the borrower is committing to provide a security of some kind to the lender in case they fail to make their loan payments. The common types of security that may be used for a bridging loan are as follows:
Real Estate Property
When borrowing a bridging loan secured against the value of an asset, the most common asset offered is real estate property. The types of property used as security can be either residential or commercial property, or some form of real estate development and each type of property attracts different loan-to-value ratios varying lender to lender which affects the amount you can borrow.
Types of Property Used for Bridging Loan Security:
1. Residential Property
This can include anything from a single-family home to an apartment building, or even a large multiunit complex. The value of the property can vary depending on size, condition, and location. A lender will appraise the property to determine its current market value either through a RICS qualified survey and valuation report or automated valuation, and the lender will typically require a deposit, cash sum or equity stake of at least 20% or a maximum of 80% loan-to-value.
2. Commercial Property
This includes properties such as office buildings, retail stores, warehouses, and other more specialised commercial properties. The value of the property will depend on the size, condition, and location of the facility, and lenders typically require a deposit payment or or equity available of at least 35%.
3. Agricultural Property
Agricultural property can include farmland, buildings, structures, equipment, and more. It can be used to secure a bridging loan if it is of a substantial enough value. As with other types of property, a lender will evaluate and appraise the value of a property for a loan.
4. Development Property
Development property is land that is meant for development or redevelopment with the intention of producing income. A lender will look at the potential of the land for proposed projects, and the value of the land after any proposed developments have been completed.
5. Vacant Land
Vacant land can be used to secure bridging loans if it is of a sufficient value. The lender will look at the value of the land based on current market concerns, and the potential development of the land.
6. Equity in Other Properties
If you have equity in other properties, you may be able to use it as security for a bridging loan. It is important to note that in order to use equity in a property as collateral, the property must have enough available equity remaining to meet the lenders LTV criteria after all other existing debt or liens are considered.
Other less common types of security include:
Vehicles
Bridging loans can also be secured against the value of a vehicle. This could include a car, motorbike, boat or even an aeroplane.
Securities
Securities such as stocks and shares can also be used as security for a bridging loan.
Other Assets
Other assets such as precious metals, jewellery and art can also be used as security for a bridging loan.
Guarantor
Lenders may also require a guarantor, who agrees to take responsibility for the loan payments in the event that the borrower fails to make them.
What is a Bridging Loan?
A bridging loan is a short-term loan used to “bridge” the gap between a long-term financing solution or to provide temporary capital for a specific purpose. They are typically taken out for a period of 1–24 months and can be used for a variety of purposes, such as buying a new house before the current one has been sold, covering cash flow problems or funding major renovations or projects. Bridging loans are usually secured against a property or other asset.
Bridging loans may be open or closed. An open bridging loan is a loan with no fixed term, meaning it can be repaid at any time, although in reality there is usually an exit strategy agreed as part of the bridging loan conditions. A closed bridging loan is a loan with a fixed term, with the loan funds released immediately but the borrower repaying the full loan amount once the loan term is up.
Benefits of Security or Collateral
The main benefit of offering security is that it increases the chance of a lender lending money to the borrower, as it provides the lender with some form of assurance that they will be able to recover their principal in the event of a default.
Borrowers may also benefit from offering security as it allows the lender to offer a lower interest rate and more favourable terms on the loan.
Final thoughts
Taking out a bridging loan can be a great solution to a short-term funding need. However, it is important to understand the security or collateral requirements that may be needed to secure the loan and the benefits that offering security may provide. As such, it is important to understand the different types of security that may be accepted by the lender, as well as the advantages that offering such security can bring.
In conclusion, property or other asset is often used as security when taking out a bridging loan. The type of property accepted as security varies from lender to lender, but can typically include residential or commercial properties, agricultural properties, development properties, vacant land, equity in other properties, or investments. It is important to know which type of security your lender will accept before applying for a loan.
