Bridging Loans Explained
Bridging finance is being used across the UK with greater frequency. More people are starting to recognise how they can apply short term loans in funding residential and commercial property transactions.
This increasing popularity is being driven by increasing use of bridging loans for residential and commercial property transactions, auction purchases and renovation and building development projects.
Increased confidence in the housing market has been a major driver of this growth with investment in building projects and buy-to-let schemes fuelling demand, as they provide investors with the opportunity to renovate and refurbish properties that could not have been financed through standard mortgage finance.
Bridging finance has become more popular in the last few years with an increasing number of people taking advantage of the flexibility that it provides both in residential and commercial funding.
What is a bridging loan?
In simple terms a bridging loan provides fast and flexible finance when time is of the essence providing borrowers with a fast cash injection which would otherwise not be available through more traditional finance routes.
There are 2 types of bridging loans:
(a) Closed bridge - The borrower has a set date when the loan will be repaid e.g. the borrower has already exchanged to sell a property and the completion date has been fixed. The sale of that property will repay the bridging loan.
(b) Open bridge - The borrower sets out a proposed exit plan to repay their loan but there is fixed deadline at outset. There will be a clear cut-off point that the loan has to be repaid by. A bridging loan is a short term loan (usually 12 months or less) although some lenders may provide finance for longer than 12 months that can be used by individuals and businesses for any purpose until more long term funding can be arranged, or they sell the property.
What are the main uses of bridging loans?
Bridging finance can be used in residential and commercial property transactions. Users of bridging finance range from home buyers, home builders, barn converters, landlords, property developers and investors.
Whether buying a property, building a property or raising funds for a refurbishment project, short term lending can be a viable option.
Bridging finance is also sometimes used by businesses in need of short-term funding e.g. to raise capital, meeting a business obligation or settling tax liabilities, it can help provide support in an emergency situation or allow a firm to take advantage of a business opportunity.
How do bridging loans work?
With a bridging loan what you get is quick finance. With a mortgage it could take two months before you can drawdown funds. With a bridging loan you could have finance in 5 to 7 days. In some cases quicker. In exceptionally time constrained situations bridging loans have been known to complete in 24 hours.
The bridging loans process
The bridging loan process is typically as follows:
We will establish with you what you are trying to achieve.
Once it is clear that a bridging loan is the right type of finance required we will research the lender market using our in-house bridging finance sourcing system for bridging finance rates.
A suitable bridge lender will be selected and will be provided with a summary of your situation, your reasons for wanting a bridging loan, the security you are providing and repayment strategy.
The lender will be given evidence (if applicable) of the new property purchase and proof of the price to be paid.
The bridge lender will issue an offer letter outlining the terms of the proposed finance and what is needed to obtain the finance.
Assuming you are happy to proceed the lender will instruct a property valuer to provide a valuation report. All documents will be then sent to your solicitor. Your solicitor will explain the terms and conditions of the loan to you.
On receipt of signed documentation funds will be released to the solicitor for legal completion. The bridging loan funds will be then sent to your bank account. This loan process usually takes 7 days to a month.
Sometimes, this can be reduced to hours, depending on the case and the set of circumstances involved, and crucially, what evidences the client has available. Similarly it could take longer in the case of a complex development loan which requires a number of conditions to be discharged by the Local Planning Authority.
Once you receive the bridging finance you will be expected to repay the loan back by the end of the term. Interest payments can be made in monthly instalments, or can be rolled up in the final payment.
Why are bridging loans used?
An increasing number of individuals and businesses use bridging loans to benefit from the unique short-term financing solution and flexibility they provide.
The funds allow people to take advantage of opportunities that arise, securing property deals (some properties at discounted prices) where there may be competition to win the deal and also to resolve emergency situations, which they would have otherwise been unable to do.
Interest rates on bridging finance are high. Higher than rates on other types of finance so this financing option should only be used where a short term finance solution is required (generally, 12 months or less).
They are also used when there is a requirement to take high speed advantage of a financial situation e.g. buying a property at a discount.
When would someone need a bridging loan?
Bridging loans are used for a wide variety of reasons, including:
- For homeowners and other property owners - Quickly securing a property. A common reason is so people can buy a new property before selling an existing one to prevent missing out on a particular property they want to purchase.
- Repairing a broken property chain - The loan can prevent a homeowner from missing out on purchasing their new home if a buyer in a property chain drops out.
- Building a house - People wishing to realise a dream and build their own home.
- Downsizing - These property owners do not require a standard mortgages but can use bridging finance to buy before the sale of their existing property so they can move quickly and independently.
- Converting a barn (or other property) - For people wanting to live in in the countryside to build their grand design home or for developers looking to turn a profit.
- Auction finance - For people buying property at auction, bridging finance can allow them to pay the required percentage needed as a deposit and then complete the transaction in the time provided for by the auction contract.
- Temporary cash flow cover - Borrowers looking for a short term loan during a property transaction can use a quick bridging loan to get a cash injection.
- For property developers and investors - Un-mortgageable properties. Bridging loans can also be used by to develop run down properties, where traditional mortgages would not be approved, for example, where properties have no bathrooms, toilets or kitchens or are not watertight.
- Renovation and development - The funding option can be used by those wanting to renovate a property, or those wanting to develop a piece of land into one house or even multiple houses.
- Fast access to finance - Bridging loans can be used to take advantage of market conditions and discounted investment opportunities, helping to finalise negotiations so that opportunities are not missed.
- For businesses raising capital - Bridging loans can be secured against land and property so that companies can raise finance in a short timeframe, for example, buying stock as an alternative to asset purchase finance.
- Tax liabilities - Businesses can use bridging loans if a tax demand is made, and the amount cannot otherwise be accessed within the required timeframe.
- Meet business obligations Borrowers - looking for short term funding to meet business obligations and payments or overcome financial difficulties can use a bridging loan as a possible short-term option.
For most individuals and businesses, bridging loans are used at times when there is a temporary cash flow issue or a tight deadline, where a quick short term loan is required to rectify the situation or provide a viable financial solution.
Property types that bridging loans can be secured against?
Bridging loans can be secured against different types of properties including residential, semi-commercial, commercial or land, and enabling options such as:
- Properties to buy
- A new residential property
- Commercial property
- Investment or trading property
- Buy-to-let purchases
- Quick completion of a property purchase to benefit from a discounted price
- Auction purchases with pre-auction bidding facilities agreed
- Properties to build and renovate
- Housing developments
- Barn conversions
- Refurbishment projects to sell on for profit
- Building your own home Properties where funds need to be raised quickly
- Un-mortgageable properties
- Buying before selling
- A short term solution for a cash flow problem
How can bridging finance be used on un-mortgageable properties?
Bridging loans can be used by investors/property developers looking to purchase properties that cannot have a normal/standard mortgage secured on them until the necessary corrective work is carried out. This could include properties with:
- No bathroom
- Properties with no kitchen
- Non standard builds.
The refurbishment of an un-mortgageable property will usually increase its value following the completion of the work.
Bridging loans provide investors with the opportunity to buy run down or underdeveloped properties and start their renovation project prior to letting and securing long-term finance or selling for a profit.
Bridging loan providers will take into consideration an investor’s current property portfolio and experience as well as their potential purchase, making sure that they have the appropriate land or property to use as security.
Investors can therefore use the equity on a current property to meet the value of the bridging loan they require to purchase to renovate another property.
Once renovation work has been carried out and the property has been made habitable, the owners can then apply for a normal/standard mortgage or sell for a profit.
How much can be borrowed?
The amount that can be borrowed depends entirely on the lender and the borrower’s circumstances.
The minimum loan size will typically be £25,000 and the maximum for most lenders is £10,000,000, but this can vary from lender to lender and will depending on the project and security.
Over how long can the money be repaid?
Lenders will typically expect a bridging loan to be paid back within 12 months.
As bridging loans have higher rates of interest than standard mortgages, it is practical to have a shorter time frame for borrowers to repay the loan.
What’s more, bridging loans are typically used to bridge a gap between finances, so the loan is often only required for a short period of time, where borrowers pay it back when their next stage of funding becomes available.
A person can normally choose to pay off a loan at any time within the 12 month time period without penalty. It is important when taking out a bridging loan not to simply look at the interest rate being charged but at the overall cost including all fees.
Bridging loan payments and interest rates
Some bridging loans are structured so that the borrower pays interest each month and repays the loan at the end of the term.
This arrangement would be suitable for those who have good regular cash flow for the duration of the loan, and who will be able to meet the monthly interest payments. Other options are rolled up interest or retained interest. The actual rate paid by the borrower will depend on a number of circumstances, including:
- The lender Whether it is an open or closed bridging loan
- The size of the loan in comparison with the property value - the loan to value (LTV)
- The type of security provided by the borrower
- The credit score of the borrower
Typically the following will apply to bridging loans:
- The interest rates payable on bridging loans are typically higher than standard mortgages as they often carry more risk to the lender.
- Rolled-up interest – Depending on the lender borrowers can sometimes choose to have interest payments rolled up. This means that they do not have to pay interest every month but instead pay the rolled up interest at the end of the bridge term. This is suited to borrowers unable to make monthly interest payments. In these circumstances, interest is typically compounded. So, while a borrower will not pay interest monthly, the repayment at the end of the term will be larger.
- Retained interest - To assist in meeting monthly interest payments, you can sometimes choose to retain from the loan an amount representing a number of monthly interest payments. The borrower can choose the number of months (if affordability criteria can be satisfied). The retained interest is still part of the capital sum of the loan, so interest will be charged on this amount. The total loan must fit within the loan to 1%–1.5% interest rate per month 1%–2% arrangement fee/broker fee 70%–75% loan to value
- If there is any retained interest which is not utilised by the time of redemption of the loan, most lenders will normally provide a credit for this amount.
Will my client need a solicitor?
It is recommended that borrowers get independent legal advice prior to signing any legal documents and entering into a bridging loan.
The process provides protection for both the borrower and the lender.
Bridging loans are becoming increasingly recognised as useful and valuable by individuals and businesses looking for quick, short-term funding solutions.
Fast and flexible, it provides people with the finances that they need in order to remedy a cash flow issue or take advantage of an opportunity, which they otherwise may have not been able to secure.
For anyone looking into obtaining a bridging loan, it is important to take the time to find a reputable lender with the following accreditations:
- A member of The Council of Mortgage Lenders
- Authorised and regulated by the FCA (Financial Conduct Authority)
- Proven track record
- Experienced in working on projects similar to yours
Call us on 0117 313 6058 to discuss your finance options today.