• July 23, 2019

What is a bridging loan?


What is a bridging loan?

What is a bridging loan? 316 159 Myles Robinson

Bridging Finance Loans give you the ability to access large funds of Cash.

A bridging loan usually taken out in order to purchase a property whilst selling an existing property as it enables you to access large sums of money for a short period of time. They can be used for both personal and commercial clients.

Due to long chains with house purchases there is quite often a gap between completion and sale dates in a chain so bridging finance loans are used to access short term cash to purchase the end property.

Not only can you use a bridge loan for a new property that you will live in, they can be good for property investors who are wanting to build their property portfolio and be able to complete on homes quickly in order to secure the sale. Many people purchase property and other assets at auctions and they do not always have the cash ready to buy. By having a bridging loan in place before the auction, you can have peace of mind that if you win that you have the cash to complete on the sale.

What is the criteria for a bridging loan?

Bridging loans are usually secured against other assets, mainly property and high value assets. Additionally they can also be secured on the asset that is being purchased, so until you exit the bridge loan, you don’t own it, similar to a mortgage. Some lenders may require a 1st and / or 2nd charge secured on sometimes two properties or assets.

You don’t always have to be in employment as such to be eligible for a bridging finance loan as usually the assets the loan is secured against is enough for the lender to be confident they have enough security for the bridge.

If you are a property developer you may be required to provide proof of a good record and standing of previous developments. Development finance loans can be again great for commercial bridging loan requirements as they can help grow portfolios quickly.

How do I get a bridging loan?

Many clients of ours are straight forward in terms of their requirements of the loan so by using a broker we are able to provide bridging rates from a panel of over 200 UK lenders. Below are some considerations to think about when taking out a bridging loan.

  1. Is the loan a first or second charge bridging loan?

A first charge loan will be used if there is no other finance outstanding on the property or asset. If there is any other finance outstanding on the property then the bridging finance will go as a second charge. The first and second charges show the priority of who should be paid back at the end of the loan if you are unable to pay off the loan. For example, if you are requiring home improvements to your existing home and it has a mortgage on it already (first charge) then the bridging loan will go as a second charge loan.

2. What are the interest rates for bridging finance loans?

The flexibility in repayment methods of bridging are one of the advantages of bridge loans. There are several ways to pay, all of which have different benefits to them and give some flexibility for both the lender and consumer.

  • End of the bridging finance agreement: Here you will pay the full loan value plus interest at the end of the loan term. For example, you take out a bridge of £150,000 for 12 months with £11,500 in fees, you would pay back £161,500 in 12 months.
  • Monthly Repayments: You can pay the bridge loan at a later stage but pay off the interest monthly.
  • Interest Retained: Monthly payments of interest are all packaged up until your date of repayment is agreed to pay back the full loan amount.
What are the uses of bridging loans?

Many of our customers use a bridge loan for some kind of property purchase, both commercial and personal reasons. However there are many other uses outlined below:

  • Property purchase (new property, buy to let)
  • Development financing
  • Auction finance (property and assets)
  • Asset finance for cars and machinery
  • Access large amounts of cash
  • Repay bills and debt

What are the rates of bridging loans?

You can choose from both fixed and variable rates which is a great advantage of bridging finance flexibility. If you opt for a fixed rate you get to know the exact amount that you will repay so that you can budget and forecast your future outgoings. With a fixed rate you have all of the advantages of knowing that your repayment of the bridge loan is fixed and peace of mind.

A variable rate for your loan can offer some uncertainty of the value you will pay back at the end of the finance term but dependent on the economy and base rate in the UK, it may work in your favour. It is usually best to consult your broker and ask for advice on what they think is the best option at the time of taking your bridging loan out.

Most bridging loan brokers will have access to lenders that offer both fixed and variable rates for your loan. We work with over 200 UK lenders which gives us the ability to find you the best deals and options for you at the time of your enquiry.

Most of the options you have for the rates side of bridging loans are dependent on various factors such as the lender chosen, if it an open or closed bridge loan, the size of the loan and the loan to value, the security of asset that is against the property and sometimes, but not always, their credit score. It would be a good idea to double check your credit score on Experian beforehand. Use our bridging loan calculator to get some indicative rates.

What are the types of bridging loans?

Open Bridge: An appropriate and agreed exit strategy is set but the date of repayment is unknown however there may be a final deadline of when the full loan amount must be repaid by.

Closed Bridge: The borrower has a date agreed when the bridging finance loan will be paid back to the lender. A scenario of this would be if the bridge loan is agreed to be paid back based on a confirmed date of completion on an existing property.

How much can I lend?

Bridging finance loans are suitable for loans that are usually between £20,000 and £200 million. Sometimes you may require less than £20,000 but it may be best to look into a secured loan if the value is lower than this. The more assets that you can secure the loan against, the more bridging finance you will be able to access. The loan to value is variant on different lenders so using a broker, unless you are knowledgeable about bridging loans, is best as they can get you the right loan to value (LTV) that you require.

Advantages of bridging loans

There are many advantages of bridging finance loans:

  • Flexible repayment options
  • High amounts of money available to borrow
  • Access funds as quick as 48 hours
  • Varying options of interest rates, fixed and variable
  • Enables you to access cash
  • Perfect short term borrowing solution

Some of the disadvantages of bridging finance are:

  • Can be costly due to high value purchases
  • Loans are secured against your assets

What is the approval process of a bridging loan?

Some of our clients have had payout within 24 hours of enquiry, it really can be that quick to pay out. The majority of cases are completed within 3 weeks but we do regularly get clients through within 1 week if the requirement of the bridging finance is fast turnaround. The first week or two get the checks and background information completed of which is then passed to underwriting to complete and then pay out of the loan is arranged. It helps If the borrower is organised and has the relevant documents required on enquiring about a bridging loan.

What are the risks of bridging finance?

The main risk of bridging finance loans are that the lenders are not able to fund the loan. This can be down to many reasons but the biggest cause is that there is not enough security to lend against.

What information is required for a quick pay out?

In order to help speed up the bridging loan it is handy to have everything you need in one place already. Bridging finance is a very niche product and your broker will be an expert in their field, but for a fast completion, the speed needs to come from both sides. Some of the list below will help if you can provide these documents:

  • Dates and deadlines of the loan and agreement
  • Full details of your assets
  • Background information on yourself / company
  • Value and details of the asset to be purchased
  • Credit background of applicant/s
  • Any previous bridging and mortgages

If you can have everything ready and prepared for your bridging finance broker then it will significantly help speed up your loan application.

Key areas of bridging loans:

Residential bridging finance:

If you are looking to purchase property or land, bridging finance can be the perfect solution.

  • Purchase land or property before you sell your existing property
  • Finance for an auction purchase
  • Get cash released from your existing assets quickly
  • Access funds for un-mortgageable properties
  • Development and renovation projects
  • Quick access to funds

If you are looking for a personal or residential bridge loan contact us today.

Commercial bridging finance:

Release cash quickly for commercial clients, great for fast short term finance

  • Get a cash boost quickly
  • Commercial property purchases
  • Asset finance
  • Auction financing
  • Raise capital for business development
  • Tax liabilities – if a tax demand is requested

Most businesses use a bridging loan for a cash flow issue or for tight deadlines where a fast solution to get cash is required.

Development Bridging Finance:

Fund your next development with a bridging loan for new and experienced developers

  • Access cash to fund new developments
  • Ability to take advantage of new opportunities
  • Access finance that would be hard to get with other finance solutions
  • Overcome any unexpected financial difficulties with a new development

What properties can a bridging finance loan be used on?

Properties that you want to buy

  • A new property albeit residential, commercial, investment or trading property
  • Buy to Let (BTL) properties
  • Property purchases at auction
  • Fast turnaround on completion of properties

Raising Funds for an existing Property

  • Annexe and Barn Conversions
  • Extensions and general home refurbishment
  • Upgrades to the home to improve the value

Can I bridge if I can’t get a mortgage?

One of the best attributes for a bridge loan is that you can finance assets that you may not be able to with other finance. For example, a property can not get a mortgage on it if it does not have a bathroom, kitchen or is a build that is non-standard.

By taking out a bridging loan you can renovate property to live in, or in most cases, sell on for profit. Many investors use bridging loans whilst carrying out refurbishment work and then once their exit date is set they will endeavour to complete the work and sell at this point.

It must be noted that not everyone will immediately pass for a development bridging finance loan as the lender may require proof of existing or previous work that you have completed to give some reassurance. At the point that the property has the set requirements for a mortgage the bridge loan can be exited and a mortgage taken out.