What is a bridging loan?
A bridging loan is a short term loan or mortgage, secured against a property. The duration is normally 3 to 36 months.
Commonly used by property developers and investors but also well known as a ‘chain breaker‘.
Bridging loans are fast. Once approved you could have your funds in just a few days.
Bridging loans are normally offered as interest only and secured against your property as a first or second charge. The maximum loan to value is generally around 70-75% but a 100% bridging loan is available in certain circumstances.
The interest rate is quoted and charged monthly and is quite a bit more than a normal mortgage. But for this you get speed and flexibility. It’s quite common for the interest to be ‘rolled-up’ so that it is paid at the end. This makes it more expensive but helps with your cashflow.
Read more about How does bridging finance work?
How long does a bridging loan take?
It is possible to have an offer available within a matter of days, subject to a property valuation. Funds could then be available within a further couple of days.
Bridging is designed to be quick which is one of its main advantages.
YOU CAN USE A BRIDGING LOAN TO
- Purchase a residential or commercial property
- Purchase a buy to let property
- Purchase an auction property
- Purchase a bargain property, quickly
- Build and convert a barn
- Build houses
- Buy an uninhabitable property
- Break free from a property chain
- Raise some cash
- and more
Differences between a mortgage and a bridging loan
LENGTH OF TERM
The cost of a bridging loan is a lot more than a standard mortgage and the rates are quoted monthly.
A mortgage will take several weeks for your application to be assessed and offered before funds are available. By comparison bridging can take just a few days.
Residential lenders will prefer normal properties that are ready to be lived in. Bridging is available for pretty much anything! So this is a popular choice for rundown properties that need a lot of work.
LOAN TO VALUE
While mortgage companies will lend using higher LTV figures, they will only use the purchase price or value when making that calculation. Some bridging lenders are happy to work from the Open Market Value (OMV), even when the price paid is below that, as with BMV deals. Below market value finance is widely used for this reason.
PROOF OF INCOME
This is an essential part of applying for a residential mortgage but bridging lenders are not as interested. They will look and the asset, the LTV and the exit strategy.
Having a good credit profile is essential when applying for a mortgage, this gets you access to the best lenders and the best rates. While bridging lenders do look at your credit profile, the security property and your exit route are more important so bad credit bridging loans are readily available.
For a bridging loan the monthly interest charges can be paid or rolled up until the end.
Open and closed bridging loans
Bridging finance is essentially short term finance that fills the gap between a sale or the availability of conventional longer-term finance.
Below are few examples of how bridging can help.
Sale and purchase chains
The most straightforward circumstance where bridging is necessary is when the purchase of one property is dependent on the sale of another property, and when there has been a delay in the latter.
There are two reasons why a client may not be able to proceed without the help of a short-term loan:
- If there is a mortgage on the house being sold and there will be a new mortgage on the house being bought, it maybe that either a client cannot afford both mortgages at the same time or the mortgage lenders will say that its unaffordable
- The more frequent reason is that the sale of the first house usually generates the deposit for the house being purchased. Obviously, this isn’t going to happen unless the sale and purchase are simultaneous.
In this circumstance the bridging lender will want to see evidence of the purchase proceeding, albeit not concluded, and evidence of the sale being at an advanced stage, again albeit not concluded. What the bridging lender will do is to take the security of one or both houses for his loan and effectively lend 100% of the purchase price of the new house. Obviously, this is subject to there being enough equity in the houses to satisfy the lender’s conditions.
As this will be the borrowers main residence it will require a Regulated Bridging Loan.
Property Auction Finance
Buying a property at an auction is simple and fast. There’s no property chain, no gazumping, if you are the highest bidder then you get the property.
But before attending the auction you do need to do some preparation so that you can buy the property within the auction timeframe. Typically this means a 10% deposit on the day and then 28 days to legal completion.
Lots of properties come to auction because they need building work, are of non-standard construction or are uninhabitable due to lack of kitchen or bathroom. Standard mortgage lenders are not interested in these types of deals, but bridging lenders love them. With auction finance in place you can purchase an uninhabitable property with a 75% loan advance, enabling you to complete the building works and then either refinance or sell.
Building and Development finance
Normally a builder doesn’t have enough cashflow to buy the land and to complete the building. Once the house is finished, the builder is relying on the option either to sell or to find long-term finance. The lenders who are in the market to provide long-term loans need to have a fully completed house on which to lend. It is the type of asset that they are familiar with and “understand”; they are not in the market of providing loans on green fields or half-built houses. Given that the time taken to buy, and to build is usually less than two years, some kind of short-term loan is needed to cover that period.
The availability of short-term finance is not restricted to medium or large-scale companies but is available to the private individual with a small building project or even a conversion/refurbishment project. The main difference between the professional developer and the non-professional, is which lenders are in the market and what the interest rate charged will be. So, for example, it is currently the case that the recognised High Street banks lend to the larger projects from larger companies and less well-known specialist companies lend to smaller schemes. By using a Bridging Loan Broker such as ourselves you will gain access to a wide range of short term finance lenders.
In nearly every circumstance where bridging finance is needed, the borrowers cannot afford to make monthly payments. This is especially true of builders who are expecting to make their profits out of a sale and whose cash flow is very restricted during the build. Although the option is offered to make regular interest payments, the lenders are happy to offer that interest payments are added to the loan and settled when the bridging finance is paid back (the exit).
It is important to note that when a bridge loan is being used for property development, usually you will only need money in tranches as your project proceeds. The lender only charges you interest for money drawn down by you, and for the period that it is drawn down. If you have asked for a larger facility for either or both amount and time (see below on Safety Margins), and you never need to use it, then you are not charged for it. Your bridging finance broker can help guide you in this area.
Safety margins in development bridges
It is particularly important to give this subject some thought. There are two points of view to consider;
- The borrower needs to make sure that they have enough money to achieve their objective
- What does the lender think if the borrower doesn’t get it right?
Let’s consider the second point first. What would you think if you were a lender and the borrower came to you asking for more money or asking for you to extend the time? You would think – “what’s gone wrong?”. Not only would you want to know why, in great detail, but if you weren’t happy with the answers, you may not want to lend any more and you might want your money back as soon as possible. And if that meant taking over the site and the project, it may be something that you needed to do. If you are the borrower, you could not guarantee that a lender would not take that standpoint.
So now addressing the first consideration. As the borrower you will want to have safety margins for your own peace of mind. A 10% or 15% contingency on costs is usually fine. When it comes to sale or refinance to a long-term loan, you must take account of how long this takes. For example, someone buying a house that you have built may agree the price very quickly but by the time a mortgage is organised, and solicitors have done their work, it can easily take 3 or 4 months or more. So, it is really important that you take all these factors into account when asking the lender. In fact, if you list your reasons for the extended term or increased amount, the lender will see that as impressively prudent and organised.
For any “normal” loan or mortgage, the affordability to a borrower to pay the monthly interest is the primary condition for a lender. In bridging finance, no monthly payment is required, so affordability and thus the borrower’s income does not come into the reckoning. Because the lender is adding the interest to the loan, it is the loan-to-value of the property at the end of the deal that is vital. The lender will look at your request then calculate what the potential interest could be if you withdrew the full amount requested at outset and didn’t repay it until the very end of the requested term. This represents in effect the maximum potential facility that might be needed, and this has to fit the lender’s loan-to-value criteria.
Simple residential, “chain-breaking” bridges, do not really need the borrower to meet any personal conditions, because it is all based on the value of the property/properties.
In the case of property development bridges, there is far more to be taken into account
- Does the project have full planning permission; “outline planning permission” is insufficient
- Does the developer have appropriate experience for the project?
If not, what professionals is the developer employing to supervise the project and what is their experience and qualifications?
- What is the experience of the builder actually doing the work?
The Bridging Market
The last ten years has seen many new lenders joining the bridging finance marketplace. This is excellent news for borrowers because not only is there competition in the market in respect of interest rates, but the range of circumstances accommodated is wider. And that is continuing to happen today with interest rates dropping in the face of even more competition. What really hasn’t changed is the core numerical underwriting rationale.
The Next Move
Do not be frightened by the term “bridging finance”. Whereas most people will come across residential mortgages at least once in their life, very few people will have the need for a bridge, unless they are regular property developers.
It is a reasonable consequence of that lack of familiarity, that people are reluctant even to enquire. Don’t be!
Do your research and only contact bridging loan brokers who are experienced in bridging loans. Their knowledge will be invaluable.
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