Bridging loans are a type of short term finance that is usually less than 12 months. These types of loans can be used by individuals or businesses. The purpose of this solution is to ‘bridge’ the gap between the payment falling due and either the main source of funding being available, or funds being received from another source such as the sale of a current property.
They can also be referred to as “caveat loans” or “swing loans”, however, in the UK they are usually just referred to as a bridging finance.
How Do They Work?
Generally, the process of acquiring funding with bridging finance is as follows:
- Contact us by using one of our forms, email or phone to explain your requirements.
- We will take you through your options in detail prior to getting indicative terms across to you.
- We will then provide you with a decision in principle. You can then use this as proof of finance when negotiating with vendors and estate agents and placing an offer on a property. This is a critical point for an average property purchase in these situations, as the vendor or estate agent will need to know that you are ready to proceed and have the funds to make a serious offer.
- An application is processed with the lender. At this stage, any surveys for valuations will be arranged and the solicitors will then be instructed.
- Subject to the above steps being completed and approval from the underwriting department, the funds will be made available to you.
Bridging loans can work very well to address a number of situations, such as property development, investments and buy-to-let purchases.
This type of funding was traditionally structured with the purpose of helping to break a chain when purchasing a new property, prior to selling the existing one. However, these loans are now often used when funds are required quickly. An example of how a bridge loan could be used is when someone is buying a property at auction. Another example would be where a property developer needs funds for development works quickly and acquiring a mortgage from a mortgage broker is not possible at that stage. The rates of interest are often based on the loan amount and the amount of risk to the lender.
Why Use a Bridging Loan?
Bridging loans are often used by borrowers as a supporting solution that precedes a longer-term form of funding. In some cases, they are incorrectly seen by borrowers as an alternative to mainstream lending.
If you are considering a short term loan like a this, you should consider the exit strategy before committing to any terms. An ideal exit strategy from a bridging loan could be to approach a mortgage lender for a longer-term form of funding such as a mortgage, or a buy-to-let mortgage, and of course there is the option of simply selling the property.
Since high street banks and building societies have become more stringent over lending in recent years and are taking longer to process mortgage applications, there has been an increase in bridging lenders that have come into the market. For these reasons, the use of bridging finance has increased.
With the influx of lenders in this space and popularity increasing across borrowers, the FCA is concerned that advisers may be too quick to recommend a bridge loan, where other solutions may be more suitable.
Please do your necessary due diligence before considering a bridge loan.
Who Can Use a Bridging Loan?
They are most commonly used by property developers, landlords and investors. These types of loans are now also being used by individuals and businesses looking to take advantage of this short-term property finance solution.
For UK bridging loans, applicants must be over 21 years’ of age and be a UK resident. As this type of funding is secured, proof of income is not typically required. Poor credit and CCJs are not usually an issue, as the security is asset-based and can typically bypass the need for a perfect credit history.
How Much Does a Bridging Loan Cost?
As one would expect, the costs charged by a bridging lender can be higher than some conventional forms of funding. A traditional lender can charge monthly interest payments, and there are other options as well, as explained in this article.
Often, people will focus on trying to find the lowest interest rates and make a decision based on this alone. Keep in mind that some lenders will increase the total cost by charging large exit fees, fund management costs and other costs that may not be initially clear. Please ask about these before committing to any offer and keep the total cost in mind when making a decision about bridging loans. It’s also important to ask about whether there are any broker fees included with the deal.
Some lenders can charge exit fees of around 1% in addition. We have a great bridging loan calculator that will help you to understand some of the costs involved and what they could look like.
Bridging Loan Rates
Commercial Bridging Loan interest rates are generally higher than commercial mortgages, to offset the risks to lenders. We have a great bridging loan calculator page that would help you understand what the monthly interest rates could look like. The rates vary widely and can start from as little as 0.37% per month and can often be seen at levels up to 1.5% per month.
Below, is a visual representation of what the monthly interest repayments could look like on a bridging loan, where the borrowing amount is £100,000:
Monthly payment of interest
Interest Repayment Options
Retained interest is where the lender ‘retains’ the interest for the full term. So, if you had a 12 month bridging loan you would not repay the interest to the lender until month 12. This can mean that as the interest rate is paid in one lump sum at the end of the term that the amount of interest repaid could be more than rolled-up or even monthly. However, this option appeals to many property developers due to the fact that it affords them time to do any internal improvements such as development work throughout the term without including ongoing costs throughout the term length.
With rolled-up interest the interest is added each month and increases in value in a sliding scale due to it being applied to the renewed sum of the increments plus the previous months’ interest, as the term progresses. This option may be preferred to some borrowers as it can often be less costly overall when compared with retained, however, may be more expensive than monthly.
Retained and Rolled-Up
As you may have guessed, this option is the combination of both retained and rolled-up interest. What this means is that for an agreed amount of months within the term the interest will be repaid as retained and for the months that are left the interest would be rolled-up. For example, on a 12 month bridging loan agreement the interest repayments could be 6 months retained and 6 months rolled-up.
As it suggests, the interest repayments are set and repaid monthly. This can mean lower amounts of interest as the borrower is repaying the amounts each month. However, for those property developers that wish to do some work on increasing the value of the property over the term, this option may not be as desirable. Where the intention is to achieve a higher gross development value than the purchase price through development on the property, retained interest, or retained and rolled-up, may be preferred in some cases as the interest is deferred.
The Fees Explained
This fee can also be found in the terms provided by the lender. Often based on either the net or gross amount, arrangement fees can also be referred to as a facility fee. The purpose of these fees is so that the lender can acquire some profit from the arrangement and can help to ensure that interest rates stay a little lower. A typical value would be around 2% for an arrangement fee, however, they can be lower and higher than that figure.
A valuation fee can vary depending on the value of the property that is used as security. These fees are an important part of the process from the lenders’ perspective. Valuations provide the necessary clarity on whether lenders can fund the borrower, based on the security property that the loan is to be set against. The fees can also vary depending on the type of reports generated from the surveys and also the location of the property/security.
There is usually a small administration fee after the loan is accepted when the borrower executes any draw-down from the bridging loan’s credit line.
Once the loan term has arrived and it is due to be repaid, the bridging loan lender will charge a redemption fee. The reason for this fee is for the removal of the charge over the security.
Lenders use solicitors to handle the agreements and securing the charge over the security (often a property). Costs are usually charged to the borrower and the value of the fee will be included within the terms provided by the lender for transparency.
Some Brokers charge broker fees and this can be seen in the indicative terms that they send across. Business Expert does not charge any broker fees at all.
Indicative Terms Summary
The ‘decision in principle’ or indicative terms provided by the lender will usually include some or all of the following when applying for a bridging loan:
- Borrowers’ name
- Borrowers’ address
- Security address
- Gross amount
- Net proceeds to borrower
- Purchase price/valuation
- Purpose of loan
- Legal fees type (first or second)
- Interest rate
- Term length
- Interest payment basis
- Early repayment information
- Early repayment charge
- Total legal fees/solicitor fees
- Solicitor’s exit costs
- Surveyor fee
- Arrangement/facility fee
- Broker fee (where applicable)
- Administration fee (where applicable)
- Exit fee (where applicable)
- Key assumptions of the lender
- Borrower declaration which needs to be signed by the borrower/s
These are short-term loans by definition. As such, they are usually offered for periods between a few weeks and up to 12 months. There are options for longer terms as well, depending on the exit strategy and the lenders’ criteria.
For those situations where a definitive end date is set, a closed bridging loan may be more appropriate. If you do not have an end date in mind, an open bridging loan may a better option, however, may cost more; so keep this in mind when making your decision.
Clearing the Repayments Early
The end of a typical bridge loan would be anything up to 12 months after you draw-down the funds from the facility. However, in circumstances where you wish to repay the amount early, unlike a traditional mortgage, there are no early repayment charges. Some lenders will have a minimum term of 30 days and if you were to repay the loan after those 30 days, you would only be charged interest for the period that you have used the funding.
First and Second Charge Bridging Loans
A first charge is the primary security against a property. A first charge takes priority over all other forms of funding secured against the same property. If there is enough equity left after a first charge, a second charge may be secured against the same property.
Types of Security that Can be Used
When applying for a bridging loan, the following types of security are considered acceptable by most lenders. Please keep in mind that if you are applying to a UK lender, the property will almost always have to be based within the UK. Here’s the list:
Houses, flats, maisonettes, bungalows, HMOs, plots of land, warehouses, factories, retail stores, shopping centres, hotels, pubs, restaurants, cafes, sports facilities, medical centres, hospitals, nursing homes.
Whilst the above list has a few options to use as security, it is by no means comprehensive and there will be many more property-types that can be used as security.
Valuations are an essential part of the process. Lenders use valuation reports in order to get a better understanding of the value of the property being offered as security. Some brokers can arrange a valuation, however, typically this is provided by the lender.
Different types of valuation reports may be used depending on the circumstances. These may include automated valuation reports, drive-by valuations and full valuation reports. These valuation reports also provide the lender with necessary information to work out the ‘LTV’ ratio.
Planning permission may be required when considering a major structural change to a property, building on land, changing the purpose of a property, or even demolishing a property/construction. It is often critical to check that planning permission is addressed fully before applying. As part of the process carried out by the local planning authority (LPA), they may also check with neighbouring residents about any objections. Clearly, an important step for any prospective property developer to check first.
GDV vs Purchase Price
Some lenders will advance funds on the purchase price of a property, whilst others will lend on the gross development value (GDV), as well. The ‘GDV’ is the estimated value of a property once it is ready to be sold on the open market after any scheduled development works have been completed.
It is important to know whether you plan to carry-out any development works on your project before applying. Having an understanding of whether you will require the funds advanced on the GDV or the purchase price will determine what type of lender would be most appropriate.
- A fast, short-term form of property finance
- They allow you some breathing space to either sell an existing property, or make arrangements for a longer-term solution
- Flexible lending criteria
- Borrowers have some control over repayment options
- Can improve credit score if repayments are made on time
- Can offer greater purchasing power since it means you are buying a property with cash
- They offer a solution when high loan-to-value (LTV) mortgages aren’t available
- Increasingly competitive interest rates as low as 0.37% per month
- More expensive and higher interest rates when compared with traditional mortgages
- Longer term credit may be needed to pay-off the bridging loan
- Commercial bridging is a type of unregulated bridging loan, so you need to be watchful for hidden charges
- There may be additional legal and administration costs depending on your circumstances
What Does Loan to Value (LTV) Mean?
In bridging terms, loan to value (LTV) is the ratio when comparing the value of the security on offer and the amount the borrower wants to borrow. So, for example, if the value of the property you wanted to buy was £500,000 and the amount you wanted to borrow was £250,000, your loan to value would be 50%.
Can I Get a 100% Bridging Finance?
While most lenders do have an LTV (loan to value) cap, certain providers do specialise in offering 100% LTV. This means that, as opposed to the customary 80% maximum, a bridging loan might cover the full value of the property you want to secure.
Providers who do offer this do so only where they have cast-iron security in place, which may include either several properties or another asset entirely. In keeping with the higher risk, 100% LTV often comes with higher fees.
Do I Qualify for Bridging Finance?
Qualifying criteria for a bridging finance is dependent on factors such as the amount of security you have, the ‘LTV’ ratio, the presence of a clear exit strategy and your credit score and ability to repay the lender. Each case is considered on a case by case basis with security/collateral the most important criteria.
Are They Regulated by the FCA?
Whilst residential funding is a regulated bridging loan against a residential property, and overseen by the Financial Conduct Authority (FCA); commercial bridging loans are not regulated.
Unregulated loans include first charge loans on commercial or investment property, or a second charge loan that is added to the initial borrowing, often used for investment purposes by a property investor.
How Much Can I Borrow?
Business Expert can help with commercial bridging loans and bridge-to-let starting at £50,000 and going up to £20,000,000 and above.
How Long Does it Take to Get Approved and Funded?
Arranging the funding can be extremely fast, sometimes just a matter of hours. The fastest bridging loan that one of our lenders has approved and funded was processed in just 10 hours..! This is not typical, however, as all of the required criteria, documents and information were perfectly aligned to get processed within this lightening-fast time.
Whilst getting approved may only take a matter of hours, receiving the money usually takes longer for most borrowers. This is because there are property valuations to arrange in most cases, as well as credit checks and documents to be filled out.
A more realistic time-frame to receive funds would be 3 to 4 weeks.
Are There Alternatives?
Depending on your circumstances, there may be some more appropriate options for you than bridging. Not least of all due to the higher interest rates for short-term finance. Below, are some of the alternative options for some borrowers, dependent on their requirements:
Where Can I Apply for a Bridging Finance?
Business Expert can assist in helping to arrange a high-quality bridging loan for your business. We focus on quality and customer care as a priority when communicating with borrowers and delivering with our bridging lenders.
Many of the bridging lenders we work with are regulated by the Financial Conduct Authority (FCA) and are perfectly placed to advise on bridging loans to take and indeed, whether this type of funding is appropriate for your situation.
To find out how we can help you gain access to funds via a bridging loan please contact us at your earliest convenience. We will be happy to discuss your options at no cost. We may be able to compare bridging products from many lenders, depending on your requirements, so don’t hesitate to get in touch to find out more. You can call us on the number at the top of the page, or alternatively, you can email us at firstname.lastname@example.org .