Category: Bridging Loans

A bridging loan is a short-term financial product that has been created to enable a purchase while the sale is still in progress.

Bridging loans are commonplace within the estate agency industry where the process of buying and selling a property can be lengthy.

Bringing loans can be used for many reasons including:

• Purchasing a property.
• Developing property.
• A buy to let investment.
• Business ventures.
• Sourcing funding during a divorce.

Such loans are also commonly used by property developers when purchasing property at auction due to the speed of the deposit transaction to secure the property.

Read our related quick help guides: 

• Bridging loans for property development.
• A guide to bridging loans brokers.
• Bridging loan examples.
• Alternatives to bridging loans.
• Development finance.
• Construction loans.

Bridging Loans within the Property Industry

A bridging loan for property development provides flexibility to enable transactions to take place either at speed, as per the auction example above, or in stages.

The loans enable property owners to access the equity within their current property or property portfolio’s, utilising this as a down payment towards other property.

The result is that two (or more) properties are technically owned while a sale is concluding. Bridging loans are a method of secured lending and therefore to apply for a loan, the procession of a high-value asset is needed.

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Within the property industry, bridging loans can offer a cost-effective option to navigate the property market and purchasing process, especially if there are issues within the purchasing chain that need swift, short term action. However, bear in mind that there are often additional legal and administration fees to cover.

Alike, a standard mortgage, application processes will be applicable and credit searches and scoring will take place to assess the risks of the lending.

Types of Bridging Loans

There are two types of bridging loans as follows:

• An open bridge loan – This loan provides the most flexibility as there is no set end date of when the loan needs to be repaid. Often open bridge loans can last up to a year or sometimes longer, depending on the circumstances.
• A closed bridge loan – A closed loan will have a fixed end date and strategy, which are often linked to best-known assumptions of when you will have funds available to pay the loan back. Closed bridge loans are short term, often offered for no more than ninety days.

Due to the differences between open and closed loans, the costs also vary. An open bridge loan will usually be more expensive due to the flexible nature of the financial product.

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Choosing a Bridging Loan

Before researching the market to commence comparing various bridging loans, a few key facts will be required about the loan and properties that will be involved.

• The ideal amount to be borrowed – Typically, lenders will offer bridging loans between £5,000 and £10 million.
• The value of the owned property – The value of the currently owned property will impact how much that can be borrowed and the loan rates available.
• The duration of time the loan is required – Best estimations are used to map out how long the additional funds are required for, for example, the timing of a housing purchase chain and the required legal process. As discussed above, the duration of the loan will define the type of loan needed.
• The equity owned within the property – The level of equity and whether there is a mortgage currently on the property will affect how much additional funds can be borrowed.

First or Second Charge Loans

When a bridging loan is processed the lender will add a ‘charge’ to the property that the loan is associated with for security.

A charge prioritises the order that debts will be handled should the property owner not be able to pay the loans.

• First charge loan – If the property was seized from the owner due to non-payment and subsequently sold, a first charge loan would take priority of being repaid from the funds of the sale.
• Second charge loan – A second charge is used to describe a situation where a loan or mortgage is already in place against a property. In this circumstance, permission from the first charge lender is often required before a second charge can be added.

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Bridging Loan Interest rates

Bridging loans are similar to other borrowing in the fact that the interest rates applied often fall into two options, fixed or variable.

A fixed-rate interest rate would apply the same level of interest across the duration of the term, resulting in a flat rate repayment plan, each monthly repayment would be the same.

Whereas with a variable rate, the interest rate can charge, often linked to the Bank of England base rates. With a variable rate, payments will not remain static and can go up and down.

Costs of Bridging Loans

Typically, interest on bridging loans can be fairly high, depending on a number of factors including the values involved, the duration of the loan and the personal circumstances of the person seeking to borrow the funds.

Due to the short term nature of the loans, interest is applied monthly rather than annually. However, there are various methods that the lender can apply interest as follows:

• Monthly – The interest is paid monthly as part of the monthly repayment amount and is not added to the bridging finance.
• Deferred or rolled up – With this option, the lender has pre-stipulated that the interest is paid at the end of the loan arrangement and does not makeup part of each monthly repayment.
• Retained – The total interest is also borrowed for a set period of time and paid back at the end of the loan.

As briefly mentioned earlier, there are often additional fees applicable to bridging loans such as administration fees. Lenders can also apply exit fees, applying an additional cost should the loan be repaid early, or arrangement fees due upon application.

Other costs to be aware of with most asset-based transaction include legal fees, valuation fees or broker fees.

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Bridging Loans Summary

As with any financial decision it is best to seek independent financial advice and be aware of the consequences of any decisions, such as what should happen if unable to meet the repayments.

At Mortgageable, we have a dedicated team of advisors that will be able to offer you help, point you in the right direction and provide you with access to some of the best bridging loan deals currently on offer.

Give us a call on 03330 90 60 30 or get in touch to talk to a bridging finance broker who can give you advice that is personal to you and takes your credit history into account. That way you will know where you stand in the bridging loan market and we can guide you on your route to securing a suitable loan.

Bridging loans are a great way to secure a large injection of cash for individuals looking to finance a new property development, ideal for those waiting for the sale of a current development to be completed.

What is a bridging loan?

A bridging loan is a short-term loan, usually lasting anywhere from 12 to 24 months, and as the name suggests it is designed to provide a financial “bridge”.

In the context of property development, this is usually to provide financial support between the sale of one development and the initiation of a new one.

How much can you borrow with a bridging loan?

The exact amount you can borrow will depend on a variety of factors, one of the major considerations being the purpose of the loan.

For example, if you are borrowing against a residential property, it may be possible to borrow up to 80% of the property value.

The lower the loan to value (LTV), the lower the interest rates, with some lenders offering interest rates at 50% LTV.

For non-residential properties, such as commercial properties and land, it may be possible to borrow up to 70% LTV.

This means that if the property is worth £100,000, the maximum you could borrow (including your existing mortgage) would be £70,000.

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When is a bridging loan repaid?

Since the purpose of a bridging loan is to “bridge the gap”, the loan is repaid when the property is sold or refinanced.

Open bridging loans vs closed bridging loans

Bridging loans are defined in two main ways, typically as either open or closed.

A closed bridging loan is one where there is an established and detailed plan, including a timeline. For instance, if all transactions have taken place, but you are simply waiting for a final transaction to be completed. These “closed scenarios” are preferred by lenders and so you are likely to have more options available to you.

An open bridging loan is the opposite, it is a situation where timelines and payment details are less obvious. These are considered riskier to lenders and so you may have less favourable interest rates and loan amounts available to you.

Read our related quick help guides: 

• Bridging loans for property development.
• A guide to bridging loans brokers.
• Bridging loan examples.
• Alternatives to bridging loans.
• Development finance.
• Construction loans.

How much do bridging loans cost?

Loan terms are largely dictated and offered by the amount of risk the lender determines, as well as the revenue they need to create to maintain profitability.

A bridging loan, particularly one that is “open” is considered relatively risky and since the loan is only provided for a relatively short period of time, the lender does not generate much income from the interest alone, as a result, it’s common to pay additional fees on top of the interest.

The fee is typically referred to as an arrangement fee and varies between lenders. On top of this fee, it is common to have other associated costs including legal fees and valuation fees. For this reason, it is important to carefully read any contract before you sign and agree to the terms, as the associated costs could impact the profitability of the project.

Since the majority of property development projects generate no revenue until the final sale, monthly repayments are often not practical and as a result, many bridging loan lenders offer what is referred to as “interest roll-up”. This enables you to pay for the interest in a lump sum at the end of the loan period instead of paying in monthly instalments.

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Requirements of a bridging Loan

When assessing a bridging loan application, lenders will assess the creditworthiness of the borrower. This means they will be looking at your credit history, ensuring that it is in good order and that you do not have any defaults, county court judgments or previous bankruptcies.

Additionally, lenders will be looking at your history in the property development sector, to assess your track record. If both of these requirements are satisfied, you will likely receive bridging loan offers with more favourable terms.

How much the property is worth is also going to be considered. It is usual for lenders to offer a maximum loan to value ratio of around 60% for commercial properties and up to 80% on residential properties.

Can you take a bridging loan out in the name of a limited company?

Bridging loans can be taken out in either the name of an individual or a limited company.

It is also possible to take the bridging loans out for offshore companies, overseas companies, and foreign nationals.

Examples of common bridging loans scenarios

Here are some common examples of situations where bridging loans are commonly employed:

Bridging loans for debt consolidation

Property development can involve the accrual of several lines of credit, which by the end of the project can become expensive and difficult to manage. In such cases, a short-term bridging loan can be used to consolidate the debts into a single loan, which does not need to be repaid until the sale is completed.

Bridging loans to buy a new site

When starting a new property development project and acquiring a new site, a bridging loan is often used with the intention of gaining planning permission. Development financing often has a loan clause referred to as the ‘mobilisation period’. This is the time period given to arrange the build before works beginning.

Often, this period is under 4 weeks and would not provide you with enough time to execute the planning application and begin the work. If you neglect to achieve this, you will fail to meet the terms of the lender.

Moreover, there is no guarantee that a planning application will be approved. As a result, there is no assurance that the work will commence on a certain date and it is not possible to agree to the terms of a finance development loan.

In this scenario, a bridging loan can be employed to bridge the gap between the acquisition of a site and the development finance.

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Bridging loans to raise capital

If you need to raise capital, then a bridging loan can often be one of the quickest and most convenient ways to do so. Bridging loans can be used to raise capital for property development in the following ways:

• Releasing capital from a completed property development with a pending sale.
• Releasing equity from other properties in order to clear debts or acquire a new site.
• Release funds to pay for upgrades or the redevelopment of a current property.

How do you apply for a bridging loan?

It is a wise idea to apply for a bridging loan as soon as it becomes clear that you require one. This provides you with plenty of time to plan and choose the best loan terms for your exact situation.

At Mortgageable, we have a dedicated team of advisors that will be able to offer you help, point you in the right direction and provide you with access to some of the best bridging loan deals currently on offer.

Give us a call on 03330 90 60 30 or get in touch with a bridging finance broker for advice that is personal to you and takes your credit history into account. That way you will know where you stand in the bridging loan market and we can guide you on your route to securing a suitable loan.