Often, we’ll have clients ask us the question “what is a bridging loan?”, and at times it can seem a lot more complicated than it actually is.
Bridging loans are one of our most popular products, and for good reason. They’re flexible, versatile and can be applied for and approved often within days, making them an excellent short-term lending solution.
In essence, a bridging loan is a short term loan that is often used as a temporary finance solution whilst waiting for something more long-term such as a mortgage or it could possibly used to bridge the gap whilst waiting for invoices to be paid.
A lot of our clients use bridging loans in the property industry because this can often allow them to turn a quick profit without needing to commit to long term financing. Having said that, bridging finance can be used for more or less anything, so we’ve written a quick guide to bridging loans for you here.
What can bridging loans be used for?
Again, bridging loans or bridging finance can be used for more or less anything, depending on your circumstances and other factors and as long as you can pay the loan back on the agreed date.
Some typical examples of bridging loans, however, would be:
- Properties bought at auction – paying for the property within 28 days of the auction
- Property refurbishments – bringing a property up to regulation standards before arranging a mortgage
- Breaking a property chain – buying your new house before your old one is sold
- Repossession prevention – If your creditors are threatening repossession before you have access to more capital
- Cashflow problems – If your business cashflow runs low bridging finance can be used for a short period
These are just some typical examples of what our clients use bridging finance for, however, there are lots of uses for a bridging loan, so it would be worth speaking to one of our specialist advisors about your situation.
Bridging loan examples
Here we’ll give you three examples of bridging loans to give you some representative overviews of what they can be used for.
A property is purchased at auction for £100,000 but the buyer is confident that with some refurbishment works, the property will be worth £150,000. A bridging loan is taken out for 90% of the value of the property (LTV) for 3 months. The client pays £10,000 whilst the bridging finance covers the other £90,000. The rate is 1.5% per month. Our client repays £94,500 at the end of the term after selling their property for £150,000. An arrangement fee of 1% (£1000) is paid.
A client is moving house, but doesn’t want to get caught in the property chain and be delayed in their property purchase. Their current property is valued at £600,000, with £100,000 outstanding on the mortgage. The new property they’d like to buy is £300,000 and the client has £100,000 for a deposit. A bridging loan of £200,000 is required whilst the sale of their previous property is completed. The loan is arranged for 2 months and the rate agreed is 0.5% per month with a 1% arrangement fee.
The client sells their previous property after 2 months and repays the bridging loan, repaying the initial £200,000 with £2000 in interest (0.5% x 2) and £2000 for the arrangement fee.
A client has had a letter threatening repossession unless payment is made within 14 days. The client requires £150,000 for 3 months until invoices have been settled and cashflow has returned to normal. The client is able to offer property as security against the loan and also prove how much capital is outstanding and due to be collected in that time.
One of our lenders agrees to lend the client £150,000 for 3 months at a rate of 2% per month with a 1% arrangement fee. After 3 months the client collects their outstanding invoices and repays the sum of the loan at £150,000 plus £9,000 in interest and £1500 in an arrangement fee.
Bridging loan calculator
We’ve included our handy bridging loan calculator which will allow you to see how much you may be able to borrow, what you would pay in interest, and what the total would be. You can adjust the inputs of the calculator according to loan amount, the Loan To Value, the interest and the length of time you’re looking to take your loan for.
Simply make the adjustments you require to be able to see what you could qualify for. If you’d like to discuss your circumstances in greater detail and talk about bridging finance with one of our brokers, simply get in touch and we’ll have somebody contact you quickly.
Types of bridging loans
Bridging finance is flexible and versatile, and that’s one of the main reasons they’re so popular. There are two main types of bridging loan that our clients tend to take with our panel of lenders, so we’ll explain them here.
Open bridge loan
Open bridging finance is fairly explanatory in that it is used in circumstances where the borrower doesn’t have a fixed date for the repayment of their loan. For example, a borrower may want to use bridging finance to break a residential property chain, however, they may not have a fixed date, or a buyer secured when they apply for the bridge.
This means there is no fixed repayment date, however, the lender will usually expect you to pay the loan and the interest back within 12 to 24 months. Because this type of bridge is considered inherently more risky the interest rates tends to be higher and you’ll need to convince the lender that you have a coherent exit strategy once you have access to capital.
Closed bridge loan
Comparatively, a closed bridging loan is one where you’re able to demonstrate to the lender the date which you’re able to pay your loan back. For example, if you’re waiting on the sale of a property, you’ll be able to show the lender when the sale will complete and when you’re able to pay in full with interest.
These types of bridging loan tend to be used in examples with a defined exit strategy. Let’s say, for example, you’re developing a housing site and need to access capital for a land purchase or materials and you know that you’ll have completed the build within 6 months, then a closed bridging loan could be right for you.
Property development bridge funding
One of the most popular uses of a bridge loan is for property developers who are looking to develop on land and either build from scratch or refurbish and redevelop an existing property into say flats or maisonettes.
We know better than most that property development can be unpredictable and our clients often need access to either consumer or business finance quickly in these circumstances. In these scenarios we’re able to help our clients access finance quickly and efficiently, and also help them through the application process.
Residential bridge loan
Generally speaking, a residential bridge loan is self-explanatory in that it is used for residential property rather than commercial property. It also usually means that the property you’re using as security is already or is intended to be a residential property.
Residential properties are usually much easier to sell quickly on the market, and so lenders will often see residential as a less risky format for lending against, with many willing to fund finance against residential properties. It also means that if your loan is classed as residential that it will be regulated by the FCA (Financial Conduct Authority)
Commercial bridge loan
Similarly, a commercial bridge loan would be classed as such when either lent against, or for, a commercial property. This means that the property itself is used for commercial or business purposes, either for your business or if you’re a landlord, that you’re letting the premises out to business or commercial customers.
It can also mean that you’re taking out the bridge loan as a business or in a commercial capacity rather than as a consumer or personally. This will usually mean that you need to provide a bit more background, reassurance, and paperwork with your lender to ensure they’re confident you have a good exit plan, but that’s something we can help you with.
Commercial loans also aren’t regulated by the FCA as they don’t fall under consumer law.
Pros and cons of a bridging loan
As with any type of lending or loan, there are pros and cons. A bridging loan may not be the right solution for everybody, however, we have years of experience within the industry and our team have helped to fund millions of pounds worth of finance over the years so we’re confident that if you decide that a bridge loan isn’t right for you we’ll be able to help you find the right solution.
Quick to arrange
A bridge loan is quick to arrange and can usually be agreed in principle within around 72 hours, although this is dependent on circumstances. Our team are highly experienced and able to talk you through the application process so that you’ve got everything you need to be able to get the funds as quickly as reasonably possible from your bridge loan.
Flexible lending criteria
With a bridge loan it doesn’t tend to work like it would if you were to approach a high street bank, for example, whereby only your income and credit history are considered. With a bridge loan, it’s much more important that you’re able to demonstrate how you intend to pay the loan back, and when you’re able to do so.
Security is flexible
You can use lots of different types of properties as security, as well as other valuable assets if you’d like to. It’s also possible not to provide security, and each case will be considered on its own merits. If you’re a developer, for example, your track record of success is much likelier to count towards your application rather than your personal credit rating.
Cons of a bridging loan
As we’ve said, a bridge loan may not be the right solution for everybody, and so we have a team that are able to talk you through the entire process, understand your circumstances in more detail, and point you in the right direct. With that in mind here some cons of bridging finance to consider.
Short term only
Bridge loans are designed to cover you in the short term and aren’t designed to be for anything longer than 12 months pretty much at the most. If you’re looking for longer term finance then it would make more sense to get a mortgage, for example. Bridging finance, more often than not, is used in property and property development as well as to cover cashflow problems, it’s not designed for the long term.
Due to the short-term nature of this lending, you’ll find that the interest rates tend to be higher for bridging finance than other forms of traditional lending. This is because finance companies need to make a profit on this lending, and with it only being shorter term, they will charge higher interest than you’d normally get with a mortgage of business loan.
Exit strategy is key
When it comes to bridging loans, the lenders won’t often credit check you in the same way a bank or traditional lender would, and are more interested in what security you have, what deposit you can afford, and what your exit strategy looks like. If you’ve not thought of this yet then it’s something our advisors and brokers can help you with, but in essence all it means is being able to show the lender how you intend to repay your loan, and it’s essential that you’re able to show this coherently. As an example, if you wanted to refurbish a house and needed bridging finance until you could sell it, your lender would want to see what your plans were, how long they were going to take, how much you thought the house would be worth at the end, and how quickly you think you’ll be able to sell it.
Alternatives to bridging loans
Of course, bridging finance is just one of option of many if you’re looking at getting finance for either a property, your business or something else.
We understand what our clients need and recognise that everybody’s different, and so are their needs. If we don’t think something is right for you, we’ll tell you, and we’ll ensure that we understand your situation completely too.
If you’re looking for alternatives to bridging loans, we can look at arranging a mortgage for you. Mortgages, whether commercial or residential, are designed to provide you with lending over many years at a much lower rate of interest, and when it comes to long term property lending these are often a good idea.
Alternatively, we also have a large panel of lenders that can provide highly specialised lending for auctions and development. We have access to niche lenders that you may not have heard of or have access to, such as wealth funds, pension funds and private investors who are keen to get more exposure to the UK property market.
By going through our brokers, you’re able to get access to exclusive rates and terms, and with providers that truly understand the nature of property development, meaning you can get preferential terms and can arrange them relatively quickly.
Speak to our head of bridging loans today
Our company has helped to arrange millions in bridging finance over the years, and our team are one of the most experienced on the market. They’re dedicated to ensuring that you get the right solution for you, as quickly and efficiently as possible.
Our team will spend as much time as it takes getting your application together, helping you out with the entire process, and ensuring that you get the best possible offers on the market for your needs.
We have a number of exclusive relationships with our panel of lenders because they understand that we only ever submit applications that have a high chance of approval, and so know they can trust us when they offer exclusive deals and rates.
We also understand that, for many of our clients, time is absolutely of the essence and so we always work as quickly as possible and in most cases we can have finance arranged within a few days and the money in your account ready for your project to be completed.
Why not give us a call today to discuss your needs, we’ll run through things in detail with you, giving you the confidence that you’re in the best hands, and not having to spend time going to lenders individually and that you’re getting a range of quotes and the best deals available.