Bridging finance has become much more common in recent years, with many more people understanding and enjoying the flexibility that it brings, but there are many borrowers who are still not familiar with bridging loan and how they can be used.
What is a bridging loan?
A bridging loan is a short-term loan that typically has a term of no more than 12 months (though in some cases it can last up to 18 months). It is generally used by individuals and businesses for any purpose until a more permanent form of funding becomes available. It is fast and flexible and provides borrowers with quick access to the funds they require, and that they may have been unable to obtain elsewhere in a short space of time.
What can bridging loans be used for?
It can be used for residential property transactions where homebuyers, builders, property developers and many others who are buying a property or raising money to carry out refurbishments.
It can also be used in commercial property transactions by businesses who need short-term funding. They may need to raise funds in emergency situations such as meeting a business commitment or for a tax liability, they may even want to buy new equipment or machinery.
How do bridging loans work?
The biggest difference between bridging finance and ‘normal’ loans is the time it takes to arrange the funding. For normal loans it can take months to complete on a deal, but with bridging finance it can take as little as 24 hours!
How does the process work?
The process usually takes (from start to finish) 7 to 28 days, and looks as follows:
- The lender is given a summary of the transaction such as what the funds are to be used for, what is the security available, and what is the strategy to repay the finance.
- Evidence is given to the proposed lender (if applicable) of the property purchase and the price being paid.
- The lender issues a proposal/ offer letter detailing the terms of the finance and the conditions that must be met.
- The lender instructs a valuation report and sends all documentation to your legal representative.
- The terms and conditions are explained to you by your solicitor, and if in agreement you sign all the paperwork.
- Monies are released to your solicitor for completion to take place, and then passed onto you.
On some occasions the timescales can be reduced to just hours, but this is rare and depends on the deal itself and the circumstances involved. Just as the time taken can be reduced it can also take longer, especially if it is a complex transaction.
After you have received the funds, you are required to repay the loan by the end of the term. You can either make interest payments monthly, in full when the loan is repaid, or they can be retained at the start of the loan.
Why do people use bridging finance?
Many more people, individuals, and businesses are beginning to use this type of funding because of the speed and flexibility it provides. The funds allow people to take advantage of opportunities that present themselves, such as securing property at auction or discounted prices, and to even resolve emergency situations as mentioned above.
The interest on bridging finance is higher than on other forms of funding and so it is generally only used where a short-term solution is required.
Examples of when bridging finance may be used.
Homeowners/ Property Owners
- Temporary Cash Flow Cover: Borrowers that need a quick, short term funding option during a property transaction.
- Quickly securing a property: It allows people to buy a new property without selling a current one, in order to secure a property, you want to buy.
- Auction Finance: For people buying at auction, a bridging loan can allow them to pay their deposit and complete the purchase in the time stipulated in the auction contract.
- Broken property chain: It can prevent a homeowner from losing their dream new home if a property chain falls apart.
- Building a house: It can assist people in buying their own home.
- Downsizing: Generally, these people don’t need mortgages, and so a bridging loan allows them to purchase the new home before selling the old one. It basically makes them ‘chain free’.
- Property conversion: It can help those who want to develop and improve heir own property.
Property Investors/ Developers
- Renovation and development: It can be used by those who want to develop a piece of land with one or multiple properties, or for those who simply want to renovate a property that may be uninhabitable.
- Un-mortgageable properties: Where a standard mortgage cannot be obtained because the property is in a poor state of repair, such as no kitchen, bathroom, and toilet, bridging finance can help.
- Quick access to funds: It can be used to take advantage of market conditions and investment opportunities, helping to finalise negotiations so that opportunities are not missed.
Businesses
- Tax liabilities: If a tax demand is made, and the amount cannot otherwise be accessed within the required timeframe.
- Raising capital: Bridging loans can be secured against land and property so that companies can raise the sums of money needed in a short timeframe, e.g., buying stock, instead of using asset finance.
- Meet business obligations: Borrowers looking for short term funding to meet business obligations and payments or overcome financial difficulties can use a bridging loan as a possible option.
On what types of property can bridging finance be used?
You can secure bridging finance against many different types of property from normal residential houses to commercial property, and land. It enables all of the following:
Build & Renovate
- Housing developments
- Barn conversions
- Refurbishment projects to sell on for profit
- Building your own home
Properties where funds need to be raised
- un-mortgageable properties
- Buying before selling
- A short-term solution for a cash flow problem
Buy
- A new residential property, commercial property, investment, or trading property
- Buy-to-Let purchases
- Quick completion of a property purchase to benefit from a discounted price
- Auction purchases with pre-auction bidding facilities agreed
Can bridging finance be used on un-mortgageable properties?
Bridging finance can be used by people/ businesses that wish to purchase properties on which a normal mortgage cannot be obtained until remedial works have been undertaken, such as:
- Properties with no bathroom
- Properties with no kitchen
- Non standard builds
Renovating an un-mortgageable property can increase its value. Bridging loans can provide investors with the facility to buy these often derelict properties and start their improvement project before letting and securing long-term finance or even selling for a profit.
Bridging finance providers will take into consideration an investor’s current property portfolio as well as their potential purchase. This is to ensure that they have the appropriate land or property to use as security. Investors can therefore use the equity in current assets to meet the value of the bridging loan they require, in order that they can buy the new property.
Once the improvement/ renovation work has been completed and the property has been made habitable, the owners can then apply for a normal mortgage or sell for a profit.
How much can be borrowed?
The amount you can borrow depends on the circumstances and the lender, but typically you can borrow between £25,000 and £25m.
How long can the funds be borrowed for?
Its normally expected that the finance be paid back within a maximum of 12 months, sometimes a little longer. Because this type of borrowing attracts a higher interest rate it is sensible to have a shorter borrowing time. Furthermore, because their main purpose is to ‘bridge’ a gap between finances, they are often only required for a short period of time.
You can usually choose to pay off the finance at any time during the 12-month period, and it is important to not only look at the interest rate but also the total costs involved in setting up the finance.
Payments and Interest Rates
Bridging finance can be structured in different ways, it can be set up such that the borrower pays interest each month and repays the loan at the end of the term, rolled up interest or more commonly retained interest where the interest is deducted from the initial cash advance, and refunded for any ‘unused’ months.
The actual rate of interest that will be charged will depend on a number of circumstances, including:
- The lender
- The loan to value (LTV)
- The type of security provided by the borrower
- The credit score of the borrower
- Interest rates vary, typically between 0.5% and 1.5%
- Lender arrangement fees typically between 1% and 2%
Rolled up interest
This means that no payments have to be made, and instead the interest is rolled up and paid at the end of the term. It typically suits the borrower who is unable to make monthly payments, but because interest is compounded the repayment at the end of the term will be larger.
Retained interest
Interest can be retained from the initial loan amount for the period of the bridging finance agreement (e.g., 12 months). Interest is still charged on this as the retained funds are still part of the agreement, but if the finance is repaid early say, 6 months, then 6 months would be returned to the customer.
Summary
Bridging finance is quickly becoming seen as a useful and valuable way of securing funding for businesses and individuals who need fast, short term funding.
Being fast and flexible, it provides the funds needed to resolve a cash flow issue or take advantage of an opportunity, which they otherwise may have not been able to secure.
