Bridging Loans

There are few forms of finance that are as misunderstood as bridging loans. Many individuals and businesses shy away from bridging loans because they don’t really understand what they are all about. Nevertheless, we have seen the use of bridging loans increase in recent years. Since 2014’s Mortgage Market Review (MMR), it has generally taken longer for mortgage applications to be approved, so bridging finance is becoming a strong option for people who need access to funds quickly.

Many consider the use of a bridging loan to be too expensive or too risky, but that isn’t always accurate. When applied in the correct way, a bridging loan can be an extremely powerful kind of finance. An understanding of bridging finance is a good thing to have in your locker because it could turn out to be your only means of securing a good deal in some situations.

Read on to learn everything you need to know about bridging loans.

What is a bridging loan?

A bridging loan is a form of short-term finance aimed at property buyers and developers. It’s best to think of it as a temporary loan or, perhaps, a short-term mortgage. There are many scenarios where a bridging loan can be used to provide a short-term finance solution until a more permanent form of finance can be secured, or until the loan balance can be cleared.

People often use the term ‘bridge’ as that is precisely what a bridging loan is intended for. It helps bridge the gap to get you from A to B. You may need this because you have monetary issues, time constraints or a mixture of the two. The most useful thing about bridging loans is that the funds can be obtained very quickly as opposed to a mortgage. You should be aware, however, that this means bridging loans typically come with high interest rates and fees, so they should only be taken out as a measure of last resort. Nonetheless, there are scenarios where a bridging loan can make good financial sense.

Mortgages vs. bridging loans

There are some similarities between bridging loans and mortgages. For example, interest is paid on the term of the loan until the debt is fully repaid. Bridging lenders will affix charges to assets and the overall value of a bridging loan is determined by the value of the property in question. The same is true for lenders that are offering mortgages. Moreover, both bridging loans and mortgages are offered on fixed and variable rates. And bridging finance can be FCA-regulated, though there are some unregulated products on the market.

The main area where bridging loans and mortgages differ is the term of the loan. Bridging is very short-term – often 12 months or less – while mortgages are typically taken out with terms of 25-35 years. Bridging can also be obtained more quickly than a mortgage. Mortgages are more intricate to arrange and it can be weeks or even months before the funds are finally released. Bridging, on the other hand, can take as little as 48 hours after approval of the application.

The interest rates on bridging loans are higher than those on mortgages. You can usually secure a mortgage with an interest rate in the range of 2-5%, or perhaps lower with a large deposit and excellent credit. Bridging finance typically starts with an interest rate of at least 8%, with the average being in the 10% range. Bridging lenders don’t assess your income and aren’t usually bothered about rental income if the finance is for a buy-to-let, as you will need to refinance the loan before you can rent out the property. You can also get bridging finance on any type of property, whereas mortgage lenders are more comfortable with specific property types like traditional or habitable homes. This makes bridging popular with auction buyers who wish to secure unmortgageable properties.

Mortgages are usually repaid through monthly payments. Bridging loans have the option to be ‘rolled up’, meaning you pay everything back in a single lump sum at the end of the term. This can be practical for people who don’t have immediate access to funds and are awaiting a new mortgage or property sale.

What types of bridging loans are there?

As with virtually every type of finance, bridging loans come packages in various shapes and sizes.

First-charge loans

If you already have an existing mortgage on your home, your lender probably has a fast-charge against your property. When you buy a property with a mortgage, the lender uses that property as the security for the loan, which they do in the form of a charge. These charges are registered with the land registry and they become legally binding.

Bridging loans are secured against property in the same way. If a bridging lender secures the first charge, this means they have first priority of repayment in the event that you default on your loan. If you’re working on selling your home but have yet to find the right buyer, so you took out a bridging loan to secure the next property, that loan would use the new property as security via a first charge. This is because no other charges exist against the new home.

Bridging loans can pay off mortgages when you move house. In this arrangement, the bridging loan would be paid to the provider of your old mortgage to clear the balance, meaning their charge on the property would be removed. The bridging loan would thus be secured as a first charge.

Second-charge loans

If a ‘second charge’ is arranged, it means that the bridging lender is entitled to any funds that remain after the lender with first charge has recouped their losses.

Bridging lenders sometimes want to place a charge on your existing home, even when it already has a mortgage. This is classified as a second charge, as your mortgage lender already has the first charge. If your home has to be repossessed, the mortgage lender will recoup what is left of their loan first. If there are funds remaining after this, the bridging loaner is entitled to them via the second charge.

The lender with the first charge will usually be required to give consent before any additional lender can secure a charge against the property. A second charge is more risky for a lender than a first charge, so they typically come with higher rates and fees.

A charge can be placed on more than one property, but this is a far more risky move to make. It would enable the bridging lender to access more than one property in the event that something goes wrong. If a bridging lender has a charge on just one property, they can only recoup the debt from that single asset.

If you need quick access to finance but want a longer-term loan with lower rates, a second charge mortgage might be a better choice than a second-charge bridging loan.

Closed-bridge loans

A closed-bridge loan is an option for when you have a date in place for a specific exit strategy. For example, you might have a buyer for your current home who has already exchanged contracts but is yet to complete the purchase. Once the completion takes place, and the funds from the property sale are in your account, you can use them to repay the bridging lender. In this scenario, as the bridging lender has a date for completion and the exit strategy is clear, the finance would be classed as a closed-bridge loan.

Open-bridge loans

Open-bridge loans are more risky from the perspective of the lender. There will be no fixed date for the repayment of the loan, though bridging lenders will often set a limit of 12 months for the debt to be repaid in full.

Open-bridge loans tend to be used by home-movers who are yet to secure the sale of their current property. A person who deals in property might also use an open-bridge loan to fund a ‘property flip’, whereby they renovate the property to sell it on.

Regardless of which type of loan you seek, a bridging lender will need to see evidence of an exit strategy. This is often the sale of a property or the securing of a mortgage. Open-bridge and closed-bridge loans can come with both first and second charges – it will depend on the specifics of your circumstances.

When is a bridging loan useful?

There are many situations where a bridging loan can be used and they are available for both residential and commercial purposes. It may be that you wish to start a property development from the ground up or that you wish to simply buy a property to sell it on. With bridging finance being more expensive than more traditional options like mortgages, why would people choose to use them? Here are some examples of when bridging loans could be a good option.

Moving house

Homeowners often use bridging loans in between selling their home and buying a new one. Perhaps you’ve already discovered your ideal home but are struggling to find the right buyer for your current one. A bridging loan could be your only chance to avoid missing out on your dream home.

Bridging finance could be taken out to use as the deposit on your new home – you would then repay it once you complete the sale of your existing home. If you’re in a chain that’s on the verge of collapsing due to a buyer pulling out at the last minute, a bridging loan could be the lifeline you need to cover the gap.

Property investment

Many landlords and investors use bridging finance when they need money for a new deal or to bridge gaps in existing ones. Bridging loans are frequently used by investors to buy auction properties where they need the funds very quickly. Auction houses usually insist that buyers complete the transaction within 28 days, so a bridging loan could be the only viable option.

Perhaps you have found a great deal on a property but the vendor needs to sell up quickly and is willing to negotiate a lower price. In this instance, securing a bridging loan could be ideal because of the speed at which the funds can be accessed.

Property investors may operate on a model of buying, renovating and selling properties. With mortgages generally being long-term arrangements, bridging finance could be more viable for this purpose. Landlords may wish to purchase a property, renovate it and then rent it out to tenants. A bridge could be useful in this case too, as they could obtain an unmortgageable property and even fund the renovation work. The property could then be remortgaged once it meets the criteria in order to repay the bridging loan (and cash in on any surplus funds).

Property development

Bridging loans are often used by property developers. For example, let’s say a developer has secured planning permission to build 5 dwellings. In order to finance the purchase of the land and the upcoming cost of the construction, the developer may seek out bridging finance in order to leverage the development costs.

Upon completion of the development, the developer could remortgage, transition to a commercial mortgage, or sell/let the dwellings to repay the bridging lender.

The key features of bridging finance are that it is fast and short-term. It doesn’t matter what state the property being purchased is in and the funds can be used for purchasing, renovating and/or building. If you have plans to develop on a larger scale, it may be more prudent to look at getting development finance.

Qualifying for a bridging loan

As the reasons for using bridging loans vary greatly, there are many variables to consider. There is no one-size-fits-all answer, but we’ll go over the general processes of assessing a bridging loan. Bridging is primarily assessed on the value of a property – bridging lenders don’t make assessments on personal income like mortgage lenders do. The bad news is that properties are valued by lenders in different ways, though this can be turned to your advantage as it gives you more options.

Valuing the property

As with a standard mortgage, the property in questions will be subject to a survey. Bridging lenders will conduct a survey to ascertain whether the loan is safe and the level of risk is not too high. The valuation will be carried out by a qualified surveyor.

We frequently see homeowners making the mistake of overvaluing their properties and, sometimes, that top value they are targeting isn’t achieved. The valuations of surveyors can sometimes appear to be undervaluing, but you should keep in mind that the valuation they arrive at is based on assessing worst-case scenarios for the lender.

If you strongly disagree with the valuation a surveyor reaches, you may be able to request a revised valuation. Be advised, however, that this will likely come at additional cost.

Loan-to-value (LTV)

A loan-to-value is simply a ratio of the loan size in comparison to the property’s overall value.

For example, an 80% LTV on a property worth £200,000 would mean a loan of £160,000 with a deposit of £40,000. With a traditional mortgage, the lender would only offer £160,000 on an 80% LTV where the property is worth £200,000. Even if you managed to secure the property much cheaper, say ~£150,000, the mortgage lender would only consider the purchase value. So that 80% LTV mortgage, on a price of £150,000 would mean a loan amount of £120,000.

You will find that some bridging lenders will follow the same principles as mortgage lenders. However, other bridging lenders will ignore the price you pay for the property and consider only its true market value. This can be very helpful when you need to borrow more funds than a mortgage lender will permit.

Gross development value (GDV)

Bridging lenders may offer to loan based on the gross development value (GDV). This is calculated by the projected value of the property once development work is completed. This can be particularly useful when you need to finance both the purchase and the renovations/build of a property.

For example, let’s imagine you could purchase a £200,000 property for £150,000 with an LTV of 80%. A traditional mortgage lender would offer £120,000 based on the price you pay, while a bridging lender will consider the true market value and offer an £160,000 loan. A bridging lender considering GDV might estimate an eventual value of £250,000 and offer a loan of £200,000.

As this example shows, the difference can be significant. Of course, you should note that the more you borrow, the higher the rates are likely to be. The bridge is also secured against the property, so you will have to repay that loan or face having the property repossessed. You must be sure to have some kind of backup available should you run into financial problems.

Exit strategy

The exit strategy is your plan for clearing the balance of the bridging loan. If you aim to remortgage the property once you complete renovations, the remortgage would be the exit plan. If you’re expecting to receive funds from a property sale, your exit plan would be selling a property.

Exit strategies are extremely important and a fundamental component of bridging. Without a solid exit strategy, it will be virtually impossible to secure a bridging loan. A clear, concise exit strategy is helpful for your application and also makes it easier to plan your projects. Any person applying for bridging finance must have a well-planned exit. Remember, bridging loans are short-term, so the quicker you can exit the better it will be for you.

Bridging lender discretion

As previously stated, the main factor that determines the amount you can borrow via bridging is the valuation. However, lenders are able to consider other factors as well. Your income will not be assessed, but other areas of your proposition could be. For example, bridging lenders may consider your level of experience if you are targeting a development or some kind of property venture. They may also make an assessment of the quality of your project – will the funds be sufficient to cover the project? Is the property saleable?

If a remortgage forms the basis of your exit strategy, a lender is likely to assess the probability and potential value of that remortgage. Bridging lenders can also assess whether the loan period will be sufficient for repayment of the loan. If you wish to make monthly repayments, the lender may choose to check your income is enough to do this. This is unusual, however, since bridging finance is usually paid in a single lump sum when the end of the term is reached. Sometimes, bridging lenders will only need to check on whether the asset in question is sufficient security for the loan.

Although bridging is considerably faster than securing a mortgage, there are still various checks that bridging lenders carry out. Their assessment criteria is extremely varied, so no two bridging lenders will have the same checks. As with a mortgage, you should probably be prepared to undergo credit checks and to disclose other financial commitments such as additional mortgages.

How to get a bridging loan

High street lenders do not offer bridging loans and you will often need to work with an adviser to broker a deal. The process and the timing of getting a bridging loan really come down to your reasons for needing one. If you plan to buy a property at auction, it is wise to have everything in place ahead of time. Bridging loan applications tend to take up to a week, and will sometimes take longer than this. Once the application is approved, the funds can usually be released within 48 hours.

Here is a rough guide to the process:

1. Speak to an experienced, qualified adviser with access to a range of bridging lenders.
2. After collecting your information, the adviser will enquire with bridging lenders, taking a tailored approach based on your circumstances and reasons for seeking a bridge.
3. An application is submitted to the most appropriate bridging lender.
4. The bridging lender will arrange a valuation of the property/properties involved.
5. The bridging lender will carry out an assessment of the applicant, covering things like credit checks, evaluating experience and looking at other financial commitments.
6. Your application is either approved or declined. If you are declined, you can reapply with the same lender or a different one – for very risky proposals, bridging loans are usually offered at higher rates rather than simply being declined.
7. Solicitors come in to handle conveyancing and formally place the charge on the property.
8. The bridging funds are released.
9. If the bridge is being used to buy a new property, solicitors will carry out relevant enquiries and liaise with the lender’s solicitors.
10. Once the lender’s solicitor is satisfied that everything is in order, the release of the loan will be approved and you will receive your funds.

It may sound like a lot, but this entire process is often wrapped up within a week or 2.

Getting a fast bridging loan

There are several factors that determine the speed of the process described above:

• How fast the valuation is completed.
• The speed at which your solicitor responds to requests for information from the lender’s solicitors.
• The depth of the checks the bridging lender performs for your application.
• In the case of a second charge loan, how fast the primary lender grants approval (if they do).
• The bridging lender’s general methodology (often, the faster you need the funds, the higher rates the loan will have attached to it).

How much does a bridging loan cost?

As previously mentioned, the costs associated with bridging loans tend to be higher than with more conventional forms of finance. Interest rates on bridging loans are charged monthly, as you would expect with this type of finance.

People often focus on looking for the lowest interest rates and base their entire decision on this factor. However, it’s important to remember that some lenders increase the total cost of the loan by attaching large exit fees, fund management costs and other expenses that may not be abundantly clear from the outset. You must ask about these fees before you commit to any lender so that you make your decision based on the total cost of the bridging loan. You should also ask about the broker fees associated with any deal.

Bridging loan Interest rates

Expect to pay a higher interest rate for a bridging loan than you would for a mortgage – this exists to offset the risk to the lender. The rates vary widely and can be as low as 0.40% per month, though they more often come in at around 1% per month.

The following is a table that shows you how the monthly interest payments might look on a bridging loan of £200,000.

Interest repayment options

Monthly

As the name suggests, the interest repayments are laid out and repaid monthly. This can mean smaller interest amounts as the borrower makes regular payments. However, for property developers who wish to carry out works to increase the value of the property throughout the loan term, this option may not be the most appealing.

Where the objective is to achieve the maximum gross development value by developing the property, a retained or rolled-up interest arrangement may be preferable. This is because the interest repayments are deferred, allowing the developer to focus on the development work.

Rolled-up

With a rolled-up interest arrangement, the interest is added each month and increases in amount on a sliding scale. This is because each interest payment is applied to the renewed sum of the loan increments plus the interest from previous months as the loan term progresses. Some borrowers will prefer this option as it defers payments, but it can end up being more expensive overall than the monthly option.

Retained

Retained interest is an arrangement where the lender ‘retains’ the interest throughout the term of the loan. This means that if you take out a 12-month bridging loan, you would make no interest repayments to the lender until month 12. This way, the interest is paid in a single lump sum at the end of the term, which could mean that the total amount of interest is higher than on a rolled-up or monthly arrangement.

Nevertheless, this option is appealing to many property developers as it gives them time to make improvements throughout the loan term without having to include additional ongoing costs each month.

Retained and rolled-up

As you might guess, this option combined both retained and rolled-up interest rates into a single loan. It means that there is a pre-agreed number of months during which the interest is repaid as retained, and for the remaining months it is rolled-up. For example, if you take out a 12-month bridging loan agreement, you could opt to have the interest repayments as 6 months retained and 6 months rolled-up.

Bridging loan fees explained

Arrangement fees

You will find this fee in the terms the lender provides. It is often based on either the net or gross amount of the loan, and may be referred to as a ‘facility fee’. These fees exist to that the lender can make some profit on the process of arranging the loan for the borrower, and they can help keep the interest rate a little lower. Arrangement fees tend to be around the 2% mark, but they can be lower or higher than that in many cases.

Valuation fees

The valuation fee will vary depending on the value of the property in question. This fee is a fundamental part of the bridging loan process from the perspective of the lender. A formal valuation will provide clarity on whether the lender can accept the prospective borrower’s application based on the asset that the loan is to be secured against. The fees can also vary depending on the nature of the survey being carried out and the location of the property will also be a factor.

Administration fees

Once the loan is accepted and the borrower draws down from the bridging loan’s credit line, there will usually be a small administration fee applied.

Redemption fee

Once the term of the loan reaches its end and repayment is due, the lender will often charge a redemption fee. The purpose of this fee is the removal of the charge over the property.

Solicitor fees

The handling of loan agreements and placing the charge over the property is handled by solicitors. The cost of these solicitors’ work is usually charged to the borrower. You should be able to find the amount for this fee in the terms provided by the lender – they are usually transparent about these things.

Broker fees

Some brokers charge fees for their service, which you will see in the indicative terms they provide for you.

Bridging loan term lengths

Bridging loans are short-term by definition. They are usually offered on terms of anything from a few weeks up to 12 months. There are some options for longer terms if necessary, depending on the lenders’ criteria and the nature of your exit strategy.

For situations where a definitive end date is determined, a closed bridging loan may be the best option. If you do not have a specific end date in mind, an open bridging loan might be more appropriate. However, these arrangements usually cost more, so factor that into your decision.

Clearing the bridging loan early

The end of a typical bridging loan would be predetermined at anything up to 12 months after funds are initially drawn down from the facility. However, circumstances change sometimes, and a situation may arise where you wish to repay the loan early. Unlike with mortgages, there are no early repayment charges for bridging finance. Some lenders will set a minimum loan term of 30 days – if you repay the loan after those 30 days, interest would only be charged on the period you actually used the loan.

Is bridging finance the right option?

Before you make the decision to use a bridging loan, you should consider your other options carefully. There are very important things to consider before applying.

The risks of bridging

Choosing to you bridging finance can be a highly risky decision. With careful planning, you can calculate the level of risk depending on the quality of your proposal. This is why bridging lenders often assess your experience level and carry out formal valuations – they need to ensure your proposal is high-quality.

Think Plutus recommends only turning to bridging loans as a last resort. If you’re unable to remortgage and have no other source of funding, a bridging loan may be the only option you have. This advice is based on the fact that there are very high interest rates associated with bridging finance. If things go badly and the worst happens, you could be left with a debt that continues increasing.

However, bridging finance can be a powerful resource if applied correctly. We’ve had a number of clients, particularly landlords and developers, who use them repeatedly and succeed in generating tremendous profits as a result. There are property deals that simply would not be possible without the existence of bridging, so when a deal comes together it can be a superb tool. Proceed with extreme caution and always have a backup plan to cover you if things don’t work out the way you planned.

Alternatives to bridging

Consult your adviser to find out if a remortgage might be possible to withdraw funds from equity. If speed is of the essence to secure the property deal you have your eyes on, bridging finance or a personal loan might be your only options.

Another option worth considering is ‘let-to-buy‘. This is an arrangement whereby you remortgage your current home from a residential mortgage into a buy-to-let. The equity this releases can be put forward to fund your new home purchase. Of course, remortgaging is a considerably slower process than bridging, so consider your options carefully.

Speak to an experienced bridging adviser

Whether you are looking for bridging finance or a standard mortgage, it is always wise to speak to a specialist broker. It will save you time and money and, in the case of bridging finance, the expertise of a broker could be vital to minimising the risk of your venture.

One of the many pitfalls of exploring bridging lenders is the number of fees they usually have – a specialist adviser will be able to search the full market to find the best possible deal with the lowest fees possible. There are also many bridging lenders who will only deal with brokers, so by consulting an adviser you ensure you have access to the whole market.

An adviser may also be able to suggest alternative ways to finance your plans – in some cases, they might suggest something you hadn’t previously thought possible. The advisers at Think Plutus are experienced in bridging finance and can assess your financial situation to give honest, impartial advice on whether bridging is a viable solution for you. Enquire today to learn more.