Bridging Finance For UK Property

What Is Bridging Finance?

Bridging finance, also known as bridge loans or bridging loans, is a short-term financing option that provides immediate funds to individuals or businesses to bridge the gap between the purchase of a new property and the sale of an existing one.

It is a form of temporary finance that helps borrowers meet their immediate financial needs until a long-term financing solution is secured.

A bridge loan offers a short-term financing solution for individuals and businesses seeking immediate funds to bridge the gap between property purchases.

It provides flexibility, speed, and accessibility, but borrowers should carefully consider the costs, risks, and their ability to repay the loan within the agreed time-frame.

How Does UK bridging Finance Work?

A Bridge loan allows clients to borrow money more quickly that standard loans and are paid to you as a lump sum for a property purchase or refinance as opposed to a longer term traditional loan and permanent financing.

Once your bridging finance has been arranged, your interest charges are usually ‘rolled up’ into the loan, leaving you with no monthly interest payments to make. This is normally referred to as retained bridging loan interest.

At the end of the loan term, the bridging finance is repaid in full, along with any interest and outstanding charges and the legal charge is removed from your property.

Repayment of a property bridging loan is usually funded through the sale of your property or by taking out a remortgage to repay the short term bridge. Your plan for repaying the loan is known as your exit strategy.

Loan to value (LTV) and equity are key to securing this type of finance, with lenders focusing on these two points to assess new loans.

Most lenders are happy to offer a maximum of 70% to 75% of the property value on unregulated bridging loans, although some will extend this to 80% for  bridging loans supported by extra assets as security.

Is UK Bridging Finance A Replacement For A Property Mortgage?

Yes a bridge loan is a short term replacement for a standard property mortgage.

They a short-term form of alternative form of funding that is used when a mortgage wouldn’t be available, but you need to borrow money against a property.

This can be because the property isn’t mortgage-able , you need the funds to purchase a new property quickly or you have a short-term financial gap that needs to be filled, for example using a bridging loan for a house purchase before your existing one sells.

Is Property Investment The Main Reason For Bridging Finance?

Yes, property investment is one the main reasons for taking out a bridging loan but its not always the case.

A bridge loan is required for many different reasons whether you’re financing an investment property, buy to let property or your own home.

This is because property bridge financing allows you to secure a property quickly and add value through property refurbishment where it is needed.

What Can UK Bridge Financing Be Used For?

Bridging finance can be used for the following reasons:

• To fund a property purchase or refinance quickly with a short term loan.
• Buying property at auction with a home equity loan.
• To finance an uninhabitable property.
• To purchase an unmortgageable property.
• Buying a property before selling your existing property.
• To settle a divorce settlement.
• To fund a business venture or tax bill.
• To pay an unexpected probate bill.
• To buy a below market value property without putting down a deposit.
• To fund a property refurbishment with a secured loan.
• To buy a property or land while undertaking an application for planning permission.
• To repay your existing mortgage while selling your property.

A Brief Explanation of Different Types Of Bridging Finance

SHORT TERM BRIDGING

• Short-Term Bridging….. Is short term financing or short-term property loan that enables you to sell your existing home, improve the property or find a new tenant while providing liquidity to bridge the period until you obtain permanent mortgage financing.

REGULATED BRIDGING LOANS

• Regulated Bridging Loans are financing secured by a charge over a residential property which is lived in by you, a family member or other close person. The purpose of the loan is not wholly or predominantly for the purposes of a business carried on, or intended to be carried on by the property owner.

BRIDGE TO LET FINANCING

• Bridge To Let Lending…… Is designed for the buy to let investment market to allow property investors to buy a property they may otherwise struggle to finance with a traditional mortgage. They have the added benefit of an exit strategy in-built by way of a pre-approved refinance onto a traditional buy to let investment mortgage.

BRIDGING REFURBISHMENT

• Refurbishment Bridging…… Is short term property finance available to property investors, landlords and developers looking to upgrade a tired or run down residential or mixed use property before renting it out. Refurbishments are much smaller projects than property developments.

BRIDGING LIGHT DEVELOPMENT

• Bridging Light Development……This is where no planning permission or building regulations are required and where there is no real change to the overall use and nature of the premises. Light development refurbishments would include new bathroom, new kitchen, redecoration, rewiring, new windows etc. There are also finance options for more complex properties including HMOs and multi-unit freehold blocks of flats as well as finance for applications made through limited companies or from first-time investors.

BRIDGING SENIOR DEVELOPMENT

• Bridging Senior Development Finance……Involves bridging development finance with mainstream development lenders so maybe you can take on bigger projects. This would involve major structural work on a commercial development that could be already built and you would complete some major work to get the project completed. This would involve planning permissions or dealing with building regulations to get through to completion such as a block of apartments.

REGULATED BRIDGING LOAN

• A regulated bridging loan is used by homeowners who may have found themselves falling short of funds, often due to delays. The borrower lives in the property the loan is for.

DEVELOPMENT FINANCE STRETCHED SENIOR LOAN

• Development Finance Stretched Senior Loan……Is a specialist development finance loan to give property developers access to a higher development loan than would be available from normal lending sources. Property developers and house builders find this higher leverage lending helpful as it means they do not need to provide such a large percentage of funding themselves. This not only helps with cash flow, for many it allows the opportunity to build more than one development project at a time.

DEVELOPER EXIT FINANCE

• Developer Exit Finance…….If your property development project is completed and you are reaching the end or nearing the end of a development loan period the financing is likely on a higher rate. Development exit finance can help replace your existing funding with affordable short-term finance and help lower costs until the properties are sold on.

MEZZANINE FINANCE

• Mezzanine Finance…….Mezzanine financing is a hybrid between debt and equity. In a multi-tiered financing of an operation, for instances, the sources of money will be senior debt, senior subordinated debt, subordinated debt, mezzanine debt, and finally the owner’s own equity. In other words, the mezzanine lender is very close to being last to get paid if something goes wrong.

CONSTRUCTION FINANCE

• Construction Finance…….Construction Finance is a specialist funding and support solution designed for contractors and subcontractors who provide construction services under a contract, framework agreement or Purchase Order. It provides funding by advancing cash against the value of invoices raised on the completion, or part-completion for staged contracts, of work carried out.

COMMERCIAL BRIDGING FINANCE

• Commercial Bridging……Is a commercial loan for borrowers who wish to use the funds for commercial purposes. This may include the purchase of an investment property or securing new offices for a growing company. Its classed as commercial if the property or land it is being used to purchase is  more than 40% commercial or 40% of the floor area in floor space.

COMMERCIAL MORTGAGE TERM FINANCING

• Commercial Mortgage Term Financing……Is a commercial mortgage or any loan or finance secured on property which is not your main residential residence. Commercial properties would be office buildings, shopping center’s, industrial warehouses, or apartment complex’s to name just a few.

COMMERCIAL PROPERTY AUCTION FINANCE

Commercial Property Auction Finance…… Is financing that you can arrange the funding in advance of the auction that can settle in 14 days. Before the hammer falls on the commercial property  you know how much your budget is, and even what specification of property the lender will fund.

ACQUISITION BRIDGING FINANCING

• Company Acquisition Finance…..helps companies complete acquisitions with the goal of growing and responding more quickly to expansion options. Through acquisitions companies also access adjacent markets as well via financing from equity and JV companies helping expansion and take-over propositions.

BRIDGING FINANCE DIRECT LENDING

• Company Direct lending…..loans are provided mainly by “non-bank” lenders, such as institutional investors to help with growth, acquisitions, shareholder buyouts and other desired financing options needed by expanding companies from the financing arena.

SENIOR BRIDGING LOANS 

• Senior Term Debt Loans…..or senior term debts are used to raise capital for specific, and often temporary objectives such as acquisitions, buyouts, refinancing, recapitalization’s or fixed asset purchases which will require a huge lump sums. Our lenders offer this lending for Western Europe, the UK and the Nordic regions.

NON STANDARD BRIDGING 

• Subprime bridging exists usually, because clients find themselves unable to qualify for mainstream or bridging and would like to purchase a property. This can be due to any number of reasons such as having complicated income streams. Poor credit history, or no previous credit rating or non-standard personal circumstances or borrowing requirements. Non standard bridging really should be your last place for finance having exhausted family, friends, mortgage lenders and second charge lenders because the interest rates and fees are high and not repaying the money borrowed when the Bridge comes to an end can have very severe consequences. Private bridging lenders charge Interest rates range from circa 0.5 to 1.5% per month — yes per month — with lenders charging fee between 1–3% of the amount you borrow. A typical Bridge term from private lenders would be 6 or 12 months with interest rolled up i.e. added to the loan. How you repay all this money when the Bridge comes to an end is key to understanding how Bridging lenders think. A lender is not really interested in your income or your job or for that matter your credit history as they are lending you money based on how they will get it back as this will be classed as sub prime lending. What I mean is the ‘exit’ strategy — a word you will hear right at the very beginning of a conversation with a lender. This exit strategy is the deciding factor to understanding if you are likely to be offered finance — how will the lender get their money back? They do not make any money until you repay the loan plus all the rolled up interest so the exit has to feasible, realistic and achievable.

BRIDGING FINANCING – Case Studies

BRIDGING FINANCE
Application Process

WHAT IS A PROPERTY BRIDGING LOAN?

A bridging loan is essentially a short-term loan that is often arranged within a short time frame and may be made to an individual or a company and secured against residential or commercial property. The defining characteristic is that it is a loan that bridges the gap to an exit, which is usually a refinance or a sale of the asset. Our expert short-term loan brokers have helped hundreds of customers secure loans for their property, so do give us a call if we can help you.

How Long Does Bridging Take To Arrange?

Bridging can be arranged within a matter of hours with funds released within 72 hours although usually this takes a bit longer and can take a couple of weeks. While a bridging transaction may be arranged much quicker than could be achieved through a traditional bank, most bridging companies still apply sensible and relatively conservative lending criteria. Usually, such lenders are smaller nimble operations and specialise in doing all of the usual checks that a bank will do but without the encumbrance of bank bureaucracy.

The term of the loan can be as short as one day usually up to a maximum of 12 months. Loan amounts generally start at around £25,000 with no maximum loan amount.

Who Uses Property Bridging?

Many individuals and businesses including professional landlords, property investors and developers all use short-term loans as part of their overall property funding strategy and can be arranged on a second-charge basis.

Why Use A Bridging Loan?

The main reasons that property professionals use bridging are listed below:

•To raise finance quickly
•To refurbish a property
•To finish a development
•To buy at an auction
•To purchase property that would not secure a mortgage in its existing condition with a mainstream lender
•To bridge a shortfall of funding between buying and selling the property when a sale is delayed
•To raise a deposit for purchasing property

Are Short Term Bridge Loans Expensive?

Short-term finance is always more expensive than longer-term lending; however, with more and more lenders entering the market it is competitively priced. The interest rate charged will depend very much on the proposition in question; however, current bridge loan rates range from 0.7-1.5% per month, potentially with even higher rates on more difficult propositions.

However, with many different lenders in the market, there is a wide variety of charging structures so, in addition to the interest rate borrowers may pay a variety of other fees to the lender.

Bridge Lender Arrangement Fees

A fee is usually charged by the lender for providing the facility and is typically two per cent. In most instances, it can be rolled up into the loan.

Bridge Lender Exit Fees

This is a fee which may be charged by the lender when the loan is repaid. If charged, it is typically one month’s interest and is charged irrespective of whether the loan has run to its full term or not.

Bridge Loan Lender Surveyor’s Fees

A fee will usually be payable to the firm hired to survey the property.

Bridge Lenders Legal fees

As with a standard mortgage, short-term financing must be processed with all the usual legal requirements. However, in many cases lenders have in-house lawyers and their costs may be included in the lender’s arrangement fees.

Bridge Loan Lender Lending Criteria

Bridging financiers will look at the credit profile of the borrower, the strength of the asset, and the exit strategy and require that the borrower has a sufficient upfront cash contribution.

What Are The Risks Of Property Bridging?

It is essential to establish a clear exit strategy to ensure the loan can be repaid (either via sale or remortgage) to avoid paying high penalty interest rates and possibly losing the property to repossession if the loan cannot be repaid. Borrowers should remember, just like a mortgage, the property may be at risk if the loan repayments are not kept up to date.

Choosing A Bridging Lender

An increasing number of short-term lenders are entering the market, and choosing one can be a minefield, particularly as some types of bridging lending require a regulated lender. For landlords and property investors, however, the type of bridging required is usually of the non-regulated variety so it is not essential to use an FCA registered bridging lender. Many reputable bridging lenders are members of the Association of Short-Term Lenders. This self-regulating body operates a strict code of conduct to ensure that borrowers are treated fairly.

Bridging lending is such a specialist area, it is always advisable to seek the services of a specialist broker or independent financial adviser. They will take time to understand the property, its location, the borrower’s circumstances and funding requirements and be best placed to match these components with the most suitable lender.