9 min read15 October 2019
While the application process for bridging finance is designed to be simple, understanding how it works isn’t always straightforward. Here, we cut through the confusion to uncover the facts.15 October 2019
Firstly, do you need a regulated or unregulated bridging loan? What’s it for? How long is it for? What security do you need? How much can you borrow? This is just the tip of the iceberg for the long list of questions people often ask about bridging finance.
To make sure you don’t drown in the sea of information sources, we created this catch-all guide. By the end you’ll have a much better understanding of bridging finance, and you’ll be able to make a more informed decision if it’s the right choice of loan for what you’re looking to achieve.
As the name suggests, bridging loans are a type of short term debt finance used by business owners who need an injection of funds to cover a gap in their cash flow.
They can be taken out over a few weeks or months – generally up to around a year – to ensure the business can operate when revenues are down, or a large investment has had an impact on the enterprise’s available working capital.
A bridging loan is a type of secured loan. This means you need a property, land or other high-value asset to get one. The lender then uses this asset as security and can repossess it if you’re unable to repay the loan within the term.
The amount you can borrow with a bridging loan very much depends on the property (or asset) you are securing the loan against. This will usually range from 65% to 80% of the total asset value.
Once the value of the property (or asset) is assessed by a surveyor, lenders will give you a quote based on the Loan To Value (LTV).
However, if you are considered to be a high risk borrower, the LTV could drop to 50%.
It’s also possible to borrow more money – up to 100% LTV. Although, this would probably require you putting up more than one property to secure the loan. This will not only cost you more in extra valuation fees, it could be very expensive if you’re unable to repay the loan and your properties (or assets) are repossessed.
Lenders will charge you interest on the amount you borrow. These interest rates tend to be higher than other forms of finance such as with a small business loan.
There are a number of ways of paying this interest, which is covered later in this guide in bridging loan interest rates.
Regardless of how you pay the interest, by the end of the loan term, you will need to have repaid the original loan amount, plus all interest charges. How you do this is known as an ‘exit route’. There are several ways people tend to repay their bridging loan, these include:
Bridging loans are a short term form of finance. Typically taken out over less than one year, possibly for only a few weeks.
Longer terms do exist, but you’re unlikely to find anything over three years. It’s also worth remembering, the longer the term, the more interest you’ll have to pay.
This section has given you an overview of how bridging finance works. But there’s a lot more to it than this. The rest of this guide should give you all the information you need.
Typically, it's considered a commerical bridging loan when 40% or more of the land is for commercial use.
If you’re using a bridging loan to help with the funding of a property transaction, you’ll need to specify if it’s for a residential or commercial project.
For example, you might be interested in purchasing a shop that has flats above it, with both covered by the sale. Therefore, to use a commercial bridging loan, the retail space on the ground floor would need to represent 40% or more of the total floor space of the property.
An unregulated bridging loan might sound a bit dodgy, but it’s simply a way of classifying if the loan is for residential or commercial use.
A regulated bridging loan is for personal residential properties only – those that you live in or plan to live in. They are overseen by the Financial Conduct Authority (FCA), which gives you an added layer of protection if you’re mis-sold a bridging loan or receive bad advice about one.
An unregulated bridging loan is used for business purposes or property investments. They need to be unregulated due to the how complex the loans can be. This allows for greater flexibility, with each loan being tailored to very specific needs or circumstances.
A bridging loan is commonly used in relation to buying or investing in a property.
For example, if you want to:
Bridging loans can also be used if you have to:
To qualify for a bridging loan, lenders will ask you to meet certain criteria. But as the loan is secured against an asset, the criteria can sometimes be less stringent than with other forms of finance.
Exactly what is required will differ between lenders, and will depend if the loan is for a residential, commercial or business need. It's worth checking whether the lender has a minimum and maximum age limit, but some of the more common requirements include:
If you think you’ll be able to meet these criteria, there are three main sources where you could go to get a bridge loan: major banks, mortgage brokers and specialist lenders.
In a word, no. Bridging loans are available to businesses of all sizes.
The qualifying criteria is generally the same, although the underwriting for larger companies may be more in depth due to the complexity of the organisation.
Certain bridging loan lenders may have restrictions on the type of commercial property they are willing to provide finance on. For example, petrol stations, hotels and restaurants are considered more high risk.
Some lenders still offer bridging loans on high-risk properties, they just charge larger interest rates and fees, and request more checks on the deal.
The two main types of bridging loan are ‘closed’ and ‘open’. Both of which you’ll need an ‘exit route’ in place for – a way of paying off the loan.
Closed bridging loans have a fixed end date. Often when you know the funds you need to pay off the loan will become available. Generally, they last weeks or a few months tops.
With open bridging loans there's no end date set in stone. Despite this, they tend to last about a year. Due to the extra flexibility this type of loan offers, they’re normally more expensive than the closed option.
This is something else you need to be aware of when it comes to bridging finance. ‘Charges’ are added to the property you are using as security by the lender.
If you don’t have any other loans secured against the property, you’d qualify for a ‘first charge’ bridging loan.
If you already have a loan or mortgage on the property, you’d need to take out a ‘second charge’ bridging loan. Should you be unable to repay the loan, these charges are used to determine the priority of debts.
You’re more likely to get a higher Loan To Value (LTV) rate on a first charge loan as there’s no other claim on the property. With a second charge loan, the lender will calculate the LTV based on the amount of equity you have in the property once the other debts/mortgages are deducted.
Permission is usually needed from the first charge lender before a second charge lender can be added. The number of charges that can be placed on a property are theoretically unlimited, but the more it has, the less willing lenders are to consider it for security.
There are two ways that interest rates can affect your bridging loan. The first is related to the length of your repayment schedule, the second is whether your loan is at a fixed or variable rate.
Due to bridging loans normally being short term, the interest is calculated on a monthly basis, rather than an annual percentage rate (APR). How you pay back this interest tends to be in one of three ways:
Monthly basis: You pay the interest every month and it’s not added to your final balance.
Rolled-up deal: No monthly interest payments are made. Instead, you pay all the interest at the end of the term.
Retained interest: When you apply for the loan, you borrow the amount needed to cover the monthly interest payments from the bridging loan lender. At the end of the term, you then pay everything back.
Bridging loan interest rates are either fixed or variable, just as they can be for savings accounts and mortgages.
Fixed-rate bridging loan: With this interest rate, you know exactly how much interest you’ll be paying over the duration of the loan – providing it’s a closed bridging loan. This is more suitable if you’re looking for stability. However, because you’re getting the security, there’s the possibility it may end up costing you more.
Variable-rate bridging loan: Here the interest rate can change, depending on fluctuations to the base rate. There’s more of a risk involved, but there’s also the potential to save money.
Arrangement fee: Typically, 1–2% of your loan that’s charged for setting it up.
Exit fee: If your lender allows you to settle the loan earlier, you’ll usually have to pay about 1% of the loan amount to do so.
Administration or repayment fee: Pays for the admin/paperwork cost of the loan.
Valuation fee: Covers the cost of the surveyor to carry out a property valuation.
Legal fee: To pay the lender’s solicitor/legal fees.
While it’s clear bridging loans serve a purpose, there are several disadvantages to them, primarily their cost. Below are a couple of alternative funding options you might want to consider.
These can be secured or unsecured. If you don’t want to use your assets as security, then an unsecured business loan could be the ideal solution for you.
This is similar to a bridging loan in that it’s a short-term funding option, typically spanning 6–18 months. Yet they are purposefully designed to help fund a residential development project.
The first part of the loan is used to purchase the land, while the second part is for the build costs. The second part is usually drawn in stages (often once a month), rather than being given at the outset. This drawdown phase is usually overseen by an Independent Monitoring Surveyor (IMS) who tracks the progress of the build and reports back to the lender about whether the project is on time and budget.
If you already have a commercial mortgage on a property, there’s the potential to remortgage to give you access to cash funds. You can do this by taking out a new mortgage with your current lender or by switching lenders. The amount you can borrow will primarily be determined by the amount of equity you have in the property.
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