The Complete Guide to Bridging Finance

Are you in need of a short-term mortgage for a project property? A bridging loan might be the way forward for you. Explore the benefits of this route in this Bridging Finance Guide

What is a Bridging Loan?

Bridging loans serve as a form of short-term financing that is commonly utilised to address temporary gaps in funding.

They facilitate property purchases and development projects to proceed swiftly in situations where alternative financing options are unavailable or have been unsuccessful.

Loan terms

The typical duration for bridging finance loans is 12 months or less. Certain lenders may provide extended repayment periods based on individual circumstances.

Bridging finance is known for its quick turnaround time, with funds typically becoming available within days, allowing for swift access to capital.

Fees

Borrowers usually pay:

  • A lender arrangement fee
  • An exit fee when repaying the loan (depending on the lender)
  • Additional fees including surveyor, legal, and broker fees

How much can you borrow?

It is important to note that the lender’s decision on your loan application will be based on various factors, including your financial situation and their assessment of the property or development.

Typically, bridging loans have a minimum starting amount of £25,000. Consider opting for a personal loan instead. There are no set limits on the amount you can borrow; it is solely up to the lender to decide.

Exit Plans

When getting bridging finance, borrowers typically have to present an exit plan.

The repayment method is typically determined by refinancing or selling the property.

Interest rates

Bridging loans typically come with higher interest rates compared to longer term loans or mortgages.

Lenders typically offer the option to consolidate monthly interest payments and repay them together with the principal amount at the end of the agreed term.

When to use a bridging loan

You should consider bridging finance if:

  • You need a quick way to access funds
  • A traditional mortgage cannot be accessed quickly enough
  • A previous source of funding has fallen through
  • The property will not be suitable for a standard mortgage until the improvements have been made
construction of a house

Types of Bridging Loan

There are several ways to categorise bridging finance. Here are the conditions that apply to any bridging loan you take out.

Closed or open bridge

Repayment for a closed bridge is set on a specific date.

For example, you could consider getting a loan to purchase a new home while still in ownership of your old one. This way, you can rest assured knowing that you have a predetermined completion date for your old home, allowing you to accurately plan for repayment.

An open bridge involves having an agreed exit strategy, without a fixed repayment date.

For example, a development deal is in place with the intention of refinancing or selling. The repayment date will be determined based on the completion of the work.

Regulated or unregulated

Bridging loans are typically regulated by the Financial Conduct Authority (FCA). However, not all bridging loans are regulated.

Regulated bridging loans involve taking out a loan as a first charge or second charge on the borrower’s home, or the home of a partner or family member.

Unregulated bridging loans typically involve securing the loan as a first or second charge against a property that is not occupied by the borrower, their partner, or their family.

If a bridging loan is secured against the borrower or a connected person’s home, and the loan is over £25,000 and intended for business purposes, it may be exempt from regulation.

Loans may also be exempt from regulation if the borrower is considered a high-net-worth individual.

How much can you borrow?

First-charge bridging loans are typically taken out on properties that do not currently have any existing loans or mortgages secured against them.

These types of loans are typically taken out against a property that already has a secured debt, like a mortgage.

The terms “first charge” and “second charge” indicate the repayment priority order. For instance, in the event that the secured property needs to be sold to repay the debt and there aren’t sufficient funds to cover both loans, a first-charge loan takes precedence over a second-charge loan.

If secured against more than one property, a bridging loan can serve as both a first and second charge.

What can a bridging loan be used for?

Bridging loans have a wide range of applications, catering to both private and commercial needs.

They are frequently used for a wide range of property and development deals.

Typical uses for bridging loan

  • Residential property transactions
  • Commercial property transactions
  • Auction finance
  • Renovation projects
  • Change of use developments (e.g. office conversions, student accommodation)
  • New build development projects

Bridging loans are a preferred choice for property projects due to their ability to provide quick and flexible access to substantial amounts of money. This allows for rapid progress in pursuing investment and personal prospects.

When to use a bridging loan
  • To quickly secure a property in the UK or abroad
  • When a deal below you in a property chain falls throgh
  • Buiding a house
  • Downsizing to pay off an existing mortgage
  • Converting or renovation unmortgageable properties
  • Buying a property at auction
  • Property refurbishment for investment purpose

How much does a bridging loan cost?

Bridging finance can be more expensive than standard longer-term financing, such a mortgage, because of its short period.

When you take out a loan, in addition to interest, you may also be charged an arrangement fee and even an exit fee when you pay it back. Legal fees, broker fees, administration fees, and appraisal fees are examples of additional costs.

Arrangement fees

The charge is applied upon receiving the loan and is calculated as a percentage of the total loan value. On average, 1-2% is considered normal.

Monthly repayments

Bridging loans are typically provided with an interest-only structure, where the principal is paid back at the end of the loan term. You have the option to tailor your repayments by either rolling up your interest or choosing retained interest. This allows you to structure your repayments in a way that best suits your needs.

The concept of rolled-up interest involves adding the interest for the entire loan term to the capital sum, allowing you to repay the loan in one lump sum. Repaying early typically results in receiving a refund for the interest on the unused portion of the original loan term.

The concept of retained interest involves borrowing an amount that exceeds your actual needs. The additional funds are then used to cover the interest on the entire loan for the entire duration of the loan term.

Additionally, in the event that you choose to repay the loan before the agreed-upon term, you may be eligible for a refund of the interest for the unused portion of the loan period, although this is subject to the policies of the specific lender.

Interest rates

The interest rates for bridging loans are typically set for the duration of the loan term, although there may be the possibility of variable interest rates.

How much interest you pay will depend on a number of factors:

  • The lender
  • The size of the loan
  • The loan term
  • Your Loan-to-Value ratio (LTV)*
  • Your credit score (this is not always required)

*The LTV calculation takes into account the property’s current value and the projected value once the project is completed.

Exit fees

While not all lenders impose exit fees, those that do typically require them to be paid upon repayment of the capital.

The exit fees can vary, similar to arrangement fees, as they are calculated as a percentage of the total loan amount. A specialist bridging loan broker, like us, can offer a variety of finance options tailored to your specific needs.

Regulated Bridging Loans

Bridging loans that are secured against a property that you, a partner, or a family member own are usually regulated by the FCA

This type of bridging finance is commonly utilised for different property transactions.

Time-sensitive property purchases

You must act fast to secure your new home as soon as you discover the ideal property. Unfortunately, it’s not always feasible to sell your current property quickly enough to free up the cash needed to purchase your ideal new residence.

With the help of a bridging loan, you can buy a new house, move in, and then sell your old one to recoup the loan’s balance. Bridge financing might be the difference between not getting the property you desire and losing out on the ever-increasing competition for desirable homes.

If the sale of your previous residence has fallen through or if your completion date is too far off to allow for the purchase of a new house, bridging loans may also be beneficial.

Downsizing

If you are considering downsizing due to the size of your current home or the desire to live without a mortgage, a bridging loan could provide a solution. It enables you to transition into your new, smaller home while waiting for your old one to sell.

After the old house is sold and the old mortgage is paid off, you can use the remaining lump sum to pay off the bridging loan, which will leave you without any debt.

Auction finance

Typically, you are given a limited time frame of 28 days (20 working days) to finalise your purchase after the auction. Typically, the available time to apply for a mortgage is insufficient, leading to the utilisation of bridging finance to bridge the gap.

If you have already found a property you’re interested in bidding on and can provide the maximum bid you’re willing to make, many lenders will be open to providing indicative terms before the auction date.

This information is not legally binding, but it can provide you with a well-informed estimate before the auction. It will give you an idea of whether you can secure the desired loan amount and the potential cost involved.

Non-regulated Bridging Loans

It is important to note that if you obtain a bridging loan against a property that is not occupied by you, your partner, or a family member, it is unlikely to be regulated by the FCA.

The regulation of loans can vary depending on certain factors. For instance, loans secured on personal property, with a value exceeding £25,000 and intended for business purposes, may fall outside of regulatory oversight. Similarly, loans may be unregulated if they are provided to individuals considered to be high-net-worth.

This type of bridging finance is commonly used for the following kinds of property deals.

Property refurbishment

If you are planning on refurbing or converting a property, it may not be eligible for a standard mortgage.

This may be the case if the property:

  • Is derelict
  • Does not have a kitchen or bathroom
  • Is valued below £50,000
  • Has structural defects

A bridging loan can help you finalise the purchase and bring the property up to a standard that is eligible for a mortgage. Afterwards, you have the option to obtain a mortgage or sell the property in order to settle the loan.

Auction finance or investment properties

When purchasing property at auction for rental purposes or as a refurbishment project for resale, it is typically necessary to finalise the purchase within 28 days (20 working days) of the sale. There is insufficient time to apply for a mortgage.

A bridging loan provides the flexibility to meet your purchase deadline and then refinance with a buy-to-let mortgage, or carry out the planned refurbishment work and sell the property.

Bridging loans secured on other assets

In addition to property, bridging loans can also be secured against other valuable assets. This particular form of bridging finance is typically not subject to FCA regulation.

Other assets bridging loans can be secured against include:

  • A business
  • Boats and other high-value vehicles
  • Stocks and shares
plans of a house on table with a pencil

Commercial Bridging Loans

Suppose your company needs short-term finance for reasons such as purchasing new premises, buying stock, or investing in a new business opportunity. In that case, a commercial bridging loan can provide the necessary assistance.

Commercial bridging loans function similarly to other forms of bridging finance, with the distinction that the loan is secured against assets owned by a business rather than an individual.

Bridging finance is utilised by a wide range of businesses, with a notable preference among commercial property developers.

Commercial property development finance

For commercial property developers, bridging finance provides a way to proceed with new developments when other funding options are unavailable. It is possible to secure the loan by leveraging both the new development and existing lots in your portfolio.

Experienced developers have the opportunity to secure a bridging loan that covers up to 100% of their development costs.

The release of finance will occur in stages as the development progresses, with interest only being charged on the installments that have already been received. This contributes to cost reduction.

Exit strategies for commercial property development Bridging finance typically involves the sale of the completed property or properties.

It can be quite challenging when dealing with multiple lots that are unlikely to sell simultaneously, which can complicate matters.

An experienced commercial finance broker specialising in commercial property development finance can often find the perfect lender for your project.

Applying for a Bridging Loan

When applying for a bridging loan, it’s important to consider a few factors. You may want to think about whether using a broker is the right choice for you, what information you’ll need to provide to potential lenders, and if the loan will be processed quickly enough to meet your needs.

Using a broker

Many individuals decide to work with a specialist broker when they apply for a bridging loan due to various factors:

  • Advice and market expertise
  • Speeding up the process
  • Getting a better deal on interest rates and fees
  • Accessing specialist lenders not available to consumers
  • Removing the hassle of contacting multiple lenders themselves

A bridging loan can help you finalise the purchase and bring the property up to a standard that is eligible for a mortgage. Afterwards, you have the option to obtain a mortgage or sell the property in order to repay the loan.

Choosing a lender

When choosing a Bridging loan lender, look for one who is:

  • Regulated by the FCA (Required for regulated Bridging finance)
  • A member of the Council of Mortgage Lenders
  • Experienced in lending on property

Information you need to provide

The lending criteria can differ among lenders, but typically, you will be required to provide the following:

  • Details of your income, expenditure, assets, and liabilities (Sight of income will depend on whether the loan is regulated or not)
  • Bank statements
  • Valuation of the project carried out on behalf of the lender
  • Details cost breakdown
  • Timeline for the development
  • All relevant planning permission documents
  • Building regulations
  • Your National House Building Council (NHBC) insurance details or an equivalent
  • Your plan to repay the loan (exit strategy)

Application process

Regardless of whether you decide to work with a broker or search for a bridging loan deal on your own, there are a number of steps involved in the application process:

Initial Application
When you or your broker approach a lender to discuss your borrowing needs, you’ll receive an agreement in principle (AIP) that outlines the amount you can borrow, the interest rate, and any associated fees.

Credit Check
Your credit history will be established through a credit check. Despite previous credit issues, you may still qualify for a bridging loan, although it could impact the interest rate you receive.

Valuation
The lender typically requires an independent valuation of your property or project before providing terms.

Agreeing terms
After completing all required checks and providing the lender with all relevant information, they will present formal terms for the loan. It is advisable to have these reviewed by your solicitor, as some negotiation may be necessary to reach final terms.

Release of funds
Once the terms are agreed and signed by both parties involved, the funds will be promptly deposited into your account.

How long will an application take?

The time it takes for funds to be released into the borrower’s account can vary, ranging from a few days to several weeks after the initial application.

An experienced broker can greatly expedite this process thanks to their expertise and established connections with lenders.

Get Expert Advice

As a whole-of-market mortgage broker, we have access to a wide range of lenders, as a result, we can offer the best mortgage solution for you and your needs.

To discuss your lending requirements, speak to one of our experienced brokers today on 0800 195 6345, email us at info@dolphinfinancialltd.co.uk, or fill out the contact form here.

Important Info

Your home may be repossessed if you do not keep up with mortgage repayments.

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