Bridging finance explained – what is it?

The major difference between a mortgage and a bridging loan is that while a traditional mortgage lender will focus on the ability of the applicant to maintain payments on the loan, a bridging lender focuses more on the property and its suitability as security. When a bridging loan is approved most lenders will build in an interest reserve facility which allows them to take payment on the loan over the term without committing the borrower to make a monthly payment.

This provides the lender with the surety that the interest will be paid on time and provides the borrower with the comfort they don’t need to make payments that may be impossible due to cashflow constraints. 

The priority for bridging lenders is the exit strategy as this is how they will get repaid: the key question for the lender is: “What will change during the term of the loan to allow the borrower to repay the loan?” Usually this means that bridging loan exits are via re-mortgage to a conventional lender or sale of the property utilised as security.

A very common misconception is that bridging loans are only used when purchasing property at auctions or when buying a new property before you have sold another property. Whilst this type of facility can be used for these purposes, they can also be utilised in other scenarios too as we will see below.

A bridging loan may be used to purchase a property that requires light or heavy refurbishment and is therefore not suitable for a traditional mortgage.

It may also be used as a non-status commercial mortgage, where a business has been suffering financial difficulties and their existing lender will not lend any more funds or reschedule their existing payments.

For businesses that have ceased trading and are waiting to sell a property or premises, a bridging loan offers a solution in circumstances where a traditional commercial bank will struggle to demonstrate the loan can be serviced and will often ask the borrower to repay the loan prior to the property sale.  

Bridging loan costs vary dramatically depending upon the security type, the term of the loan and the credentials of the borrower with rates varying from four percent per annum to 18 percent per annum. Arrangement fees can also vary from one percent to three percent. While values may be up to 90 percent for some property types.

For example, the cost of bridging loan on a piece of land would be much higher than the equivalent loan secured against a typical family home in an established residential area.

The final cost of a bridging loan depends on you or your broker having access to the full market so that you are able to secure the best available deal.

What are the pros and cons of bridging a loan?

Bridging loans can be a useful funding option if you need quick access to funds for short-term purposes, but they also come with pros and cons that you should carefully consider before taking out a loan. Some pros include:

• Quick access to funds: Bridging loans typically have a fast application and approval process, allowing you to access funds quickly, often within a matter of days.
• Flexible repayment options: Bridging loans offer flexibility in repayment terms, allowing you to repay the loan in a lump sum or in instalments, depending on your financial circumstances.
• Bridging finance for property transactions: Bridging loans are commonly used to bridge the gap between the purchase of a new property and the sale of an existing one, allowing you to secure the new property without having to wait for the sale proceeds from the old property.
• Minimal credit requirements: Bridging loans are often based on the value of the property being used as security rather than your creditworthiness, making them accessible to borrowers with less-than-perfect credit.

However, bridging loans also come with cons, including:

• Higher interest rates: Bridging loans typically come with higher interest rates compared to traditional loans, reflecting the short-term nature and higher risk.
• Short-term financing: Bridging loans are designed for short-term use, usually ranging from a few months to a year, which means you must have a clear exit strategy for repaying the loan.
• Additional fees and charges: Bridging loans may come with additional fees and charges, such as arrangement fees, valuation fees, and exit fees, which can add to the overall cost of borrowing.
• Risk of property repossession: If you are unable to repay the loan as agreed, you risk losing the property used as security, as lenders may seize the property to recover their investment.

The short answer is usually, “yes”. There are a large number of bridging lenders across the UK and due to the complexity of the process, most of them are set up to work alongside finance brokers.

The finance brokers run the process to take ownership of the relationship between borrower, solicitor, lender and other professionals involved ensuring a smooth journey to completion.

Any individual, partnership or company may obtain a bridging loan if they are the owners or the intended purchasers of a property that is considered suitable security by a lender.

Any ultimate beneficial owner of a borrowing company or any individual must be at least 18 years of age.

Traditional banks and household names are not usually the best option for those seeking bridging loans as these traditional lenders focus more on the borrower and their credentials rather than the property, when analysing a proposal.

Some smaller banks offer bridging loans, but they are typically more stringent in their underwriting approach, require more borrower due diligence and are typically slower to transact. The rates and fees from these smaller banks are, however, typically lower than traditional specialist bridging lenders and are worth considering. A knowledgeable and professional broker will guide you through the market to disclose the options that are available to you. Get in touch and speak to one of our experienced Commercial Finance Managers.

Bridging loans are seen by many as a short-term solution, though the loan terms may run from one month to up to three or more years. As borrowers will save interest and maintenance fees by exiting quickly, there is pressure for the loans to be repaid as quickly as possible.

Most bridging lenders are keen to be repaid as quickly as possible and re-circulate their funds by supporting another borrower, so most do not charge redemption fees which provides flexibility to the borrower. However, there are lenders who provide ‘open ended bridging loans’ which means they have no fixed term and it is up to the borrower how and when they repay the bridging loan.

As the focus is on the property rather than the lender, bridging loans are often available to people for whom other borrowing is not an option or too expensive. So long as the lender is satisfied with the ultimate exit strategy and repayment of the loan, personal credit scores will be less important. 

If the loan exit is via re-mortgage, then the lender will want that borrower or their credit broker to prove that a viable re-mortgage is or will be available. 

Some lenders only want to deal with prime borrowers with exemplary credit ratings where others actively prefer to deal with borrowers who have suffered difficulties managing credit relationships. Again, this shows the benefit of working with a broker who knows and understands the market and can point would-be borrowers to the right lender.

As with most borrowing, the track record of the borrower will affect the interest rate and fees offered on bridging loans, though some lenders offer a ‘valuation only’ product where their primary concern is the property value and detail within the legal conveyance pack.

In this scenario the only borrower caveat is that they do not have a criminal record or are currently being investigated for any form of fraud.

How to apply for a bridging loan

To apply for a bridging loan, you should follow these steps:

• Research lenders: Begin by researching lenders who offer bridging loans and compare their terms, interest rates, fees, and eligibility criteria to find the most suitable option for your needs.
• Gather documentation: Prepare the necessary documentation required for the application process. This may include identification documents, proof of income, details of the property being used as security, and any other relevant financial information.
• Submit an application: Complete the application form provided by the chosen lender. Provide accurate information about your financial situation, the purpose of the loan, and the property being used as security.
• Property valuation: The lender may require a valuation of the property being used as security to assess its value and determine the loan amount they are willing to offer.
• Credit check: The lender will conduct a credit check to assess your creditworthiness and determine your ability to repay the loan. Make sure your credit report is accurate and up to date before applying.
• Approval and offer: If your application is approved, the lender will provide you with a loan offer outlining the terms and conditions of the loan, including the loan amount, interest rate, fees, and repayment schedule.
• Acceptance and settlement: Review the loan offer carefully and accept the terms and conditions. The lender will then arrange for settlement, where the funds will be disbursed to you.

By following these steps and carefully preparing your application, you can increase your chances of successfully getting a bridging loan to meet your short-term financing needs.

How long does a bridging loan take to be approved?

The time it takes for a bridging loan to be approved can vary depending on several factors, including the lender’s processes, the complexity of the loan application, and your specific circumstances. In general, the approval process for a bridging loan typically ranges from a few days to several weeks.

Lenders will review your application and this process can take anywhere from a few days to a couple of weeks, depending on the lender’s workload. If the application is approved, the lender may require a valuation of the property to assess its value accurately. This valuation process can add additional time to the approval process, usually taking a few days to complete.

While some bridging loans can be approved relatively quickly, it’s important that you allow ebough time for the application and approval process, especially if there are any complexities involved. Working closely with the lender and providing all requested documentation promptly can help fasten the approval process.

How to decide if bridging finance is right for me

Deciding whether bridging finance is the right option for you requires careful consideration of your financial situation, needs, and goals.

You must evaluate your timeline for accessing funds and whether you need quick access to financing. Bridging finance is typically used for short-term needs, such as purchasing a property before selling an existing one or funding a renovation project with a tight deadline.

Also consider the costs related to bridging finance, including interest rates, fees, and charges. Bridging loans often come with higher interest rates compared to traditional loans, so it’s important to assess whether the benefits of quick access to funds outweigh the additional costs.

You should also have a clear plan for repaying the bridging loan within the timeframe. This may involve selling a property, refinancing with a traditional loan, or securing other sources of funding. Make sure you have a realistic exit strategy to avoid financial difficulties.

Additionally, understand the risks related to bridging finance, such as the risk of defaulting on the loan if your plans don’t go as expected or if you’re unable to repay the loan on time. Consider whether you’re comfortable taking on these risks and whether you have bakcup plans in place to reduce them.

Consider seeking advice from a financial advisor, mortgage broker, or other qualified professionals who can help you assess your options and make an informed decision based on your circumstances. The decision to use bridging finance should fit your financial goals. By carefully evaluating these factors and seeking professional advice if needed, you can decide whether bridging finance is the right choice for you.

What are the alternatives to a bridging loan?

When considering alternatives to a bridging loan, you have several options to explore depending on your specific needs and circumstances.

One alternative is traditional funding options, such as a mortgage, especially if your need for funds is not immediate and you meet the eligibility criteria for these types of loans. Traditional loans typically offer lower interest rates and longer repayment terms compared to bridging loans, making them more suitable for long-term finance.

Another option is to explore other types of short-term financing, such as a line of credit or a business overdraft facility, which may offer more flexibility and lower costs compared to a bridging loan for certain purposes.

Additionally, you may consider tapping into your savings or liquidating other assets to fund your short-term financing needs, especially if you have enough funds available or assets that can be easily converted into cash.

For property transactions, you may also explore alternative arrangements such as delayed settlement or vendor finance, where the seller provides financing for the purchase of the property, eliminating the need for a bridging loan.

The most suitable alternative to a bridging loan will depend on factors such as your financial situation, the purpose of the financing, and the availability of other financing options. It’s important that you carefully consider each options and weigh the costs and benefits before making a decision.