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What is bridging finance?
Also known as a bridging loan, bridging finance is a short-term funding solution which can be arranged very quickly, and where a standard residential mortgage or commercial loan are not suitable.
Are there different types of bridging finance?
Traditionally, bridging finance is used to help people complete the purchase of a property before selling their existing home, and also to assist with auction purchases. However, the last few years has seen bridging lenders to diversify their product range, which can be used as a temporary measure while a business or individual secures long term commercial investment funds.
Each can be broken down into different types including:
- Pre-Planning Bridging Finance
- Below Market Value Bridging Finance
- Adverse Credit Bridging
- Auction Bridging Finance
- Bridge to Sell or Developer Exit finance
- Bridge to Let
- Commercial Bridging Finance
- Overseas Bridging
- Light/Heavy Bridging Finance
- 2nd Charge Bridging Finance
How is bridging finance and development finance different?
Bridging finance can often stretch to heavy refurbishments, but once external walls are being moved or extensions added, a full development finance loan is often required. Development finance will always require regular monitoring and structural work whereas a bridging refurbishment loan may not.
How does bridging finance work?
Bridging finance can be provided up to a specific loan to value (LTV) which is set for a specific term.
The interest is quoted monthly but will be rolled up and deducted from the loan in advance. Some lenders are able to either add the interest to the loan or, will allow the client to service the interest on a monthly basis.
How long does it take to get bridging finance?
Bridging finance can take as little as three days to complete! Each lender will work to individual timescales and are dependent on many factors such as:
- Is a valuation required or has one been completed already?
- Have the searches been completed?
- Has a report on title been completed?
- How quick is the solicitor that has been appointed?
- How quick and detailed can the client provide the required information for completion?
A generally realistic completion term for bridging finance would be within two-three weeks from the fully packaged application being submitted.
How long does bridging finance last?
The minimum term for bridging finance is three months, although some bridging lenders will not have a minimum interest period which means the loan could be paid back within a month without penalty.
There are more bridging lenders in the market than ever before, covering many niche sectors with additional levels of complexity. This market expansion means it is now possible to get bridging finance for up to 36 months if required, depending on the repayment method.
Reasons to get bridging finance
Although bridging finance comes with a cost, they can be a benefit to you overall when a property is; in an unmortgageable state, for business purposes, tax purposes, chain break, land acquisition and planning gain, light and heavy refurbs, bad credit, for overseas clients or assets, when buying below market value or when paying personal and company tax bills and VAT.
What can I use a bridging finance for?
Most property-based assets will be available for bridging finance including; places of worship, pubs and clubs, hotels, development projects, multiple units on one freehold, and care homes. Bridging finance can be used to ‘bridge a gap’ in any financial transaction where property or land is available as security.
Would bridging finance be right for me?
There are a few major reasons why bridging finance may be right for you:
- The property that you wish to raise money against is not mortgageable in its current condition
- Refurbishment is required on the property and traditional lenders will not accept it
- The funds are needed more quickly than a traditional lender can provide them
- You are unable to raise money using a traditional mortgage.
Whatever your goal, the key is to ensure you are taking out the loan for the right reason and your exit is viable. Taking a bridging loan with no viable exit will generally result in nothing but an expensive delay of the inevitable.
After having a detailed discussion and completing a fact find, an LDN Finance adviser can assess to see the most suitable type of finance for you based on the speed of which the loan is required, the lowest rate and fees available.
How much can I borrow?
Bridging finance is available from £25k to £100mn+. Some lenders have products up to 80% loan to value (LTV) as standard which can stretch to 100% with additional security.
On assets where value can be added post completion, it may be possible to bring in an investor on a joint venture basis which allows us to stretch to 100% of the purchase price.
How much does a bridging finance cost?
The range can be from 0.4% per month to 1.5% per month but typically, the average bridging rate would be between 0.6% and 0.8% depending on the lender, the LTV, the location and the client profile.
Typical arrangement fee is 2% with 0% exit fee
A valuation fee is likely to be applicable and, in this instance, a solicitor would need to be instructed. It is important to note that some lenders offer free legals and valuation, simply ask an LDN Finance adviser.
Are there any hidden costs?
All lenders will present their finance in their own standard format, but sometimes specific requests for information need to be made for all the fees and costs to be understood. This is where it can be very important to have an experienced adviser to assist a client in ensuring a fair comparison can be made between lenders.
Will I have to pay anything upfront?
Some lenders will charge a commitment fee or an admin fee once the terms have been accepted by a client. The next set of fees that would have to be paid for are the valuation fees, QS fees (if applicable) and an undertaking for the legal fees. Again, these fees vary considerably amongst lenders. Some lenders do not charge anything up front and offer free valuation and free legals as part of a special package.
Can I get bridging finance if I have a bad credit rating?
Yes, many lenders will consider clients with adverse credit, however it may mean you will be unable to access those lenders with the most attractive products. Speak with an LDN Finance adviser to discover the options available to you.
What happens if I am unable to repay my bridging loan at the end of the term?
This is very much dependent on the situation and how flexible the lender can be. With the right levels of communication, we can often request an extension of the loan or alternatively we will source another lender who would be willing to refinance the loan.
Can I request additional funds once my bridging finance is in place?
Yes, although the situation will need to be reassessed to ensure the leverage is still within the lender’s parameters and the reasons as to why further funds are required must be made clear to all parties.
What are the alternatives to bridging finance?
Generally bridging finance is used for a specific reason such as speed, property type or complexity. There are alternative finance options which may be more suitable depending on the asset.
- Standard residential and buy to let mortgages are often a preferred type of mortgage if the transaction requires a longer term finance option at a lower rate.
- If the project is a more complex deal with a high level of construction, then a development finance loan could be more suited.
- A traditional commercial investment loan may be more suitable if the intention is to hold a commercial asset for a longer term.
Do I qualify for bridging finance?
There are over 100 lenders in the market who all work to different criteria in assessing a loan. There is usually a loan available for every situation if you have a property available as security with sufficient equity in it. Another key factor is the exit strategy, to qualify for bridging finance, you will need a solid and reliable exit strategy in place. This is usually either a refinance to a term loan (mortgage) or sale of the security property.
If you have any questions you would like to ask, simply contact us and we will have a dedicated member of the team get back to you.