A bridging loan is arguably one of the most exciting finance products available to businesses, yet so easily overlooked. Companies will wrongly shy away from bridging due to not understanding how it works and perhaps assuming it’s not the right product for them.
That said, with mortgage applications becoming increasingly complicated, long-winded and interest-rates rising, bridging loans are increasingly popular. Particularly where a project is time sensitive, bridging provides a powerful solution that a business needs to keep moving forward and secure the deal they need.
What is a bridging loan?
Put simply, a bridging loan is a short-term “temporary” loan designed to help you make a purchase when the funds to do so are not yet available. They are ideal for property buyers and developers for this reason.
The value of them can vary from anything between £5,000 and £25m, depending on your requirement, credit history and financial circumstances.
Bridging can be used for many different reasons to literally “bridge a gap” until a more permanent form of finance can be arranged, like a mortgage. The funding application is much faster than something like a mortgage too.
How does a bridging loan work?
It’s easiest to understanding bridging when used in a specific scenario.
Imagine you’ve found the perfect property for your new business venture, but it needs a lot of work. As a result, you’re struggling to secure a mortgage despite having a quarter of the property value in deposit.
With a bridging loan, you can essentially secure the remaining value of the property in short-term funding and buy the property outright. When you’re in a position too, you can then sell the property to repay the bridge and apply for a commercial mortgage.
How are bridging loans like mortgages?
Bridging loans are very similar to mortgages but are faster to apply for and secure. They work the same in that the value of the loan is determined by the property value, placing interest (either on a fixed or variable rate) on top which is payable until the loan is repaid in full.
You can also expect a few fees with bridging loans (much like a mortgage) including arrangement fees, exit fees, early repayment fees and legal fees.
Differences between a mortgage and a bridging loan
The Pro’s
Bridging is very short-term in comparison to a mortgage. Mortgages are usually taken out on 25–35-year terms, where-as bridging loans are generally offered for one year or less. As a result, bridging loans are much quicker to apply for and funds are often released within 48 hours of application approval.
Bridging is also available on any type of property including auction or rundown properties, whereas mortgage lenders tend to favour more traditional and reliable brick-built properties.
Bridging loans offer flexible payment terms, and they can even be repaid as a lump sum once the term expires, unlike a mortgage. This can be practical for when you’re cash-strapped and are awaiting funds either from a new mortgage or a property sale.
The Con’s
Of course, with every pro comes a con, and with bridging it can often be the rate of interest. The shorter term and time sensitivity of a bridging loan can attract higher interest rates than that of a mortgage application. That said, lenders are not often concerned with things like asset or rental income when it comes to assessing your eligibility, so the process can be simpler.
If you have a bad credit rating, you will be considered ‘higher risk’ and so the cost of your loan may vary for that reason too.
Types of bridging loans
As with most forms of business finance, a bridging solution can look different depending on the business and its requirement. The two main options are…
Closed-bridge loans
Closed-bridge loans are for when there is a dated exit strategy in place that is just waiting on a contract exchange, for example.
Once completion takes place and you receive funds from the property sale, you then repay the bridging lender on the given date.
Open-bridge loans
These are the opposite – when there is no fixed date for the bridging loan to be repaid. Open-bridge loans will come with a fixed term like 12 months, and you’ll often still need to have evidence of an exit strategy like how you plan to repay the loan at the end of the term.
What does “first-charges” and “second-charges” mean?
This isn’t a fee to pay, the ‘charge’ actually refers to the priority of debts to be paid off in the event that you cannot make your repayments.
First-charges
Like mortgages, bridging loans are secured against properties as charges. If a bridging lender secured the first charge, it would indicate that they’ll have priority of repayment in the case you defaulted on your loan.
If you’re in the process of selling and took a bridging loan to secure your new property, the loan would be secured on your new property as a first charge.
Bridging loans can also be used to clear mortgages when moving properties. In this case, your bridging loan would pay your lender the mortgage balance, clearing their charge on the property and the bridging loan would now be secured as the first charge.
Second-charges
A ‘second charge’ is used when a ‘first charge’ already exists with your mortgage lender. It means that the bridging lender can secure any funds remaining after the lender with the first charge has recouped their loan.
Lenders that have the first charge will usually need to provide consent for any additional lenders securing charges on the property as it presents further risk and can bring higher interest-rates
What can I use a bridging loan for in business?
Property investment
Landlords and investors often use bridging finance when they need to fund a new deal or bridge gaps in their existing projects. Investors sometimes look to bridging in the form of “auction loans” to secure auction properties, where time is of the essence and a mortgage lender wouldn’t be suitable.
In another scenario, you may have found a great property deal, but the vendor needs a quick sale and is prepared to offer the property at a discount. A bridging loan could be ideal in this instance to secure the deal quickly.
Property investors may also want to buy, renovate, and sell a property. It may be that the property needs a total renovation and is unmortgageable in its purchase state. A bridging loan would be a suitable solution for both these scenarios.
Property development
A developer may have secured planning permission to build multiple new premises for the ground up. With this, comes the cost of builders, labourers, and suppliers. A bridging loan could help to finance the initial purchases and hiring, until the development is complete. When the project concludes, the developer could move to a commercial mortgage or sell the development to repay the bridging lender.
Asset purchases
A bridging loan can provide a fantastic solution when you need to purchase something but can’t secure an asset finance deal due to the asset being abroad. Asset Finance lenders will often need you to already own and have access to the asset to be generating income. A bridging loan can help to get the asset to you, then you can later switch to an Asset Finance deal.
Can I get a bridging loan?
Bridging is largely assessed on the value of a property, and not on personal income. The way a property is valued varies greatly, but it does give you more scope to secure the loan.
Property valuation
As with standard mortgages, your property needs a visit from a qualified surveyor. Bridging lenders will want to ensure that their loan is safe, fair and isn’t deemed too high risk.
Exit strategy
An exit strategy is a term used for the evidence you can provide for how you plan to clear the balance of the bridging loan. It is an imperative part of the application process, and some examples of exit strategies are to remortgage or sell the property.
Without a clear and reasonable exit strategy, you are unlikely to secure any type of bridging loan.
Bridging lender discretion
As with anything, there’s no one set of criteria you must follow to secure a bridging loan. For example, in a development venture, lenders may assess your personal experience in this field and whether the end goal is likely to generate enough funds to repay the loan.
In another example, if your exit strategy is to remortgage then a bridging lender may want to assess the projected value of the remortgage and whether the loan period is sufficient for it to be repaid.
Additional credit checks
Like a mortgage, you may need to undergo credit checks and affordability, such as additional mortgages that you may have. Bad credit doesn’t mean you can’t secure a bridging loan, but it may change things a little.
How to get a bridging loan
Bridging loans aren’t available from high street lenders and will often require a broker like us to assess the options for you. We will take a tailored look at your own individual circumstances and find solutions to suit. The general process can often be achieved in a week, but this depends on how fast the necessary stages are achieved:
- Making an application to a bridging lender
- A property valuation
- A financial assessment of the application (other mortgages, credit checks)
- Once the loan is approved, solicitors are allocated to handle conveyancing.
- The solicitors will liaise with your lenders solicitors as required and approve the loan to be released.
Speak to our Bridging Loans Specialist
Moorgate Finance are proud to have a Bridging & Development specialist in our team, ensuring we give you tailored, helpful advice. We can provide advice on suitable routes to take and, if instructed, find the best deal available. Our panel of lenders has a wide variety of deals and product, so we may be able to inform you of alternative helpful finance products too.
Our specialist advisor – Jasmine – is experienced in Bridging Loans and can make an accurate assessment of your financial circumstances and requirements to decide whether bridging is the right option for you.
Head to the ‘APPLY NOW’ form on our website to make an initial no-obligation application for a bridging loan.