Bridging loans & finance explained
What is bridging finance?
Bridging finance is a lending product designed to span a short-term borrowing requirement, i.e. bridging a gap.
But, it is also a product commonly designed to cater to higher risk opportunities and spurious scenarios, priced accordingly.
Who should consider bridging finance?
As it is generally expensive compared to traditional mortgages, the first question in considering bridging finance is whether it is necessary.
Often people will look to a bridging lender when it is not needed. We receive many enquiries about bridging loans for purchasing a property that is not habitable when the applicant might have a perfectly suitable alternative property with sufficient equity to arrange a far more cost-competitive alternative.
As your advisor, we will always seek to establish the broad range of options available to you and then consult you on these, the differences in costs, and your preferences, so that you can make a fully informed decision.
Most bridging lenders work only through master brokers and are not open to members of the public to apply directly. That is to prevent them from being swamped with inappropriate enquiries.
So you will usually benefit from having a competent advisor to help assess whether bridging is needed and what structure is best.
How a bridging loan works
Bridging loans may be secured on a property you are buying or one you own already, including one with an existing mortgage. The type of arrangement will affect the rates and fees applicable.
Bridging loans are purely short term, so you need an intended timescale at application along with an ‘exit strategy’; the proposed method of repaying the loan. Most lenders offer bridging up to 12 months, some up to 24 months.
The exit strategy has to be tangible and realistic. The lender will want to feel a relative degree of surety that you can repay the loan. Hence a highly speculative exit may be unsuitable.
An example would be purchasing a block of woodland based on getting planning consent for residential development; the strategy would be too likely to fail to be agreed upon.
Like any secured loan, a formal application will be made, including your personal and financial circumstances: your identity, income, outgoings and credit is checked, as with any other loan. You will need to arrange a solicitor or conveyancer to handle legal matters.
Usually, the interest payments on the loan are ‘rolled up’ into the loan; you do not make monthly payments; the loan interest is paid upon exit as part of the balance. Some lenders may take monthly payments if desired.
The interest rate for the loan is usually quoted & calculated monthly due to the product's short-term nature, unlike traditional mortgages and loans, which quote annual interest rates.
The rates will be high, as will the fees involved, depending on the lender.
Some lenders might offer the option to convert to a mortgage with them once the exit is ready. For a property needing modification, this would be upon completion of works.
Often, switching to a mainstream lender from the high street banks will present a more competitive option; if we have advised you on a bridging loan, it will save you a lot of time if we assist with any future conversion back to a traditional mortgage.
Example uses of bridging finance
Bridging finance is often used where speed of arrangement is a concern. It is frequently used with the purchase of property at auction, especially where there is a concern about traditional lending being suitable; due to the need to complete within a 30-day timeframe.
That would apply to properties in a non-habitable or lettable state, such as those without a functioning kitchen, bathroom, plumbing or electrical services.
It is also used, for purchasing properties with major structural concerns preventing a mortgage, such as subsidence requiring underpinning.
Purchasing a property to change use is another common issue; a property previously used as a ‘house in multiple occupation’, or converting a bed and breakfast back to a purely residential use, or vice versa.
Bridging loans can be a great way of breaking chains. Raising a loan against an existing property to fund the purchase of an investment, especially when the new property is unsuitable for a mortgage.
Others may use a bridging loan when buying a new home to complete the purchase whilst their old home remains on the market.
It is a superb stopgap when you have funds known to be available to you within a short period (such as share options vesting, an inheritance clearing probate, or a bonus payment). If you know you will have cash funds to clear the loan within a few months, the costs of a bridging loan are less concerning.
Types of bridging finance; open or closed bridging
An open bridging loan applies when there is no known date of exit. If you break a chain using a bridge; by borrowing against a house that was still on the market, it would be an open bridge.
A closed bridging loan applies when you can specify a known exit date. In an example where a property needed the installation of a kitchen, bathroom, and electrics to obtain a mortgage, you could specify a timeframe of 3 to 6 months and take a closed bridging loan.
Bridging loans do not usually have an early repayment penalty. Hence on early repayment, any interest no longer due is deducted from the amount owing.
Types of bridging finance; first or second charge
Bridging loans can usually be arranged as a first or second-charge loan, with rates typically higher for second charges.
The order of charges dictates who is first in line to receive any proceeds from a sale in the event of default and repossession.
If you arrange a bridging loan over a mortgaged property, it will be a second-charge loan.
If you raise money against an unmortgaged property you own already or against a property purchase, it is a first-charge bridging loan.
Types of bridging finance; regulated or unregulated
First-charge mortgages are regulated by the FCA when you or your family occupy more than 40% of the property.
So raising a loan against your residence, a pied-à-terre or another property occupied by your family, as a first charge, will be regulated. A loan on a block of flats could also be regulated, if your family lives in one of the units depending on the floor area.
The additional regulation is often undesirable to bridging lenders, and many do not consider regulated first-charge bridging. Those that do may charge extra for this.
So unregulated bridging would be available solely on properties that are investments and occupied by non-related persons.
Bridging finance risks
Bridging loans are a very high-risk product. As loans may be agreed for properties unsuitable for traditional mortgages, there is a considerable risk that any intended exit strategy fails.
You must have adequate advice on whether any future conversion to a traditional mortgage is realistic.
You must be aware that the market can change constantly; if you cannot exit, the high-interest rates mean you could lose the property.
In a scenario where bridging is used against a property still on the market to break a chain, the same risk applies; if you cannot find a buyer, you risk repossession should you fail to maintain payments or exit the loan.