What is a bridging loan?
A bridging loan is a short-term interest-only loan that usually has a maximum term of 24-months.
- Bridging loans can be as short as one week but are usually between 1 and 24-months.
- Bridging can be arranged for almost any borrower raising funds against a UK based property.
- We are able to raise bridging finance for individuals, UK limited companies, Expats or Offshore entities, purchasing or refinancing property in the UK.
- There are many reasons your client may need a bridging loan and there are many benefits to this type of finance.
Bridging loans are secured against property either being purchased or owned by the borrower - and can include houses, flats, commercial buildings (such as shops or industrial units), buy-to-let properties; and they can be individual assets or a portfolio of properties.
- For example, they could secure a bridging loan on one or more properties depending on the amount they wanted to borrow from the lender.
- Clients can even borrow against a plot of land - whether it has planning permission or not.
- A bridging loan can be regulated or unregulated – depending on whether it is to be used or intends to be used, as a dwelling by the borrower or their relative. See “Regulated Bridging Loans” for more detail.
- The most important factor when taking out a bridging loan is the exit strategy. How is the bridging loan to be repaid?
Satisfying the lender that there is a sensible, achievable plan in place to redeem the loan is key.
- Typical methods are through the sale of property or refinance onto a longer-term form of finance. See "An untapped opportunity: When is the best time to use a bridging loan?" for illustrative examples.
- A bridging loan can be secured by way of a first charge on the property, or as a second charge if there is already a mortgage in place.
An untapped opportunity:
When is the best time to use a bridging loan?
A bridging loan can be used to fix a broken property chain.
For example, your client has found their perfect home and are waiting on the sale of their current property to complete, but the buyer suddenly pulls out, your client can get a bridging loan to purchase their new home.
That way, they have more time to sell their property and can use the proceeds of the sale to repay the bridge.
If a property is unmortgageable, such as a house without a kitchen or bathroom, borrowers can use a bridging loan to purchase it.
This enables them to undertake the renovations required to transform it into a mortgageable property, which will allow them to change the finance to a mortgage or sell the property.
They can repay the bridging loan with these funds.
A bridging loan is an option if a borrower’s goal is to renovate a property with the aim of adding value to sell at a higher price.
Purchasing a property that has less than 80 years left on the lease can be challenging, as the banks may decline the mortgage.
This is where a bridging loan could be convenient, as borrowers can purchase the property with a short lease, and then extend the lease so that the mortgage will be approved.
Once they have secured the purchase with a lease extension, they can either sell the leasehold for a profit (it is usually a lot less to extend a lease than the increase in the value) or re-mortgage and use the funds to pay off their bridging loan.
Some lenders will also fund the cost of the lease extension if needed.
If your client wanted to purchase land or property for the sole purpose of getting planning permission (or a use change) and then re-selling, a bridging loan could finance that transaction.
Land with planning permission granted commands a higher value, so they could sell on for a profit or alternatively develop it themselves, exiting on to a development finance facility.
When purchasing a property at an auction your client will usually have to pay a deposit of 10% of the full purchase price on the day of the auction - and will have up to 28 days to pay the remaining funds.
A bridging loan can be very helpful when they need access to money fast, so many people use bridging loans for this purpose and then repay the loan once they have the mortgage.
The benefits of bridging
There are many benefits to bridging loans such as speedy application, quick transfer of funds and broader lending criteria - to name a few. Let's look at these and others in more detail.
Speedy Application Process
The application process for a bridging loan is usually much quicker than a mortgage or second charge application.
The process usually takes anywhere from 5 – 14 days, with some cases taking just 24 hours! Bridging loans are taken out by people and businesses who need money fast, for reasons such as buying a property at auction, refurbishment costs (residential or commercial), break in the property purchase chain and ground-up development so bridging loans need to be available quickly.
Once the application has been processed and approved, the funds are immediately released to the applicant’s solicitor and are ready for use.
Adaptive Lending Criteria
Bridging lenders look at the case scenario rather than individual affordability criteria and "tickbox" lending.
This leads to more ‘pragmatic’ underwriting; as long as the property and exit strategy are solid, a lender can agree to the deal.
There are two main ways lenders will charge interest, both options mean the borrower isn't required to make any monthly interest payments (often with bridging, borrowers want to be free of any regular payments during the term of the loan).
With loans taken out on a retained interest basis, the lender adds all the interest to the balance of the loan and effectively pays the interest itself when it falls due at the end of each month.
With loans taken out on a rolled-up interest basis the lender rolls up the interest and adds that interest to the balance of the loan each month.
Condition of security properties not a factor
The property your client uses as security for the loan does not have to be up to a certain standard.
It can be in disrepair or needing major refurbishment, but as long as it has a value, it can be used as security.
Be aware that bridging lenders will lend against the lower end of the purchase price or the current market as established by a qualified surveyor.
Why choose a specialist finance distributor instead of going direct to the lender?
Using an established specialist finance distributor such as Aria Finance has multiple benefits
- We can help save borrowers and brokers time researching through the many lending partners and help them find the bridging loan best suited to their specific needs.
- If bridging finance is new to you, this process could feel overwhelming. Through Aria Finance, you will be accessing a wide range of bridging finance lenders to ensure the client obtains the best possible terms.
- This research and product selection would be carried out on your behalf as part of the service we offer.
- With over 20 years’ experience of specialist lending and our large business volume, we know our lenders very well, and we’re sometimes offered exclusive rates that other providers and intermediaries can’t access.
- These long-term relationships mean we understand the underwriting requirements for each lender and will be able to get deals accepted and offered quickly; an essential feature of bridging finance.
- You also can choose to let us handle your client’s application from the initial enquiry stage all the way through to completion. You can choose to be as hands-on or off in this process as you wish.
Things to consider
1. Exit Strategy
- Refinance – this could be the refinancing of the bridging loan with a mortgage or in some case another bridging loan from a different lender ( a lender cannot write back-to-back bridging loans on the same property). This would usually need to be evidenced by an agreement in principle.
- Sale of Property - The client may sell the property that the bridging finance has been secured against within the term of the loan to repay the bridging loan. This can also be the sale of an alternative property. For example, in a chain break scenario, often the bridge is secured against the property that the client is looking to purchase, but the exit comes from the sale of their existing property.
- Equity Release
- Cash redemption - The client will need to evidence that a definite cash sum will be made available during the term of the loan, substantial enough to redeem the loan. This could be a pension lump sum, investment or share portfolio maturity. There are other exit routes that can be considered alongside these, as long as we are able to obtain evidence they will occur within the term and are deemed viable by the lender, consideration can be made.
- Inheritance (with evidence)
It’s possible to have more than one exit strategy, and the more exit strategies a borrower has in place the better.
For example, if they cannot sell the property, they could release equity from another property to repay the loan.
It may seem obvious but if the customer opts to service their loan monthly; make sure they know the date the payment is due each month and that there isn't anything on the horizon that could delay that payment.
It is paramount the borrower understands the consequences of non-payment. They could have their property repossessed.
3. Application Process
The lender will have a clear application form and detail their requirements in terms of paperwork.
Sending the completed form, with the client’s ID documents will allow them to start underwriting the loan.
It is good practice to have all the paperwork and documentation the lender needs kept together and send them altogether, rather than it be sent gradually.
There may be additional documents requested afterwards, but at the start it is good to have everything in order before sending to the lender.
What’s the impact of retained interest on a bridging loan?
If your clients choose to have the interest retained or rolled up, it is important to note what impact this will have on the net loan amount available to the borrower.
If the client is looking to achieve the maximum loan to value available, interest and fees can generally only be added up to 75% maximum.
If the exceeds this threshold once interest and fees are added, they will be deducted from the loan instead.
For example, your client wants to borrow £100,000 at 75% LTV and interest rates will be 1% per month.
With a 12-month term and after 2% fees, the net loan amount will be £86,000 As the monthly interest payments of £12,000 and the fees will have to be deducted from the gross loan to ensure the entire borrowing does not exceed 75% loan to value.
It is important to note that the client will only ever pay for what they use. If they elect to retain interest on the loan, but are able to repay the loan before the end of the term they will receive a refund of unused interest.
Again, using the scenario above, if the client where able to repay the bridging loan in month six, and did not require the full 12-months, they would receive a refund of six months' unused interest payment; £6,000 in this example.
As mentioned above there are two types of bridging loan - regulated and unregulated.
A bridging loan will be ‘regulated’ if the loan is/ was secured against a property that is (or will be) the borrower’s main residence or will be occupied by any member of their immediate family All other deals would be unregulated.
If your client was a landlord and tenants were living in their property, this would be an unregulated loan. This is because it is not your client’s own home or occupied by any of the borrower’s immediate family.
The maximum loan term for a regulated bridging loan is 12 months, whereas an unregulated bridging loan can be up to 24 months.
The Financial Conduct Authority will regulate the loan if it's secured on the applicants' main residence. It's worth noting that some bridging lenders themselves are unregulated and can't offer FCA-regulated bridging loans.
For regulated bridging loans your most competitive rate starts at 0.45% per month, for unregulated bridging rates start at 0.47% per month (as of Sept 2022).
Unlike a standard, high street residential mortgage, bridging loans are underwritten with less focus on formal criteria, affordability and credit checks and more focus on the strength, viability and plausibility of the client’s exit strategy to pay off the loan and the quality of the asset offered as security - rather than the client’s ability to pay.
Of course, there will still be formal identification checks in order to prove identification of borrowers to lenders.
If your client reaches the end of their loan term and has not been able to repay the bridging loan they could be charged. For unregulated loans interest rates will increase in line with the terms of the loan agreement where the loan remains unpaid after the agreed term date.
This will likely add to their costs or could see them losing some or all of the profit they would have made from the deal.
This late or non-payment can occur if they are relying on the sale of a property to repay the loan.
While it may be difficult to gauge the property market 12-months from the start of a bridge, the borrower needs to be certain that they will be able to realise their desired value at the term end in order to ensure that their property sells should this be the exit strategy to repay the bridging loan.
Speaking to an estate agent about the current housing market would be advised.
Why are bridging loans considered to be expensive?
Expense should be considered in terms of how much the overall cost will be for your client. This can often be categorised in two ways;
1. Financial Benefit
Your client purchases an unmortgageable property for £100,000 at auction.
With use of a bridging loan, they are able to complete renovation works of a new bathroom and kitchen, the property sells for £150,000.
Once costs have been taken into account from the £50,000 return on the sale, it eliminates the perceived expensive nature of the bridging finance used. It is no longer expensive finance, but the only finance available to achieve this opportunity.
2. Emotional Benefit
A landlord client’s buy-to-let mortgage lender pulls out at the last minute, and they are already in their notice-to-complete period, having already exchanged.
With the flexibility of a bridging loan, a case can complete in days – saving the landlords deposit and avoiding losing the investment property as they can still complete on the new purchase and then have a period of 24-months to arrange traditional finance on the property to replace the bridging loan.
The expense of bridging reflects the risk the lender is taking in the lending decision. They operate minimal underwriting and often secure against unmortgageable, unmarketable properties that finance could not be obtained for through traditional routes.
Bridging generally carries no redemption penalties, so with some lenders, after the first month, the client is free to redeem the loan.
This all contributes to the higher interest rate the client will be charged above traditional finance.
What happens if the client doesn’t exit the bridge within the agreed term?
Ideally, this shouldn’t happen as the exit route will be a major part of the underwriting of the case at outset.
The ability to repay the loan is a fundamental element to the loan being granted in the first instance, but circumstances can change during the loan – if they do and the exit cannot be achieved within the timescales, there are two options. The customer should give as much notice to the existing lender if they foresee any issues in redeeming their loan in time, and we can help to arrange another way of repaying the loan.
1 – Going back to the existing lender to extend the term. This will incur a new set of fees in line with arranging the original loan.
2 – Rebridging to another lender – however, this will typically be more expensive because the client wasn’t able to exit the bridge within the original loan term and is therefore riskier. It's important to pay off the bridging loan before it expires to avoid paying expensive fees and penalties.
Bridging loans summary
- A bridge is a short-term interest-only loan that usually has a term of up to 24-months.
- This type of finance is extremely flexible.
- Bridging loans are secured against the assets owned by the borrower, this includes residential and commercial property, plus any type of land – with or without planning permission.
- A bridging loan can be regulated or un-regulated.
- Regulated bridging loans are secured against properties that are occupied by the applicant or a close family member. They are regulated by the FCA.
- The exit strategy is key for a lender when deciding whether to approve the loan. The more exit strategies the better.
- If you need any assistance with this process, Aria Finance will be able to help.