What is bridging finance?
Bridging finance is a type of short-term financing that is typically used to bridge a gap between the purchase of a new property and the sale of an existing property. It can also be used to finance other short-term needs, such as to fund a renovation project or to provide capital for a business venture.
How does bridging finance work?
Bridging finance is a type of short-term financing that is secured against the equity in a property or other assets. It is generally based on the value of the property or assets being used as collateral, as well as the planned exit strategy for repaying the loan.
Unlike traditional loans, bridging finance is often more concerned with the equity in the properties and the exit strategy rather than affordability.
This means that the lender will generally be more interested in the value of the properties being used as collateral, as well as the borrower’s plans for repaying the loan, rather than their income and credit history.
The interest payments on a bridging loan can often be rolled up and paid in full when the loan is repaid. This means that the borrower will only need to make one lump sum payment when the loan is due.
There are two main types of bridging finance: open and closed.
Open bridging finance is used when the borrower does not have a firm date for the sale of their existing property or other exit strategy and may take longer to repay the loan.
Closed bridging finance is used when the borrower has a firm date for the sale of their existing property or other exit strategy and can generally repay the loan more quickly.
Types of bridging loans
As with almost every form of finance, bridging can be packaged in many different ways.
First charge bridge
A first charge bridge is a type of bridging finance that is secured with a first legal charge against a property or other asset. In the context of property, this means that the loan is secured against the property being used as collateral, with the lender having the first priority to recoup their investment through the sale of the property in the event of default.
If you have no mortgage on your existing property or on the one you intend on bridging on, a first charge bridge may be arranged. This means that the lender will have the first legal charge over the property, providing them with greater security in the event of default.
Second charge bridge
A second charge bridge is a type of bridging finance that is secured with a second legal charge against a property or other asset. In the context of property, this means that the loan is secured against the property being used as collateral, with the lender having a secondary priority to recoup their investment through the sale of the property in the event of default.
This is because the first legal charge is held by the lender that provided the first mortgage or other secured loan against the property.
If there is already an existing mortgage on the property, a bridge may be arranged as a second charge.
However, it is worth noting that the borrower may need to obtain permission from the first charge lender before taking out a second charge bridge, as the first lender’s consent is required for any additional secured borrowing against the property.
What can I use a bridge loan for?
Short-term bridging finance may be useful in a variety of situations where quick access to funds is needed, such as:
- Property purchase: Bridging finance can be used to purchase a property quickly, before the sale of an existing property is complete. This can be particularly useful in a competitive property market, where the borrower needs to act quickly to secure a desirable property.
- Property development: Property developers may use bridging finance to fund the acquisition and development of a property, with the aim of refinancing or selling the property once the work is complete.
- Refurbishment: Bridging finance can be used to fund the refurbishment of a property before securing long-term financing or selling the property. This can be particularly useful for investors who want to improve the value of a property before selling it.
- Auction finance: Bridging finance can be used to finance the purchase of a property at auction, where funds need to be available quickly and in cash.
Can I get a bridging loan?
When considering a bridging loan, the lender will typically focus on the equity or collateral available in the property being used as security, as well as the borrower’s exit strategy for repaying the loan.
The amount of deposit or equity required for a bridging loan will vary depending on the lender’s specific criteria, but it is generally true that a larger deposit or equity stake will increase the likelihood of being approved for a loan and may also result in more favourable loan terms, such as a lower interest rate.
As a general rule, borrowers should expect to provide a deposit or equity stake of between 25% and 40% of the property value when applying for a bridging loan.
However, it is worth noting that some lenders may be willing to lend a higher percentage of the property value, particularly if the borrower has a strong exit strategy in place.
GDV (Gross development value)
GDV (Gross Development Value) bridging is a type of bridging finance that is specifically designed to help property developers fund the construction or renovation of a property.
The loan is based on the projected GDV of the completed development rather than the current value of the property.
With GDV bridging finance, the lender will typically lend a percentage of the GDV based on the projected value of the property once development work is complete.
This can provide developers with access to a larger amount of funding than they would be able to secure with a traditional bridging loan, as the loan is based on the potential future value of the property.
GDV bridging finance is typically used by property developers who are looking to build or refurbish a property with the aim of selling it for a profit.
An exit strategy on a bridge loan is a plan for repaying the loan at the end of the term. This is an important consideration for lenders, as they want to ensure that they will be repaid on time and in full.
There are several acceptable exit strategies for a bridge loan, including:
- Sale of the property: This is one of the most common exit strategies for a bridge loan. The borrower plans to sell the property before the end of the loan term, and use the proceeds to repay the loan.
- Refinance: The borrower plans to refinance the property with a long-term mortgage before the end of the bridge loan term, and use the funds to repay the loan.
- Cash reserves: The borrower has sufficient cash reserves to repay the loan at the end of the term.
- Other assets: The borrower plans to use other assets, such as investment properties or stocks, to repay the loan.
Risks of bridging
Like with any type of borrowing, there are risks associated with bridging finance that borrowers should be aware of.
Some of the key risks include:
- High interest rates: Bridging finance can be more expensive than other types of borrowing, with interest rates typically higher than those on traditional mortgages. This can make it more difficult to repay the loan and could lead to financial difficulties if the borrower is unable to make the payments.
- Short-term nature: Bridging finance is designed to be a short-term financing solution, typically ranging from a few months to a year. If the borrower is unable to repay the loan within this timeframe, they may face additional fees and charges or risk having their property repossessed.
- Exit strategy risk: Bridging finance requires a clear exit strategy, which means a plan for how the borrower will repay the loan. If the exit strategy fails to materialise or if the property does not sell for the expected amount, the borrower may be unable to repay the loan, leading to financial difficulties.
- Valuation risk: The value of the property used as collateral for the bridging finance loan may fluctuate during the term of the loan. If the value of the property falls, the borrower may be required to provide additional collateral or face higher interest rates.
- Repossession risk: If the borrower is unable to repay the bridging finance loan, their property may be repossessed by the lender. This could result in the borrower losing their home and facing financial difficulties.
Bridging finance interest rates
Bridging finance is generally considered to be a high-risk form of lending, and as such, it tends to be more expensive than other types of property finance.
Interest rates on bridging finance can vary widely depending on the lender, the loan amount, and the borrower’s financial situation.
Typically, interest rates for bridging finance are higher than those for traditional mortgages, and are usually advertised on a monthly basis rather than annually. As an example, a rate of 1.25% per month would represent an annual interest rate of 15%.
Bridging Ioan administration fees
In addition to interest rates, there may be various fees and charges associated with bridging finance, such as arrangement fees, valuation fees, legal fees, and exit fees.
Administration fees for bridging finance are usually charged as a percentage of the loan balance, typically ranging from 1% to 2%.
However, it’s important to note that the exact fees and charges associated with bridging finance can vary widely depending on the lender and the specifics of the loan.
How Strive Mortgages can help with bridging finance
Bridging finance can be a complex area of lending, and it’s important to work with a mortgage broker who is experienced with this type of finance. A broker can help you navigate the various options and find the best deal for your individual circumstances.
They can also provide guidance on the application process and help ensure that all the necessary documentation is in order. By working with a broker, you may be able to save time, money, and stress and increase your chances of being accepted for a bridging finance loan.
Additionally, a broker can help you understand the risks and potential downsides of bridging finance and can help you determine whether it’s the right option for your specific situation.