Bridging Loans
Bridging the gap between lucrative finance deals and high-net-worth individuals, investors, and developers in the UK.
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Bridging Loans
All about bridging loans with Scott West.
What is a bridging loan and how do they work?
Bridging loans are confusing to most people, but they’re relatively simple products. They essentially bridge the gap between what you have and what you want.
People will have probably most often seen them used for auctions. If you’re buying a property at auction you have to complete very quickly. There’s not enough time to get a normal mortgage in place, so you can close the gap between now and then with a bridging loan. It lets you complete very quickly and acquire the property at potentially a lower price.
They have many other users too. You can use them to acquire and refurbish a property if you’re doing a flip. If you don’t intend to hold a property very long, it is impractical to put the borrowing on a long-term product.
So bridging loans have a wide array of uses and, depending on the lender, there’s pretty much nothing you can’t do with a bridging loan.
Who is a bridging loan for and how can they be used?
They can be used by anybody, both companies and individuals. You might use a bridging loan to buy investment properties, Buy to Lets and residential homes. On a home you plan to live in, a bridging loan is regulated and has different terms.
They can be used on land, both with and without planning permission, and to buy commercial units. Commercial units could be offices, a factory, a garage – you can cover almost any property with a bridging loan. They’re very versatile products. The use will depend on your circumstances, but most commonly people use them to purchase properties.
Auction finance is the key one, as I mentioned. Another popular application is to purchase something that needs work doing to it. If the property is going to become a Buy to Let, the lender wants it to be habitable and lettable from day one. But if the property needs a kitchen, new windows and doors, a bathroom update, new paint and carpeting, that property isn’t lettable on that first day.
A bridging loan is handy here. Most people will purchase with maybe a 55% or 65% loan, so you need to put slightly more deposit in than with a mortgage. But the loan allows you to completely refurbish the property – creating an equity uplift in most cases. Then you can take a mortgage from a Buy to Let lender. If you’ve been sensible with costs you can probably recover all of those expenses through the additional equity.
What is the exit strategy?
Your circumstances will dictate which route you’re going to take with lenders. If you are taking a regulated bridging loan on a home you will live in, the limit is 12 months and you need to have a very firm exit. That means we need to know exactly how you’re repaying the loan after 12 months.
It might be with the proceeds from a property sale, in which case that home needs to be listed for sale on a recognised nationwide website such as Rightmove. If your exit strategy is to refinance, you need a Decision in Principle from a lender confirming that they will give you the money.
With regulated loans, lenders are very particular about what they will accept for an exit because this is your home. Nobody wants to make you homeless.
On the unregulated side of things with investment properties, it doesn’t matter whether it’s company owned or personally owned. There’s a lot more flexibility about what we can and can’t accept. You can use refinance, the sale of other properties, company sales or profits or dividends and we can use development exit finance. If you’re building something to sell on a plot of land elsewhere we can use that. We can use pretty much anything – even gifts and family money, so it can be very flexible.
What are first charge and second charge bridging loans?
It’s essentially about who has first dibs on the property. If you’ve got a mortgaged house, whether it’s a Buy to Let or residential, your mortgage lender will have a first charge. They have first rights to the property.
In the instance of repossession they will get all their money back first and foremost. Anything left over goes to you. But if there’s a second charge, it means there’s another lender on that property that sits behind the first one. So in the unfortunate event of repossession, Lender 1 gets their money first, then Lender 2 gets their money, with you then getting what’s left over. You can have third charge and fourth charge, although no lenders I know of will give those, but they can be done.
An equitable charge again can be placed as well. There are other things outside of this. Say you have a company that owns properties, it’s quite normal for a lender to take a floating charge. That means the assets contained within that company can also be charged to cover any shortfall.
So if a lender has first charge over a property, they have to repossess and there’s still a shortfall, they have the right to take money from the bank account or other assets owned in that company to to recover any difference. It’s essentially the company version of a personal guarantee.
Your property may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
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How long does it take to arrange a bridging loan?
It’s incredibly quick, but that is price dependent. The more urgent you need the money, the more expensive it will be. A loan can be arranged as quickly as 48 or 36 hours if the asset is there and the loan value is right.
If you’re not pressed for time we can seek a more affordable, more practical lender and complete a full valuation. Three or four weeks is a normal timeframe.
Can I get a bridging loan if I have bad credit?
You can – although much like a normal mortgage, the severity of your credit issues will affect the lending choice and the rates that you get.
Most lenders won’t really care about your bad credit because bridging is ‘asset based’ lending. They are not lending to you based on your income, it’s based on bricks and mortar with a set Loan to Value.
But we do need to consider your credit report as an exit – if you intend to remortgage to repay the loan, we need to look at the viability of that. It’s no good getting you a bridging loan for 65% if your credit is so bad that nobody will lend you money on a term basis. We don’t want to get you into a loan that we can’t get you out of.
It’s a very important thing to consider. Some lenders are really disinterested about your credit profile. Some will give you higher monthly rates depending on how bad it is, because it can affect their chances of getting an exit.
What costs are involved with bridging loans?
They are similar to a mortgage. Legal costs and evaluation costs are a big part of it and you will unfortunately not receive the same product benefits of a normal remortgage such as free valuations or free legals. That doesn’t happen with a bridging loan, they’re very commercial products.
Valuation costs are fairly standard, but with legal costs you will pay your own plus the lenders’ costs in almost all circumstances. I tend to suggest allowing £800 to £1,000 per case, and if you’re paying the lenders’, double it to £2,000. That sum can be deducted from the loan amount.
There are also interest rates for the product itself and this is where most people get scared. With term lending we’re currently seeing rates of between 3% and 6% [podcast recorded in March 2023].
Bridging loans tend to be 0.5% a month, so that’s 6% annually, up to 1% a month or 12% a year. It does depend on the property value, your credit, the exit and a few other factors, but more likely you’ll be in the 8% to 9% range on a product. At first that sounds incredibly expensive.
But those loans are almost always not serviced – so the loan retains the interest. You don’t make any payments for it, you simply pay back a bigger loan at the end, which gives you the cash flow to finish the refurbishment or sale.
So the cost of the product is more expensive than a normal mortgage – but you shouldn’t compare the two. It’s like comparing apples and pears. It’s a really different product for a very different use. A normal term mortgage might take eight weeks to arrange, meaning you lose the property. The bridge gives you the ability to get the cash very quickly with very little paperwork.
How do you apply for a bridging loan?
We do a lot of bridging loans and we will apply for them on your behalf. You’ll come to us with an enquiry – you need a property, you want to refurbish something or build a home in your back garden…. whatever it might be. We will look at the options with you.
We don’t bridge just for the sake of it, because they are expensive products overall. We will look through your portfolio and your overall assets to see if there’s a cheaper way of doing it. But if time is a key factor, then obviously bridging comes to the forefront.
We have access to any provider on the market, so we can approach any lender that we feel is the best fit for you. Then we work with them to achieve your plans.
What are the alternatives to a bridging loan?
There are alternatives, but they usually rely on raising capital on other assets. You can raise money against cars, watches, phones, planes, anything of value. But if there’s a need to raise money quickly it will almost always fall back to bridging.
If clients have the time for us to go away and find a long term solution, we can look at a number of different options with the lenders to achieve your goals.
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