A Guide to Bridging Finance: Part 1

What is a bridging loan?

A bridging loan is a short-term property loan which is designed to assist property developers or investors for a period of up to 18 months. Normally the loans are asset backed which means they are secured by a way of first or second legal charge against a property or properties.

What is the difference between commercial bridging and residential bridging?

A commercial bridge is secured against properties which are considered for purposes such as retail use, office use and industrial use (this is not an extensive list). A residential bridge is secured against traditional housing properties.

Who needs a bridging loan?

Bridging loans are taken either by professional property investors or developers when they need swift finance. Bridging finance can be used in a number of different circumstances including:

  • To assist with a swift purchase
  • To refinance an existing loan
  • To allow time for a planning permission to be obtained
  • To release equity
  • A combination of the previously mentioned purposes

 

Some non-professional property investors take advantage of the availability of bridging loans in order to release some equity against their properties. The latter can be qualified as a regulated transaction. In this instance, the bridging lender and introducing broker should be FCA regulated.

What are the key benefits of taking a bridging loan?

Bridging loans are popular because of their availability, the transaction speed and flexibility when it comes to the borrower and the asset.

What should you be aware of when borrowing?

Borrowers and their advisors should carefully read terms of the loan agreement and have a clear understanding of the following:

  • Interest rate
  • Loan term
  • All fees including arrangement fees

Any potential penalties or minimum payments under the loan.

Why is a clear repayment strategy important?

A clear and solid exit strategy is imperative for anyone considering bridging finance due to the higher cost of the loan as a result of the short time frame and flexibility. If borrowers do not repay on time it can lead to expensive penalties and in certain situations, enforcement action.

How can you repay a bridging loan?

The most common way to repay a bridging loan is through sale of a property or by refinancing it with another product loan which is much cheaper. It is important to be wary of refinancing one bridge loan with another which may include a second charge product. This in times of market downturn may prove to have a negative impact.

How long does it take to obtain a bridging loan?

A bridging loan can be obtained within 3-4 days. This is dependent on the borrower providing all of the information required and the motivation of the borrower’s solicitors to provide everything needed for a speedy completion.

What information should be supplied for rapid completion?

In brief, a speedy completion of a bridge loan would be possible if the following is available:

 

  • Valuation report
  • Report on title
  • Solicitors certified KYC documents