Bridge Financing Explained

SUMMARY

  • Bridge Financing provides developers, investors and landlords with the cash injection they need in order to deal with cash flow issues or to take advantage of an opportunity as quickly as possible
  • Different from regular property loans, Bridge Financing is a very fast product because the funds can be originated quickly
  • As a result, borrowers should expect to pay a slightly higher price in order to benefit from the speed required for a particular transaction
  • Given the service a bridging lender provides and the ‘value add element’ a higher price is often justified

INTRODUCTION

The popularity of Bridge Financing has grown over the past 10 years as a consequence of the Global Financial Crisis. This is because traditional lenders and building societies are generally slower and more reluctant to provide property finance particularly to less experienced borrowers.

There is a huge bridging market in the UK, and there are now more than 150 mainstream bridging lenders who are all competing for business. Whilst bridging is traditionally more expensive, the increased supply over the past two years has seen prices drop especially on the vanilla end of the market.

WHAT IS BRIDGE LOAN AND WHEN SHOULD IT BE UTILISED?

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. A bridging loan will also be asset backed which means they are secured by a way of first or second legal charge against a property or properties.

It can be utilised by individuals and businesses for different purposes until permanent funding becomes available or a property is sold. Investors buying at auction, or people who plan to own a home only for a short time, may also use bridging loans. Other reasons include re-mortgaging, equity release, business purposes, senior financing delays etc.

WHAT ARE THE TYPICAL TERMS AND PRICE FOR BRIDGE FINANCE?

The vast majority of bridging loans are up to 12 months because it is generally considered to be a short term solution. On most regular property loans, the borrower pays interest each month in arrears and repays the loan at the end of the term. However, many bridge loans offer borrowers the chance to “roll-up” interest. This means that the lender also lends the interest and fees under the facility, which mitigates the borrower’s cash flow pressures.

In terms of pricing, it is often the belief that bridging finance is always expensive. This is often the case, but not always. The price depends on the unique characteristics of each transaction, how much time the lender has before the initial drawdown, the nature of the real estate being used as security and how the bridge facility will be repaid.

Borrowers typically pay interest that range between 0.5% and 2% a month, plus an arrangement fee (the amount paid to the lender for setting up the loan) of 2% of the sum advanced (and occasionally exit fees too). Given the high costs of borrower acquisition, it is standard practice to have a “minimum interest” clause in loan agreements that guarantee a lender 3-4 months of interest, regardless of loan duration.

RISKS AND REGULATION

Many bridging lenders are not regulated by the FCA, which so may consider to be a cause for concern however this is generally because they are lending to borrowers for business purposes. There is a trade body called The Association of Short Term Lenders however (www.theastl.org) which creates polices around best practices for its members and ensures that lenders treat customers fairly.

There are some exceptions when bridge financing falls into regulated space. A typical case is when the facility regards anything that involves a borrower’s main residence and they are borrowing in their own personal name. In this circumstance an unregulated lender will not work on a regulated case because it does not have the appropriate permissions.

WHY USE A BRIDGE FOR YOUR PROPERTY LOAN REQUIREMENT?

Nowadays bridging finance is widely recognised one of the best financial solutions for entrepreneurs and investors to get access to quick short-term funding. These loans are often used for real estate transactions due to the intrinsic time pressure. They are often put in place while waiting for a more long-term solution to be put in place.

By selecting a professional, experienced and trustworthy lender, borrowers can be sure the funds they need will be provided according to their timescales. For brokers, borrowers and investors, most lenders understand how important it is that they provide the highest level of service because delivery is everything.

WHEN AND HOW SHOULD I APPLY?

We encourage you to apply as soon as the need becomes apparent. This gives us the best chance of tailoring the right facility for you and getting the formalities completed before you need the money. We accept applications via brokers or directly through our website and we have a dedicated team here to help.

Bridging Finance is a short term finance solution ideal for a borrower who needs to obtain funds quickly and efficiently. There are many sources of Bridging Finance in the market and whilst there are lots of competing lenders, it is important to choose the right finance provider which understands the borrower’s requirements and provides the service it needs to complete on a wider property transaction.

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