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.
A bridging loan helps a borrower move forward on a project within a short period of time. In comparison, a mainstream bank may take some months to put together a loan for a borrower whereas an experienced bridging finance company should be able to advance a loan within a couple of days provided all the correct documentation and information is in place. While a bridging loan is set up in a shorter timeframe than a traditional bank loan, most bridging finance companies will still do the same, if not more, due diligence on a transaction compared to a bank.
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.
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:
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.
Bridging loans are popular because of their availability, the transaction speed and flexibility when it comes to the borrower and the asset. They make processes much easier for the borrower and create less financial interruption for development projects.
Borrowers and their advisors should carefully read terms of the loan agreement and have a clear understanding of the following:
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 timeframe and flexibility. If borrowers do not repay on time it can lead to expensive penalties and potentially, enforcement action.
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. In times of market downturn this may prove to have a negative impact.
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.
In brief, a speedy completion of a bridge loan would be possible if the following is available:
Take a look at Avamore’s insight videos for a full overview of the process from initial enquiry to completion.
Most borrowers prefer the interest to be retained but a bridging loan can be serviced monthly. It is generally cheaper to service a loan rather than accruing interest on the retained amount and in this case, most borrowers will receive more money in terms of day one net advance.
At the moment, there are a number of products on the market which would allow a bridging loan to be refinanced. It is very important that the interest rate of the new loan is lower than the original bridge. Professional finance intermediaries can add a great deal of value into the refinancing process as they are able to provide a menu of options.
It is important to understand that unless the borrower is very experienced and that they have clear exit/refinance strategy in place, then it would be wise to use the service of a broker.
In cases when the borrower is not able to service a loan then the interest and arrangement fees can be retained by the lender. This means that the borrower will make a one-off balloon payment at redemption. In these cases, it is important for the borrower to distinguish between gross loan and net loan. The gross loan is the total loan amount including retained interest and arrangement fees which means that the borrower would normally receive the net advance at the completion of the loan.
The bridging process is as follows:
It is very important for the borrower to choose the right solicitor and make sure they have not set unrealistic expectations in terms of the market value of the property.
An experienced broker will provide a suite of finance options and will guide their clients through the funding process.
Brokers add value because they have a number of working relationships with lenders and can determine the best product in the market to suit a borrower’s needs. Furthermore, they are familiar with how lenders on their panel would perform their due diligence process which means that deals can be completed more efficiently and effectively. A broker would also help identify the most suitable product to meet the borrower’s needs and ensure the borrower is getting the value for money on the chosen product.
The valuation report is instructed by the lender but it is paid for by the borrower. A valuation report is a common way of determining the value of a property through an opinion or the use of data, appraisal can be based on location, amenities, structural condition and recent sales of similar local properties.
Legal costs are also covered by the borrower. Normally the borrower would put their solicitor in funds after which they would provide a formal cost undertaking to the lender’s solicitor.
There are few other fees like CHAPS fees, registration fees, an administration fee and, in some cases, indemnity insurance.
An acceptance fee is paid in advance together with the valuation fee and the legal fee. Although this should be funded in advance by the borrower, it is not considered an additional cost as the borrower receives this back on the day of the loan completion.
It is not recommended to refinance a bridging loan with another bridging loan unless the latter would offer better terms with regards to the interest rate. Alternatively, you can refinance one bridge with another if value has been added to the property, which would lower the Loan to Value (LTV) to the existing loan.
In brief, a bridging loan should be refinanced with another bridging loan only if the interest rate is lower, if equity can be released while keeping the LTV at the same level or a combination of both. Borrowers sometimes do not understand the implications of obtaining a bridging loan or they are badly advised so they fall into financing options which are inefficient or expensive.
This is a practice that is used worldwide to prevent theft, financial fraud, money laundering and terrorist financing. The main KYC goal is for debt providers to know and better understand their borrowers, and therefore manage their risks appropriately.
A development loan can be structured in many different ways but normally there are three facilities within the loan which can match the borrowers’ requirements during the construction stages. These are:
A full development appraisal normally covers all aspects of the property including legal, planning and due diligence. Most of time however, it is just a financial spreadsheet which helps property developers to calculate the NPV (net present value) of a project.
Preparing a rigorous development appraisal is crucial for every property developer before making an offer to purchase any development site.
An accurate development appraisal is crucial when considering an opportunity. It is very important to input the correct data as developers need to be comfortable with the residual value of the site and the real cost of the project.
For instance, slight variations in GDV, build cost, professional fees and interest cost can completely change the feasibility of the project.
You will need to prepare a full pack of information in order to allow the lenders to analyse the project. At Avamore, we recommend that the pack includes the following:
Development finance is now available to less experienced developers or real estate professionals from the construction industry who have never undertaken a project as property developer.
Most non-bank lenders like us at Avamore are very flexible and creative when it comes to providing solutions and products for market newcomers.
Normally it is a function of the developer’s understanding of the market dynamics and ultimately it depends on very clear concept of the developed product. The best strategies also include alternative options and back up plans.
A clear and rigorous exit strategy is very important when approaching a development lender as it is a good testament of professionalism and experience.
In cases when the borrower is not able to service a loan then the interest and arrangement fees can be
retained by the lender. This means that the borrower will make a one-off balloon payment at redemption. In
these cases, it is important for the borrower to distinguish between gross loan and net loan. The gross loan
is the total loan amount including retained interest and arrangement fees which means that the borrower
would normally receive the net advance at the completion of the loan.
The Finish & Exit is for a scheme which is partially built and requires additional funding to complete the project. The product also covers the exit period of the site.
Avamore can step in at any stage of the build after works have started.
No, the project does not need to be wind & watertight to qualify for the product.
To complete on a Finish & Exit transaction, a valuer and solicitor will need to be instructed as usual. In some instances, Avamore will not require the heavy involvement of the Monitoring Surveyor but this will depend on how far along the project is.
The Finish & Exit can be used when the developer does not qualify for a traditional developer exit and the scheme falls into one of the following scenarios:
In some cases, Avamore can provide a pre-agreed equity release once PC, final building control sign off and new homes warranty is achieved.
No, the purpose of the Finish & Exit is to complete final works and cover the exit period. This means that borrower does not need to pay two sets of fees.
If you have a specific development or bridging case to discuss, you would like to learn more about Avamore’s criteria or have any other general questions, please do not hesitate to get in touch. The team will respond to you as soon as possible.