Bridging Finance

What is a Bridging Loan?

A bridging loan, akin to a mortgage, serves as a financial tool for individuals and businesses to acquire capital secured against residential or commercial properties or land assets. Unlike traditional commercial mortgages, bridging loans offer a rapid execution and drawdown process. These loans may be secured against properties where a conventional mortgage might be unsuitable, especially in cases where the applicant lacks a regular income.

How Bridging Finance Operates

The fundamental distinction between a mortgage and a bridging loan lies in the lender’s focus. While a mortgage lender assesses the applicant’s ability to make regular payments, a bridging lender prioritises the property and its suitability as security. Upon approval, most bridging lenders incorporate an interest reserve facility. This enables them to receive interest payments over the term without obligating the borrower to make monthly payments, ensuring a smooth cashflow for both parties.

The pivotal factor for bridging lenders is the exit strategy. This determines how the borrower plans to repay the loan. Common exit strategies involve refinancing with a conventional lender or selling the property used as security.

When to Opt for a Bridging Loan

Contrary to a common misconception, bridging loans are not exclusively for property auctions or purchasing a new property before selling an existing one. While suitable for such scenarios, bridging loans can address a range of needs:

  1. Property Refurbishment: Ideal for purchasing properties in need of refurbishment, unsuitable for traditional mortgages.
  2. Non-Status Commercial Mortgage: Applicable when a business faces financial difficulties, and the existing lender refuses further funds or rescheduling payments.
  3. Businesses Waiting to Sell: Provides a solution for businesses that have ceased trading and are awaiting the sale of a property. Traditional banks might struggle to approve loans in such circumstances.

Understanding Bridging Finance Costs

The cost of bridging loans varies based on factors such as security type, loan term, and borrower credentials. Interest rates can range from 4% to 18% APR, with arrangement fees varying from 1% to 3%. While certain property types may secure loans of up to 90% of their value, the final cost depends on accessing the full market to secure the best available deal.

The Role of a Broker

In most cases, working with a broker is advisable. MortgageTek is a leading Bridging Finance Broker based in Watford. We offer numerous financial products from the leading bridging lenders in the UK. MortgageTek facilitates the relationship between the borrower, solicitor, lender, and other professionals. This ensures a seamless journey to completion.

Eligibility for Bridging Finance

Any individual, partnership, or company can obtain a bridging loan if they own or intend to purchase a property deemed suitable security by a lender. Ultimate beneficial owners must be at least 18 years old.

Bridging Finance from Traditional Banks

Traditional banks, including major ones and household names, may not be the optimal choice for bridging loans. These lenders typically focus more on the borrower’s credentials than on the property when assessing proposals. Smaller banks offer bridging loans but follow a more stringent underwriting approach. Rates and fees from smaller banks might be lower, making them worth considering.

Duration of Bridging Loans

While bridging loans are often considered short-term solutions, their terms can range from one month to several years. Lenders generally prefer early repayment to recirculate funds. Some lenders offer ‘open-ended bridging loans,’ allowing borrowers flexibility in determining when and how they repay the loan.

Bridging Finance with Bad Credit

Bridging loans often cater to individuals for whom other borrowing options are impractical or expensive. Personal credit scores are less critical, with the focus primarily on the property’s viability as security. If the exit strategy involves re-mortgaging, lenders may require proof of a viable re-mortgage.

Alternatives to Bridging Finance

  1. Secured Loans: Ideal for smaller funds, secured loans offer lower interest rates compared to bridging loans.
  2. Property Development Finance: Tailored for property developers, this financing option supports development projects.
  3. Commercial Mortgages: Suited for commercial properties, offering fixed or variable rates based on financial strategy and market conditions.
  4. Family Loans or Personal Savings: Appropriate for smaller purchases but less feasible for larger investments like properties.
  5. Personal Loans: Suitable for smaller amounts, personal loans involve minimal to no lender arrangement fees.

Choosing Bridging Finance over Commercial Mortgages

Opting for bridging finance over a commercial mortgage is advisable in specific scenarios:

  1. Urgency and Speed: Bridging finance is ideal when immediate funds and swift property acquisition are crucial, such as in auctions or time-sensitive deals.
  2. Temporary Financing: When anticipating a short-term financial need, bridging finance provides temporary financing until another property sale funds the purchase.
  3. Flexibility in Property Types: Bridging loans offer more flexibility for properties requiring renovation or unconventional conversions, accommodating scenarios where traditional lenders may decline.
  4. Immediate Investment Opportunities: For time-sensitive investment prospects with high returns, bridging finance facilitates quick action that might be hindered by the lengthier approval process of a commercial mortgage.

Common Bridging Finance FAQs

What is a ‘first charge’ and ‘second charge’ bridging loan?

  • A ‘first charge’ occurs when a property has no pre-existing loans, making the bridging loan the primary charge.
  • A ‘second charge’ applies when existing loans, like mortgages, are already secured against the property. The bridging loan becomes a secondary charge.

These charges determine the order of repayment in case of default, with second charge loans generally carrying higher costs.

In conclusion, bridging finance offers a versatile and rapid solution for individuals and businesses navigating various financial needs. Whether for urgent property acquisition, short-term financing, or flexibility in property types, bridging loans provide a valuable tool in the financial toolkit. If you have further questions or require assistance, our experienced Commercial Finance Advisors are ready to guide you. Contact us at 020 3827 8558 for expert advice tailored to your specific needs.