Bridging loans chapter 1.
What is a bridging loan?
A bridging loan is a short-term loan, typically lasting no more than 18 months, which helps property developers to secure financing for their development projects.
Bridging loans provide instant cash flow when funding from other sources, such as banks, would take too long to secure. They are high interest loans that are backed by a type of collateral, which is often property.
Bridging loans are quick, flexible and require little documentation. Therefore, they are perfect for borrowers searching for a quick cash injection to close on a property. Other uses of bridging loans in property finance include breaking a property chain, buying real estate at auction, and controlling cash flow.
It is currently estimated that bridging loans account for around £4 billion of the market in the UK.
How does a bridging loan work?
As High Street banks no longer offer bridging loans in the UK, there is a gap in the market which has been filled by smaller bridging loan lenders. Applicants can receive their desired funding in as little as a few days.
Here’s how they work:
- Bridging loans are often secured against properties or land. As a result, you may not need to provide evidence of income and credit ratings.
- You are usually able to borrow a maximum gross loan of up to 80% of the property you are purchasing, although limitations vary.
- Bridging brokers compare deals across the UK to find the best offer. Native Finance's Source tool is perfect for finding the right bridging loan lender for any deal.
- The amount owed, which usually includes borrowing costs and interest, is typically repaid in a single lump sum.
How much can you borrow with a bridging loan?
The amount that you can borrow varies depending on the purpose of the loan.
The most straightforward bridging loans are offered with a loan-to-value (LTV) ratio between 70% and 75%, so you’ll require a deposit of between 30% and 35%.
For more high-risk commercial bridging loans, LTV may be reduced to 50% so that lenders can protect their own interests.
The lower the LTV, the lower the interest rates.
Higher LTV deals (up to 100%) may be granted under exceptional circumstances, such as when the borrower can provide other assets as security.
Bridging loan payments and interest rates
There are multiple ways that borrowers can pay interest to bridging loan lenders:
- Monthly payments: the borrower pays interest each month throughout the loan term.
- Rolled up interest: added to the amount of the loan and paid at the end of the loan term.
- Retained interest: the lender adds the interest to the balance of the loan when the loan is initially agreed upon at the beginning of the term.
The amount paid by the borrower depends on several factors, including:
- The type of loan
- The LTV (loan to value)
- The lender
- The kind of security supplied by the borrower
How long does it take to secure a bridging loan?
The amount of time that it takes to secure a bridging loan varies, but the process normally takes between 7 and 28 days.
The process of securing a bridging loan with a lender includes:
- Agreeing on the credit and the terms in principle
- The bridging loan lender approves the valuation and conducts the security arrangements so that the capital can be released
- Once the funding is secured, you will need to repay the loan by the end of the term
Pros of bridging loans
Bridging loans are being used more frequently by borrowers in the UK for a number of reasons, including:
- Flexibility: Bridging loans are more flexible than traditional mortgages or high street lending. They allow borrowers to fund projects without having a clearly defined method of repayment.
- Short-term financing solution: As you are able to quickly secure capital, bridging loans help borrowers to take advantage of opportunities as they arise.
- Resolving emergency situations: Bridging loans help you to swiftly address emergency situations, rather than having to wait for more traditional forms of financing.
- Simple process: Bridging finance is easy to secure and requires less documentation than other types of loans.
- Deferred payment: You typically don’t need to repay any of the bridging loan until the agreed end date of the loan term.
Cons of bridging loans
There are also some disadvantages to using bridging loans, such as:
- High interest: Bridging loans attract higher interest rates than other loans due to the lack of security provided to the lenders.
- Fees: Lenders may charge processing, administration and processing fees.
- Collateral: You need some form of collateral to back the loan, so it may be impossible for you to secure a bridging loan if you don’t have sufficient equity.
How does a bridging loan differ from development finance?
Although bridging finance and development finance are similar, there are some key differences. Development finance is dished out in stages throughout a property development project. This makes it more suited to larger property development projects. Development finance may be too complicated for smaller projects, which tend to be better suited to a bridging loan. Whilst bridging loan lenders may still release the funds for the project in stages during the loan term, their view of the process is far more simplistic.
Which lenders provide bridging finance?
Since the financial crisis, banks have been less attracted to new projects. In their place are specialist property lenders. At Native Finance, we provide you with access to more than 480 lenders in one place, so it’s easy to access bridging loan lenders. Try out our Source tool today to find the perfect lender for your deal.
Are bridging loans regulated?
Some of the bridging loans in the UK are regulated by the Financial Conduct Authority. However, commercial bridging loans, such as bridging loans for property development, are unregulated. This is due to the separate assessment criteria which exists for commercial lending.
Are there bridging loans for limited company borrowers?
Yes, and the rates will be the same as the rates received by other borrowers. Lenders treat these applications in the same way as Ltd Company buy-to-let deals, so they may ask for a guarantee from the director of the company before they release the funds.
Bridging loans are widely used in the UK property finance market because they involve a simple application process and can be secured quickly by property developers. In recent years, the popularity of bridging loans has even led to overcrowding within the industry. With more bridging lenders appearing in the market, smart tools such as the solutions offered at Native Finance are becoming more necessary to borrowers and brokers searching for the perfect lender for their individual deal.