Bridging Finance & How does it work?

You may have heard about bridging loans in the context of property investment or moving house, but what exactly are they? Basically, bridging finance is a type of short-term loan that allows a buyer to purchase a property before their existing home or investment property is sold. As the name suggests, it ‘bridges’ the funding gap in the lag between purchase and sale – offering rapid access to the necessary purchase funds for a brief period of time.

Borrowers can access from £5,000 to £250 million, depending on applicant status, the value of the property and other lender criteria. Higher lending amounts are typically reserved for borrowers who can put up several properties as security. Quotes are provided on a Loan to Value (LTV) of 65%-80% in most situations.

Bridging loans can be used in a number of situations. For example:

1. When people are moving home in a chain, with a gap between completion dates (e.g. needing to pay for the new property before receiving funds on the completed old property).
2. When property investors or private buyers renovate a home and want a rapid sell-on.
3. When an individual is looking to buy a property at an auction.
4. When property investors and developers are looking to pay a tax bill
5. When buyers want to secure finance against an uninhabitable property.

This type of finance can be used by homeowners, landlords and property developers alike.

The bridging finance market has grown rapidly, with a number of small and focused lenders now on the market, catering for specialist property finance needs. The market has changed because large high-street lenders have become less willing (and sometimes less able) to lend ever since the financial crisis of 2008.

As to whether a bridging loan for property development, auction purchase or private home buying is a good idea, it depends on a variety of factors. Bridging loan requirements vary by lender, but each will have certain common features that need to be considered.

The most notable feature of this type of finance is that the interest rate is likely to be high. At the same time, there are typically high administration fees applied to the loan. Because of this, it is essential to proceed very carefully and with a full view of the facts. Borrowers have been burned by this type of loan in the past, in instances where transactions have fallen through, or where lenders have turned out to be unscrupulous and untrustworthy.

Benefits of instant bridging loans

1. Rapid access to money
2. Ability to borrow large sums – often up to £250 million depending on applicant status
3. Options for flexible borrowing.

Possible downsides of bridging loans:

1. Failure to understand the unique features of these loans can result in financial risk
2. Bridging finance is secured against your property; meaning it can be sold if you can’t meet the repayment terms
3. A costly option with fees and higher interest

Bridging finance interest rates will vary by lender. However, interest costs of 1.5% a month are not unusual, which can equate to an annual percentage rate of 18%.

Bridging loans may have fixed or variable interest rate features. Fixed interest rates are ideal for customers who want stability, as they offer the same amount of interest for the duration of the term. The rate is pre-agreed, but there may be a premium for this security.

The other choice is to have a variable rate bridging loan which can change with the base rate. However, you can save money if the base rate decreases. Borrowers who are less concerned about security sometimes prefer the variable rate option if they believe that the financial markets will travel in their favour. Knowledge and market insight is required here, along with a thorough understanding of personal risk tolerance. If interest rates appear to be rising, most customers will choose the fixed interest rate to lock it in and avoid further increases in the event of a base rate rise.

Bridging loan periods tend to be for several months and there are usually different options for paying the interest portion.

Monthly repayments

The customer repays the interest every month as a separate payment, rather than adding it to the outstanding balance

Rolled-up bridging finance deals

The compound interest is calculated monthly but added to the outstanding loan balance and paid together when repayment is due.

Retained interest

The monthly interest payment due is covered up to a predefined date so that the full sum is only repaid when monies are due.

As well as interest payments, there will be an arrangement fee for the set-up of the bridging loan, which is usually around 1-2%. A repayment fee for exit paperwork may also apply, along with valuation fees for the cost of the surveyor.

Remember, this type of finance is designed to be short-term. As soon as it extends beyond the agreed interim or bridging period, penalties can rapidly stack up. Typically, bridging finance is available for 1 – 18 months.

Yes, there are two broad types: closed bridging finance and open bridging finance.

With closed bridging finance you will tell the lender how you will repay the loan – with what funds and when. These loans usually complete within a few months and the clear exit plan is required as a lending condition.

Open bridge finance won’t usually need this type of exit plan, and it is typically the loan of choice when funds are needed urgently to complete a property transaction. No detailed plan is needed to explain how the debt will be settled, and the finance tends to be offered for up to a year. Of course, it’s important to note that interest will keep being applied throughout this period.

There are also first charge bridging loans and second charge bridging loans.

If you have a loan against a property which is already mortgaged, you’d take out a second charge loan. An example of this would be if you were planning to finance a property extension to improve the property. The categorisation tells the lenders who will have legal priority for repayment if the loan was unable to be paid off at the term-end.

First charge loans apply if the new loan is the first secured on the property.

Bridging loan requirements will depend on the lender. Often, lenders will require that:

Customers must also take out their property mortgage with them too, providing the bridge finance as an interim measure before the standard mortgage comes into play.

Property is put forward as security against the loan. Some lenders expect applicants to have more than one property in order to be eligible for their bridging finance products, but this will depend on the lender and the size of the loan.

Applicants show proof of income – although, interestingly, as loan interest isn’t repaid monthly, some lenders do not request this.

The applicant shows evidence of their property investment track record if they are planning to develop their purchased property.

The applicant can show a business plan if they are using the bridging loan for commercial purposes.

Development loans are another type of short-term property development loan. They are repaid in stages and calculated on the gross value of the development. Personal loans are another option, as are remortgages when timescales are more flexible and a long-term loan is desirable.

Use a bridge loan calculator
Ask for your lender to provide a tailored bridge finance example or illustration around your particular borrowing needs.
Think carefully about the type of bridging loan that you need – whether open bridge finance or closed bridge finance.
Know whether the loan is a first or second charge type.
Clarify whether the interest rate is fixed or variable.
Review products from several lenders.
Be clear on your security.
Read the small print!

Bridging loans are offered by banks, building societies, specialist lenders and brokers. They aren’t widely advertised and usually require a direct application by the customer to find out the product features and offers.

Once you have made an application, a decision will usually be made within 24 hours. The funds then will take around two weeks to be issued, including time for checks to be carried out, the valuation and the actual transfer.

Hank Zarihs are highly experienced and specialist financial intermediaries operating in the property development market. We work with a tried and tested panel of over 60 trusted lenders and can provide excellent bridging finance with attractive features. Contact us to find out more.

Want to know about the various routes of finance for property development that are available? Our guide will help tell you everything that you need to know about this specialist type of short-term property finance.

Property development finance is a specialist form of loan that is short-term in nature and designed for developers progressing residential property builds. These can include both ground up development projects and refurbishment/conversion projects, where an existing property needs finance to be renovated or converted. These short-term loans are paid back in stages and funds are released in tranches, as work is completed according to certain agreed milestones.

This specialist finance loan is used for residential development, refurbishment and conversion projects, as well as for retail units, commercial buildings, industrial premises and more. Each lender will have its own criteria which determine the type of project it will lend against.

These loans are typically taken out by developers and builders; both experienced and new, depending on their situation and finance access needs. Here are some examples of when a development loan may be a useful loan product:

1. When a property developer with a solid track record in developments and a ready pipeline of projects wants to access ready finance in a flexible, cost-effective way.
2. When an individual wants to buy a house at a property auction, with the view of doing it up to flip for profit.
3. A builder of student pods
4. A builder who wants to buy land to build a property or properties for onward sale - needing finance to begin the project.
5. A self-builder who wants to lead their own self-build project, without the usual types of mortgage available without an underlying asset.
6. A developer or builder who is mid-project, but in need of extra funds to meet escalating costs.
7. Developers or builders converting office blocks to residential apartments under the PDR scheme.

The amount of money that you can borrow with a property development loan depends on various factors. These are large loans which may reach into millions of pounds. Typical development finance loans will start at around £10,000 and go up to £50 million. The factors that affect the funding are:

1. What the gross development value of the project will be - defined by what the site will be worth when the construction or refurbishment work is finished.
2. What the developer's track history is with similar projects and borrowing
3. How much the lender is prepared to offer according to their own terms and availability
4. How good the lender's credit rating is
5. How good the accompanying business plan is (where required.)

These will depend according to the development finance loan in question. However, features to expect include:

Value

- A LTGDV (Loan to Ground Development Value) of up to 75% for residential projects
- LTGDV of up to 55% for commercial projects

Interest rates and fees

- Interest rates that may be expressed annually, but which are repaid monthly.
- Possible exit fees (but not in all cases, as some lenders allow you to repay early without fees)
- Options to pay interest fully rolled up, part-rolled up or serviced, according to affordability. (Typically, a loan advance is paid net of the total interest fee over the term of the loan, plus the arrangement fee.)
- On some loans, the ability to repay the loan early, if wished, without early repayment charges.
- Valuations on this type of loan can be more expensive than with other loans, because of the complexity of the product.

Terms

- A maximum loan term of around 36 months
- Funding released in stages, upon a series of checks
- Security for the loan can be provided via other owned properties
- Interest is only paid on the money borrowed - if the project stays under budget, applicants are not usually obliged to borrow the entire original loan value.
- Usually, to secure the loan, the lender will require a building contractor’s contract, JCT. Every lender will have their own set of criteria, which a development loan broker will be able to advise upon.

Some applicants will prefer to take out other types of loan secured against assets, to use their own assets or capital, to use equity release to look for investors or to seek grant funding for certain types of public build. However, the use of owned assets reduces the applicant's liquidity and other routes are time-consuming and unlikely to result in smaller sums of finance. Development loans tend to be the most popular route because they are designed to meet the specific needs of this type of project, and can be arranged extremely quickly.

The interest rate usually depends on the applicant's status and will vary accordingly. Remember that these are short-term, specialist loans and will be more expensive than other more standard types of mortgage. Some lenders charge as little as 0.37% a month. The loan can be serviced by deducting the interest charge from the advance, by rolling it over to repay at the conclusion of the project (and upon the sale of the resulting asset), or by servicing the monthly interest charge each month.

No, development funding and bridging loans are not the same things, although both are specialist loans secured against property or land. With bridging loans, the finance is released in one sum, pending the sale of the secured asset. With development funding, the finance is released in stages as the project is progressed, and as each stage of development is approved by a panel of professionals with the ability to confirm that the right standards and stage of build are in place according to the terms of the lending deal.

Development loans are specialist products which cannot be taken out on the high street as you might a standard mortgage. Most applicants will use a broker to maximise access to available products and to receive tailored advice on the products which may be most suitable for them.

A good development loan broker will have access to a large panel of lenders or loans for flexibility. It will offer loans that span from regulated lenders through to unregulated lenders, depending on the applicant's needs, turnaround time requirements and risk profile. The lender will also provide access to an experienced team of financial advisors who can make recommendations on the best product for the applicant's needs and have a process which is slick and rapid, in order to secure funds as quickly as possible.

The applicant must be confident that he or she will be able to repay the loan before applying for it. Development finance can be risky if you lack experience in the field, or if you do not understand the specifics of this type of finance. Always read the small print in detail and have a contingency plan in place. Remember that the underlying asset - the property itself - can be sold to raise funds to repay the loan.

Development finance can be a useful product for developers and builders wishing to move ahead quickly with building or renovation projects. These types of loan are expensive but have specific features which mean that they are only designed to be short-term in nature. Crucially, they are available very quickly and without onerous paperwork and this makes them ideal for professionals who are comfortable with this type of commercial funding and ready to move ahead quickly to complete the work and move the property towards a sale or a conventional mortgage.

The right broker can make the process as quick and smooth as possible. At Hank Zarihs we work with a large panel of specialist lenders who are motivated and ready to lend to ready applicants. Each lender has its own risk profile, terms and conditions and lending limits, and our team of finance experts will need only basic information from you to provide a tailored illustration of the development finance loans which might be best suited to you.

Call us without delay and we will discuss the options with you. Our lenders are open for business and ready to lend to the right applicants, so don't allow your project to fall behind schedule for want of funding! Secure a development loan now to bring your building work to a conclusion and move towards that all-important sale or mortgage without delay or stress. Contact the team now for a no-obligation chat about your needs and we will be delighted to help.