What is Bridging Finance?
Bridging is a type of short-term finance, typically spanning anything up to 12 months. It has a variety of uses, such as an aid to cash flow, but is primarily used to fund a gap in between property transactions. These loans can be arranged and drawn down in days, where traditional term loans could take weeks.
In order to secure Bridging Finance you must have an exit route, which is the term used for a defined repayment plan. This could be anything from the sale of a property to an offer for a term loan.
For example: You may have found a new home that you are looking to exchange contracts on quickly, but are yet to find a buyer for your current residence. A regulated bridging loan would “bridge” the gap between the purchase and sale, allowing you to purchase the new property straight away. The “exit” for this loan would be the sale of your original residence.
Short-term finance can be a valuable asset in a range of situations:
When purchasing from an auction, buyers have just 28 days to complete the purchase of the property. The speed in which bridging finance can be completed makes it a good option for auction purchases, with an exit route via sale or refinancing onto a term product.
When a client is involved in a property chain that has fallen through due to one member of the chain withdrawing, bridging finance can be used to salvage the rest of the chain and enable them to still progress with the purchase of their new property.
Land or property could be used as security against a bridging loan (by way of a first or second charge), the client can raise capital for almost any legal purpose in a short timeframe.
Many landlords/investors are progressively using short-term finance to quickly turn around transactions. Securing a bridging loan in a matter of days can make all the difference for purchasers to act quickly when finding a suitable property.
Bridging finance could be used as a top-up product for development funding. The extra funds could aid the development process, allowing the developer to meet the next conditional stage of their plans. It’s also useful to secure a purchase before planning permission is in place.
Product Panel Highlights Highlights
- Up to 80% LTV
- Up to 36-month term
- 1st and 2nd charge accepted
- Commercial, residential and land
- Property, luxury asset and unsecured options available
- Up to 100% of purchase price available
Examples of use
- We were approached by a client who had been let down by a “mainstream” bridging lender on the day the case was due to fund. The case had complicated income issues, and was a second charge on the main residence for a lease extension, investment into a business and new buy-to-let purchase.
The lender raised a number of questions and required additional evidence on the day the borrower had committed to purchase the lease extension. We took the case over at 11:00 and had it funded by close of play the same day.
- We were recently approached by a client looking to purchase a former manor house in Liverpool for £640,000. The client intended to convert the property into 14 apartments to sell once completed. We managed to obtain a loan of £480,000 for 9 months to facilitate the purchase.
- Second charge across three properties to raise funds to purchase a new plot, and to obtain planning permission, at which point the loan will be redeemed by development finance. The loan here was £1m.
Key terms explained
- LTVA common calculation of debt and equity: loan amount divided by the property value.
- Bridge-to-letA type of bridging finance followed by a buy-to-let with the same lender. This process typically has lower fees than two separate transactions.
- Regulated transactionsAny case involving the residence of the applicant is typically a regulated transaction. The Financial Conduct Authority have placed stricter criteria around these transactions to safeguard the customers involved.
- Term loanA term loan is a fixed loan amount that is expected to be paid that adheres on a fixed schedule. A monetary loan that is repayed regularly, over a set period of time.
- Exit routeThe means of paying off a bridging loan.
- Unsecured loanA loan secured against the credit of the applicant, rather than property collateral.
- AVM Automated Valuation Model uses mathematical modelling, as well as a property database to determine the value of a property without visiting it. The sale of previous properties and the area, historic fluctuation of pricing and house specific details provide a fairly accurate valuation for a fraction of the cost.
- Light refurbishmentAs a general rule, light refurbishment does not alter the structure of the property, and involved work costing less than 15% of the property value.
- Heavy refurbishment(Also known as renovation use of funds) Usually refers to altering the property’s structure. Extensions and demolitions are usually grouped into this category as well as work costing more than 15% of the property value.
- Draw downThe point at which the funds are released to the customer.