Bridging Finance is simply a short term loan used to purchase land, residential and commercial property quickly, until you are able to arrange a longer term financing option. Whilst most bridging loans are available for up to 12 months, a number of lenders will provide financing up to 18 months.
Bridging Finance Key Points
The loan is secured
Unlike other forms of business or alternative finance, property finance are secured against a property and bridging is no different. The lender will want to ensure that if they lend you money to buy a property that they can always get their money back if they had to repossess it for any reason.
Most lenders will offer loans up to 65% for a commercial investment property and up to 75% on a residential investment property. Check out our guide to bridging loans.
Arrangement fees, exit fees and interest rates
All Leeds Bridging Finance deals that we offer are interest only which means that you are not paying any of the initial advance back and this why these loans are considered short term solutions.
Interest can be rolled up which means that you would not be servicing the loan repayment each month so that in effect, you will have no money to pay back each month. Interest rates start from 0.55% a month.
There is usually an arrangement fee (sometimes known as a facility fee) charged by the bridging lender which is usually in the region of 2% and again, this can be added to the advance. Some lenders will also charge an exit fee which means that when you redeem your loan, you will be charged a fee for doing so and this fee will usually come out of the sale proceeds or re-financing.
Types of property and locations
All residential and commercial property will be considered in mainland UK including office blocks, factories, hotels, pubs and similar. We can even fund nursing homes. Of course, being a West Yorkshire based brokerage, we focus on Leeds, Harrogate, Dewsbury, Bradford, Wakefield, Huddersfield and Halifax but we do have clients all over the country.
The average bridging loan in the UK in 2016 is approx.£255,000 according to the trade body, the NACFB. However, the minimum loan for all the lenders we deal with is £25,001 and the maximum loan is £25m but most will cap their loans at £5m.
Is Bridging Finance regulated?
Yes and no. If the loan is for a residential property that the client, or an immediate family member intends to live in, then the loan is regulated. If this is not the case and the client is buying the property to refurbish and sell on, then this will not be regulated. For any commercial usage building such as offices, these loans are not regulated.
Bridging finance is fast with most loans being completed within 2/3 days. Some lenders will not even ask for a valuation to be carried out and as long as the Solicitors representing both sides (the lender and the client) are in tune with each other, the deal will pay out quickly.
They can be expensive because whilst some lenders will charge between 0.55% and 15 a month in interest, for more complex deals, rates can go up as high as 1.75 a month.
You also need to consider an exit strategy so that after your loan reaches the end of the term, usually after 12 months, you must either sell the property or arrange longer term financing with another lender.
Access to Funding
We deal with over 200 lenders and rather than you having to go to each one to find the right deal, we will do that for you as we have built up some excellent lender relationships over the years.
Typical uses of short term finance
Short term property loans can be used for:
- Refurbishing or renovating a commercial or residential property
- Capital raising
- Land acquisition – with or without planning permission
- Avoiding bankruptcy
- Buying a property below market value (BMV) with no money down
- Breaking a chain in a residential house purchase
- Buying a property at auction
- ‘Flipping’ a property for a quick profit with no money down
- Building a property portfolio
Bridging Finance Key Questions
What costs are involved?
The lender will charge a valuation fee and legal fees and usually these fees are upfront. Costs will vary from lender to lender and will depend on the property purchase price or valuation. In addition, our lenders will charge an arrangement fee of 2% of the loan advance. and this rarely deviates.
However, this will usually be deducted from the loan advance on completion of the loan process. No A1 Commercial Finance deal will ever attract an exit fee as we don’t believe in them and even on development finance, we never see them charged.
What if I have bad credit?
Not a problem. Whether you as an individual or your company has CCJs, defaults or arrears, there are a multitude of lenders who will still lend to you. Adverse credit is not as much of an issue in bridging or short term funding simply because the loan is assessed against the asset (house or land) and not the individual applying for the loan.
You can even apply for a bridging loan if you have previously been made bankrupt.
Bridging Loan Repayment Options
- Client makes interest only payments, paid monthly in arrears
- Most lenders will consider providing a fully rolled up facility, enabling the client not to have to make monthly payments each month and this will undoubtedly improve cash flow. Rolled up interest is paid on redemption of the loan which is typical of a bridging or development finance.
- To assist clients who do not wish to make payments from their own resource we will also retain any number of months’ interest and on redemption, any unallocated interest will be refunded.
Are there any risks involved with Bridging Finance?
Of course, Bridging Finance is more expensive than a conventional mortgage and is considered as a short-term funding option. It is essential that a clear exit strategy is in place to ensure the loan can be repaid (either via sale or refinancing of the existing bridging loan) to avoid paying high penalty interest rates and possibly losing the home to repossession if the loan cannot be repaid.
What is a Regulated Bridging Loan?
A regulated bridging loan is where the borrower or a family member will reside in the subject property and accounts for just 3% of all bridging finance completions.
First charge bridging loans (like the ones noted above) are regulated by the FCA’s Mortgage Conduct of Business rules, while second charge mortgages fall under the FCA’s Consumer Credit rules.
The divide in FCA regulation of first and second charge mortgages is due to change with the implementation of the Mortgage Credit Directive in March 2016, when second charge mortgages are set to fall into the same bracket as first charge mortgages.
Bridging finance can be an excellent way to start your property empire but it is important to note that it is not without its dangers, particularly if you are inexperienced in financial matters relating to property.
A bridging loan is not the same as a residential mortgage as it is a short term loan, not a long term finance option and it comes with a completely different fee structure.