As the name suggests, bridging finance ‘bridges’ a gap of some description. They are short-term loans – usually for no more than two years – that are secured against property, and which are normally repaid via one of these methods:
- You sell the property on which the bridging loan was taken out
- You sell a second property to provide the funds to pay off the bridging loan on the first property
- You re-finance the property on which the bridging loan is held, so you instead put in place an alternative, longer-term arrangement such as a mortgage
One of the principal advantages of bridging finance is that the funds might be provided within a few days or weeks, whereas obtaining a standard mortgage might take several months.
Examples of when a property business might benefit from bridging finance include:
You want to complete the purchase of a property quickly. This may or may not involve a purchase at an auction, but it’s certainly the case that you can’t wait for the standard mortgage application process to complete. It’s possible that, once your loan is in place and you own the property, you might want to carry out some refurbishments, especially if you intend to let the property to tenants. In these circumstances, you can apply to borrow an amount, via a bridging loan, that will cover both the purchase price and the expected cost of your renovations. You might then take out a longer-term buy-to-let mortgage at a later date and use this to settle the bridging loan.
A standard mortgage lender is likely to believe that the property you wish to purchase is ‘uninhabitable’. This might be because of structural deficiencies, or because it doesn’t have running water, or doesn’t have a kitchen. You wouldn’t be able to obtain a normal mortgage in these circumstances, but you might still be able to obtain a bridging loan. Once you have acquired the property in this way, you would then carry out the necessary renovations to make the property habitable, and then re-finance to a standard mortgage.
You are undertaking a property development project and have taken out a number of loans during the course of the project. You decide to consolidate these borrowings into a single bridging loan, which you intend to repay when the development project is complete when you would sell the property.
You wish to purchase an area of land but planning permissions have not been secured. You recognise that many types of finance are out of the question due to this lack of planning permission, but you can see that the land has considerable potential. However, you can still obtain bridging finance on land that doesn’t have planning permission. You, therefore, take out a bridging loan until such time as planning permission has been obtained. You would then either sell the land for a profit or carry out your own development project on the land.
You have completed a development project, and a sale of the property is pending. However, you wish to raise capital for your business in the meantime. In these circumstances, you can raise the capital amount you require via a bridging loan, which will be paid off using the sale proceeds when you receive them at a later date.
You wish to purchase a property, carry out improvements and then sell it a short time later at a higher price.
You are planning to re-locate your business or undertake some other significant business project. To fund this, you take out a bridging loan and offer a property owned by the business as security for the loan. Once your business starts to see the financial benefits of the re-location or other project, you are able to repay the loan.
Bridging finance lending was once largely confined to high street banks. However, recent years have seen a number of specialist bridging lenders enter the market. At Funding Bay, we have access to a large number of bridging finance providers.
Before you take out bridging finance, it’s important to understand the way it works, as some of its particular features are unique to this form of lending:
- Bridging finance can be ‘closed’ (with a defined term) or ‘open’ (where the repayment term is open-ended)
- It can be arranged as either a first or second charge
- The interest rates – which are usually quoted as monthly rates – will probably be higher than for a standard mortgage. A typical rate might be between 0.5% and 1.5% per month, and the rate could be fixed or variable
- You don’t usually make monthly repayments, and would instead repay all of the capital and interest in one go when you exit the arrangement
- There are often a number of fees to pay, such as exit fees, arrangement fees and legal fees
- If you fail to repay the loan, the lender can re-possess the property