20th March 2018

Your Guide to Bridging Finance

QikBridge

Editor, Bridging Finance

Unlike the loans from high street lenders bridging finance isn’t an off the self product. QikBridge has put together this guide to help you better understand bridging and it’s uses.

What is Bridging Finance?

The term bridging finance refers to short-term loans, which are usually used to ‘bridge’ a gap while the borrower secures alternative funding or a sale.

Bridging loans are usually offered for between 1-18 months, with the loan repayable in full at the end of the term.

With bridging finance interest is often rolled into the loan, meaning there are no repayments to make during the term of the loan.

The application process is usually far simpler than seen with other finance options and completions can happen quickly – this can be as quick as 2 days from application but usually within 4-14 days.

In recent years bridging finance has gone from being viewed as a niche product, often used as a last resort, to a multi-purpose form of lending.

In the year to June 2017, gross bridging lending amounted to £4.3bn, providing considerable support to the UK property market.

Types of Bridging Loans

Closed Bridge

A closed bridging loan is a loan that has predetermined exit strategy. In other words, the lender will have been informed of the date and the method in which the customer will be repaying the loan before the funds were released.

Open Bridge

An open bridge is a loan with a proposed but not definitive exit strategy in place. These have become increasingly common as very few bridging loans these days have a guaranteed exit.

How Much Can I Borrow?

The amount that can be borrowed depends entirely on the lender and the borrower’s circumstances.

The minimum loan size is typically £10,000 and the maximum can vary from one provider to another with some lenders offering loans well in excess of £10,000,000

How Long Can I Borrow For?

Lenders will typically expect a bridging loan to be paid back within a maximum term of 12 months.

As this funding option has a higher rate of interest than standard/normal mortgages, it is practical to have a shorter time frame in place to repay the loan.

When Can Bridging Finance Help?

Uses for bridging finance are numerous. We look at some of the more common reasons below:

Buying at Auction

You want to buy a property at auction – which requires the buyer to complete the sale within a set time period.

This can be up to 28 days but some auction houses will require completion within an even shorter amount of time, often 14 days.

Obtaining the funds from a mainstream lender within that time frame is often impossible. Bridging finance can help you to access the funds quickly and easily – often within 48 hours – meaning the transaction can be completed on time.

Buy-to-let Purchases

Recent changes to buy-to-let regulations have seen high street banks continue to tighten criteria.

Bridging finance can help both new landlords and those with large property portfolios bridge a short-term gap, whilst a long-term financial solution is put in place.

Second Charge Lending

When looking to raise capital quickly, perhaps to complete on a business deal, many business owners often face a delay in receiving commercial finance from their bank.

With second charge bridging, as long as you have a property, you are able to use this as security against a bridging loan.

This allows you fast access to funds to fill the short-term gap, whilst the necessary commercial finance is put in place, thereby helping you to grow your business by providing the necessary cash injection.

Self-employed borrowers can also find it difficult to raise capital because they are classed as non-status. Bridging finance, however, is lent against the value of a property so this is not a problem.

Refurbishment

When looking to purchase a property that is deemed unmortgagable due to structural issues, or a lack of what is deemed as basic requirements (a kitchen or bathroom for example), bridging finance can help.

High street lenders usually view such properties as too high risk to be mortgaged. Bridging finance can enable you to purchase the property and make the necessary renovations before seeking mainstream finance.

You may have a property that could be a lucrative investment once refurbishments are carried out. With a bridging loan the necessary funds can be advanced quickly so that renovations can begin.

Bridging Finance in Use

The Homemover

A borrower is ready to move property and exchange but is still awaiting the sale of their existing home. The borrower is in need of the funds locked in their current property to buy their new home.

Through the use of bridging finance the borrower can obtain the amount they need to purchase their new home with a loan secured on their first home. The exit from this bridging loan is the sale of the first property.

Overall the borrower has managed to ensure they did not miss out on the property they wanted whilst extending the period of time they had to sell their existing home.

The Developer

A developer has found a large house they would like to convert into a House of Multiple Occupation (HMO) to rent out post-completion.

A bridging loan allows the developer to access funds quickly to purchase the property and start the conversion. By using bridging finance the developer has been able to speed up the process considerably when compared to the time it would have taken with a high street lender.

The loan is supplemented by the developer themselves and makes up approximately 60% of the overall costs.

Once complete the developer is able to refinance onto a long term deal and pay off the loan.

The Business Owner

A business owner has the opportunity to secure a large order for the manufacture of vehicle parts.

However the order needs completing quickly and requires additional tooling to speed up the process.

Through the use of bridging finance a loan can be secured against either the business premises or the owners own property.

The use of bridging finance allows the business to access the funds required quickly and tool up for the job. The exit of the loan comes on completion of the order which provides the funds to clear the bridge.