Bridging Finance

Bridging finance, sometimes referred to as a ‘bridging loan,’ provides short term finance for property owners, developers and investors. These loans are often taken out when a property transaction needs to be completed with speed or if the property is in a poor condition. For example, if a property is acquired at auction (auction finance) or in the case of a homeowner who is looking to secure ownership of a new property prior to the sale of their existing home.

In cases such as these, often the transaction will need to be completed quickly or underwritten to a different set of criteria to traditional property loans. We work with some of the UK’s top bridging lenders to secure you the best rates on your loan. We have a wide network and over 20 years’ experience in sourcing and securing loans with the most competitive rates.

Our dedicated bridging finance team have a wealth of experience in securing loans against different types of residential and commercial properties as well as assets including development plots and land.

SPF Short Term Finance has many years of experience in arranging bridging loans and completed over £100 million of loans during 2016. Our multi award-winning team are dedicated to securing the best bridging loans for our clients. We utilise our extensive network of lenders to secure you the ideal finance within the required time frame.

Call Us – 03332 226 687

Email Us – finance@spf.co.uk

What is a Bridging Loan and How Does it Work?

A bridging loan is a short term loan designed to allow a borrower to raise money on an asset or assets ahead of a pre-determined event that will repay the loan – this is normally referred to as the exit. Examples of common scenarios include; a homeowner wishing to purchase a new property ahead of the sale of their existing residence or enabling a property investor to buy a dilapidated property quickly before refurbishing it and selling for a profit.

Loans are also available for business purposes, such as a cash injection or to settle a tax bill. In all instances it will be crucial to demonstrate a plausible repayment strategy by the end of the loan term i.e. sale of property or assets, a liquidity event such as sale of a business or bonus payment. These loans are suitable for property owners across the board including homeowners, developers and property investors.

Example 1 – A homeowner who is selling their primary property to fund the purchase of a new property may take out bridging finance. If the homeowner hasn’t secured a buyer for their current property or if their current property’s sale is going through but will not be completed in time for them to complete on the second property, a bridging loan fills the void until they have sold the first property.

A bridging loan can be arranged across both properties even if the existing property already has a mortgage secured upon it, this will only be possible where there is sufficient equity within the two properties. Upon the sale of the first property, the property owner will pay off the bridging loan with any residual mortgage borrowing arranged by way of a traditional term loan mortgage.

Example 2 – A property developer has identified a property in need of modernisation; the speed in which they need to move to secure the property as well as its condition means that traditional Buy-to-Let mortgage finance is not viable. A refurbishment bridging loan is arranged based upon the assessed value of the property. This loan is arranged quickly which enables the property developer to purchase the property ahead of other interested purchasers. They then refurbish the property before either selling it to realise their profit or refinancing the bridging loan onto a Buy-to-Let mortgage and letting the property.

Open Bridging Finance

Most bridging loans fall into this category. Open bridging finance is when there isn’t a totally definitive exit strategy in place when the loan is taken out. This effectively leaves the loan ‘open’ with no time limit or strategy set upon that would allow the borrower to pay off the loan in full; for example after the sale of a property or another asset. This can occur for example when a bridging loan is taken out and the borrower is waiting for the sale of a separate property to compete in order to pay off the loan.

Closed Bridging Finance

This is an ideal scenario and where there is a clear and defined exit strategy in place. In the case of a closed bridging finance arrangement, the borrower will have an exit strategy in place and they will know how and when they will exit the agreement with the lender. In these cases, an agreed date can be set between the borrower and the lender. This may occur when the sale of another property or an asset that will be used to clear the loan is already agreed upon, yet the borrower is looking to speed up a transaction.

Whether the bridging loan taken out is open or closed is likely to have an effect on the amount the borrower will be allowed to borrow, the amount of time the loan will be permitted over and the interest rates and charges of the loan itself. Lenders will prefer it when there is a clearly defined exit strategy in place for the loan in question.

Property Bridging Finance – Legal Charges

In order to take out bridging finance, you must own at least one property, as the loan by its very nature needs to be secured against a property. Bridging loans can be used both to acquire additional properties as part of an expanding portfolio and for single property owners who are looking to use the loan to help fund and speed up the purchase of another property.

Depending upon the circumstances, the loan taken out will either be a first or a second charge loan:

First Legal Charges – This refers to the principle loan secured on a property, for example the mortgage. In the case of a first charge loan, the lender of the loan and the loan itself will take precedence over any others. The lender will usually set a ‘maximum threshold’ which is the maximum amount of the property’s value that they will lend to the property’s owner; the ‘Loan to Value’ (LTV). For example, a lender may only lend say 70% of the property’s value. This leaves them the space to recoup any losses through the outstanding equity in the property should the borrower default on the loan.

Second Legal Charges – These are loans that are secured on a property that already has a loan or mortgage secured against it, making these more complex than first legal charges. If after taking out a first charge loan there is enough equity left in the property, a second charge loan can be taken out so long as the lender of the first legal charge agrees to it.

Interest Rates on Bridging Loans

Interest rates on bridging loans are higher than those for traditional mortgages. This is because bridging loans are taken out over much shorter periods of time as a short term finance option. Also, due to the increased risks involved with bridging finance, and the requirement for them to be much quicker than typical mortgages, lenders will offset the increased degree of risk through slightly increased interest rates.

However, taking out a bridging loan is hugely beneficial for many people and the perfect solution when looking to purchase another property, injecting speed into the process.

Much in the same way as a traditional mortgage, the interest rate on each bridging loan varies in nature. Interest rates can be either fixed, meaning the borrower pays the same amount of interest each month over the entire term of the loan, or variable. Variable interest means that the interest rate on the loan is subject to changes over the course of the loan.

Retained Interest

Retained interest bridging loans, such as those that we help intermediate have the advantage that the borrower does not need to service these loans on a monthly basis. When a loan with retained interest is taken out, the lender will add all of the interest and any additional charges onto the loan. This is a convenient way to take out a bridging loan knowing all of the costs and interest payments up front.

Get in Touch for the Perfect Bridging Loan

We have a dedicated and experienced bridging finance team who will help you secure the bridging loan that you need. With over 20 years of industry experience and a wealth of knowledge of the bridging loans industry, we are sure to find you the best loan from across our extensive network of lenders.

Call Us – 03332 226 687

Email Us – finance@spf.co.uk

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