Bridging loans are more popular than ever with the total estimated demand for bridging loans sitting at over £4 billion annually. More people are making use of this short term financial resource as traditional mortgages from high street lenders are harder to secure and the application process can be long and rigorous. Bridging finance has become a popular way to inject speed and flexibility into property transactions and is now utilised for many different purposes to great effect.
Bridging loan providers underwrite purely on an asset basis and its typical for interest costs for the loan to be added to the opening balance., This means that so long as there is enough equity within the property and there is a clear strategy to repay the loan, bridging loan lenders unlike many of their mortgage lender counterparts do not concern themselves with affordability stress tests or income verification.
We have mentioned already the importance of a borrower having a clear and plausible plan to repay the bridging loan at the end its term, bridging loans are by design a short-term financing solution and as such attract a higher interest rate than that applied to a traditional mortgage – it is certainly not in the interests of borrower nor lender for a client to retain a bridging loan for an extended period.
Once the bridging lender is satisfied that they have ascertained the true value of the asset(s) and have satisfied themselves that a borrower’s exit strategy is viable, there are a multitude of beneficial and popular uses for bridging loans.
Obtaining a bridging loan for property development purposes is one of the most popular reasons for taking out loans of this nature. In the property development sector, speed is very much of the essence and in order to secure a good viable project within a competitive environment, purchases often need to be made quicker than those for homes or other properties. It is common for land or property to be acquired prior to a planning application being submitted.
Some traditional development lenders wish always to test the full development value of projects pre-development which often prevents them from being able to do so where planning approval is absent or is being amended. Bridging loans can be granted on the value of the project as it stands today and can be arranged with speed.
Developers can secure the loan against the site they are looking to acquire or mixture of other assets they own on a first or second charge basis. Once planning has been granted – as well as an uplift in value as a consequence, the developer is free to refinance the bridging loan onto an appropriate development finance loan for the specific project.
Refurbishments and Conversions
Bridging loans can also be used to purchase property that is in a dilapidated state of repair or requires modernisation before being sold on or being eligible for refinancing onto a traditional buy-to-let mortgage if the property is to be retained (paying off the bridging loan in the process.)
Chain Breaking Finance
This refers to circumstances where one of the ‘links in the chain’ of a property transaction pulls out, potentially leaving the other parties in the chain of purchases and disposals unable to proceed. This is a difficult yet common position and very stressful for those that have ‘lost’ their buyer.
In instances where there is sufficient equity across the property that you are selling as well as the one you are buying, it is possible for you to continue with the purchase of your new property using a bridging loan. In cases like these, a bridging loan covers the amount you need to pay to acquire the new property whilst you find a new buyer for your property.
This would be an open bridging loan as there is an exit strategy in place [the sale of a property to pay off the bridging loan] but the timeframe is not yet determined. Similarly, one could use the same structure in instances where your property is taking longer than expected to sell in both these cases, once the initial property is sold, the loan is repaid.
Bridging Loans for Business
It may be the case that a borrower needs equity to inject into a business venture (new or existing) but it is experiencing difficulties in arranging finance by traditional means. In these cases, bridging finance can be considered but as with all bridging loans, a plausible pre-determined method of repaying the loan must be evidenced.
Loans for business purposes can be secured on commercial or residential assets on a first, second or less commonly a third charge basis. In cases like these, bridging loans can be taken out to cover the short term needs of the borrower and their business; to repay debts and then be repaid by the receipt of revenue by the business or by refinancing an asset that the business already owns or has acquired.
Our consultant provided an outstanding service. He is a credit to SPF and is the exemplar of professional and efficient service. We cannot speak highly enough of him and the service he provided.
We would like to highlight that the service provided by your consultant securing our mortgage on our property has been exceptional. We have dealt with brokers in the past but she was a league above.
Her service was swift, knowledgable, reassuring and she found the best product for us whereas other companies had failed before. She was always reachable even when away and made us feel in safe hands throughout the process. We will warmly recommend her to our friends and look forward to dealing with her in the near future on our other properties.