What are Bridging Loans ?
Bridging Finance is used to provide short-term finance to enable the purchase of a property or the release of funds based on equity in a property. People think of it as a super-fast way of raising finance but in reality the majority of loans take at least a month or more to put in place.
How do they work?
Loans are normally in place for 3 to 24 months with an exit through sale of the property or into a more conventional loan such as a buy-to-let or commercial mortgage depending on property type, and we can help put this in place or get to agreement in principle at the outset.
Bridging finance is a relatively new industry, mushrooming since 2018. It is highly remunerative for the lenders because it is expensive debt relative to a long term mortgage, they require good security and typically net out at an LTV around 50-55%.
Bridging finance is normally provided as a loan secured against property. We have seen some flexible credit facilities but these are not typical.
Bridging finance providers will often require personal guarantees in addition to the property security, and they will want to know if you are a homeowner and whether you have a personal mortgage.
How does interest work?
The key thing about bridging facilities is to understand what the interest options are. Typically that the interest is either “serviced” or “retained / deferred”.
A serviced facility means you are servicing the interest as you go along, i.e. paying it monthly in arrears which is how normal loans are structured. Some lenders don’t offer this as an option.
A “retained” or “deferred” facility often means the. initial loan amount you sign up for includes the interest you would be paying for the facility for the amount of time you envisage having it.
As a borrower you need to understand whether the interest is added monthly to the loan amount or added in whole at the beginning of the loan – this latter structure is a pretty unattractive option and
if we are helping you source finance and you want to defer interest payments we would start with lenders where interest is added monthly.
Deferring interest is pretty common for property transactions because the borrower knows that they don’t have to find funds to service the interest in the life of the loan. If you bought a “doerupper” at auction using bridging finance you could concentrate on getting the work done on the property as quickly as possible and then exit to a cheaper longer term loan (or sell the property) based on the increased value from the works you have undertaken – all the time not worrying about meeting the monthly interest.
Net and gross loans
This is where the concept of “net” and “gross” loan comes in – so say your property purchase is £100k and you want to borrow as much as possible to do it up over the year and then sell it. The lender might say they lend a maximum of 65% LTV – so you might think you will get £65k as a loan, however you have to factor in the interest and fees. The “gross” loan might be £65k but if you estimate 1% per month interest that’s £12k out of the pot, together with say 3% arrangement fees
(£1950) a monitoring fee, a valuation fee, legal costs and everything else (say another 3% or £1950) you are looking at a “net” loan i.e. what you actually receive to complete the deal would be £65k minus £15,900 which is £49.1k.
Our advice is not to enter into a bridging transaction without a clear idea on your exit, they are not cheap and should be seen as a temporary or transitional measure.
If the exit is to a lender on a refinance, where possible you should have an agreement in writing that the go to lender will take you on as a customer. Some lenders are very good at this and we can help you find one.
With bridging finance it is essential to read the small print and you may want to take advice from your accountant and solicitor before entering into it.
Where bridging loans can become problematic is if the works or requirement for the funding runs on longer than expected and the deferred interest builds up to a level that the funder cannot support. Extending a bridging loan can be expensive, and porting a bridging loan from one bridger to another will be expensive. If you need to extend your loan or borrow more you could find that the existing lender is your only option because there are not many alternative funders that will refinance an existing bridge.
Your property is at risk and if you have given a personal guarantee you could be personally liable which could extend to recovering monies from you, this could reach as far as putting your home at risk.