Are You Familiar with the Modern Bridging Loan?
While bridging loans have traditionally only ever been used to “bridge” the gap when one link in a property chain has broken down, the practice of using bridging finance for other purposes has become more common in recent years. This has come about due to a variety of different contributing factors.
For starters, people have grown weary of the lengthy processing times that it often takes traditional banks and building societies to handle applications. As a direct response, a plethora of specialist lenders have sprung up in the marketplace, with certain companies offering bespoke bridging finance services. With greater specialisation in the sector, there is now a far larger range in terms of product choice, with each different product offering its own unique terms and conditions. For buyers who need to complete a deal quickly, these kinds of services can prove to be very attractive indeed, meaning that bridging loans are now used for a wide variety of different purposes.
There's a number of reasons why a bridging loan may make sense for your particular situation. These can include:
Expediting the sale. The ability to quickly draw down funds can equip buyers with the ability to negotiate a more attractive purchase price and speed up the whole process, avoiding the holdups often incurred via traditional funding applications.
Maintaining a position in a property chain. If you find yourself unable to meet your obligations in a property chain (due to a buyer pulling out of a deal or being unable to find one in the first place), a bridging loan can help you to meet the shortfall and maintain your position in the chain.
Purchasing in a property auction. Most auction houses specify that the deal must be completed within 30 days of the auction itself. A bridging loan can provide the capital needed to complete the sale and take ownership of the property, either for residential or refurbishment purposes.
Acquiring a failing business. If the business in question does not possess satisfactory evidence of its future profitability to satisfy the criteria of a conventional business loan, bridging finance can be used to give the new owner the breathing space needed to turn things around and begin turning a profit, at which point the bridging loan can be refinanced into a conventional business mortgage.
Buying a property when funds are delayed. In situations where buyers are waiting on the funds to be released from a separate transaction, venture or source and a delay occurs, a bridging loan can be used to meet the temporary shortfall.
Development financing. Bridging loans can provide the capital necessary for short-term development projects, with the balance repaid after the development has been completed and the property remortgaged or sold. However, this scenario may benefit more from a conventional long-term financing option, should the circumstances permit it.
Development exit financing. In situations where the development project has been completed but not all of the units have yet been sold, a developer may look to use a bridging loan to pay off their development loan from the bank and free up cash to begin their next project.
In addition to the above scenarios, there are also a number of slightly less conventional purposes to which bridging loans are being put nowadays. These include:
Solving a short-term cash flow problem. If invoice payments are delayed or trade receipts are yet to be realised, a short-term bridging loan can help to meet the temporary shortfall in cash flow.
Paying Inheritance Tax. After a bereavement, it’s possible that the payment of Inheritance Tax will be due before the assets of the estate have been liquidated and the funds released. In these circumstances, a bridging loan can pay off the Tax before the beneficiary receives their equity.
Buying a property below market value. Banks and other conventional mortgage providers are often wary of funding the purchase of a property below its market value, even in situations where there are valid extenuating circumstances that justify the under-valuation. As long as a solicitor can provide evidence of those circumstances, a bridging loan can be used to fund the purchase and the ongoing mortgage repayments until such time (normally between six months and a year) as conventional providers are more comfortable with the situation.
Paying unforeseen tax obligations. An unexpectedly high tax bill or unforeseen pecuniary penalisation from HMRC could mean that a short-term injection of funds is needed to avoid further charges or legal ramifications. If you’re able to pay off the loan within a reasonable time period, bridging finance could provide the answer.
Extending a lease. For leaseholders whose current lease is about to expire, a bridging loan can buy the time required for the paperwork necessary to extend the lease to be processed. As before, this would eventually be refinanced via a conventional mortgage after the fact.
Preventing repossession of a property. In order to avoid losing the equity in a property that is about to be repossessed, the owner may wish to refinance the property from their existing mortgage onto a bridging loan. All interest accrued during the period of the loan could simply be added to its final balance, meaning that no repayments are necessary while it is in place. Once the property is sold, the balance of the bridging loan can be repaid and any leftover equity retained by the owner.
One of the primary attractions of a modern bridging loan is the multitude of options that they offer with regard to specific fees and repayment terms. For example, both fees and interest accrued can be paid off during the period of the loan, meaning borrowers can access between 70% and 75% (and, on rare occasions, up to 80%) of the loan-to-value (LTV) ratio at the outset of the arrangement.
Alternatively, borrowers may wish to stipulate that all fees and interest accrued are to be added to the loan itself and become repayable at a specified date. In this case, the value of such expenses would be calculated at the outset and then subtracted from the overall LTV, resulting in a final LTV of around 60% to 65% accessible at the outset. In this way, less funds are available immediately, but no repayments take place until the loan expires.
Other aspects of bridging finance to consider
Early repayment charges. Bridging loans are generally taken out over a period of between one and 24 months. If the borrower wishes to pay off the balance earlier than the agreed timeframe, this is likely to incur early repayment charges. It’s to best to seek professional advice to find a bridging finance provider which offers products most appropriate for your unique situation.
Front-loaded interest in case of early repayment. If the borrower chooses to have their interest front-loaded (calculated at the outset of the loan and repaid at the end), but then decides to pay off the loan before the agreed-upon terms of the loan, any additional interest will be refunded on a pro-rata basis.
Flexibility of terms and conditions. When it comes to bridging loans, most providers operate on a case-by-case basis and each borrower’s situation is assessed on its own circumstances, allowing for greater flexibility than with more conventional forms of financing.
Monthly interest. If the borrower chooses to pay off interest on a monthly basis, it’s likely that the bridging finance provider will conduct an assessment to determine whether they have enough external income to meet those repayments.
Mortgage offer. Bridging finance providers can furnish borrowers with both a bridging loan offer letter and a term mortgage offer letter at the outset of the arrangement, offering the borrower peace of mind that they will be able to access a term mortgage upon repayment of the loan.
The crucial ingredient in assessing the validity of any bridging finance application is the borrower’s ability to prove that they have a credible source of capital from which they can repay the loan. This could take the form of selling or liquidating the asset, remortgaging the loan onto a longer-term product or deriving funds from other external sources.
It should be remembered that an LTV of between 70% and 75% is always secured against the value of the property itself, and that bridging loans comprise a more expensive source of financing when compared to conventional mortgages. However, there are circumstances in which the long-term profitability of the property or project in question makes up for these additional costs, while the availability of up-front cash from a bridging loan can also be instrumental in securing a particular property, whether it be for residential or business purposes.
These features may make a modern bridging loan the ideal solution in certain transactions, but it’s always advisable to discuss the terms of any deal with a qualified professional before committing to it.
So try out our Bridging Loan Calculator today to get an idea of what you can borrow on a Bridging Loan.