Bridging Loans Explained
What's a bridging loan?
Bridging loans are a form of short-term financing typically offered over periods of between 1-18 months. They’re used to finance the gap between the need to pay for something quickly & waiting for other funds to become available through the sale of something else.
This type of lending is most commonly used to fund an individual’s property needs amongst the real estate market where they may be seeking funding to buy a house for example, whilst waiting for the sale of another to go through.
Bridging finance can be used for lots of reasons but most commonly used for buying properties, developing or refurbing properties, buy-to-let investments, tax bills, business ventures & divorce settlements. Bridging loans are also used by those in the property development business who need to make large secured payments at short notice such as auction purchases.
How does bridge financing work?
Unlike the conditions of banks (who focus on credit ratings) bridging loans is a type of secured financing, meaning the borrower must have a high value owned or partially owned property or land to put against the loan.
Because of this difference, the application process is also usually much swifter, with lenders paying out in as little as several days, making them a popular choice for those in a fast-pace sector.
Finding & comparing bridging loans can be difficult but understanding the different types of bridge financing is the first step in ensuring you get the best deal for your needs or venture.
Regulated & Unregulated Loans Explained
The term ‘regulated’ when talking bridging loans refers to a loan which is regulated by the Financial Conduct Authority (FCA). The aim of the FCA is to not only protect consumers from unscrupulous lenders but to enhance the integrity of the industry whilst promoting healthy competition in the interest of consumers.
When applying for regulated finance you can expect a more detailed discussion around your current circumstances & what your goals for the end of the term. It’s important to do this as otherwise you risk not fully knowing whether the particular loan type in question is the right option for you and given the cost of this kind of lending it’s important to get it right.
Whilst unregulated loans may seem less favourable because of the reduced FCA involvement, they aren’t as scary as the definition suggests. Generally speaking the FCA only regulates industries where consumers are deemed to be more vulnerable such as residential or personal enquiries by individuals, which is not the case with commercial finance for example as this is typically sought after by that of a limited company who are therefore not deemed as ‘vulnerable’.
Currently, all commercial bridging finance is unregulated, meaning the FCA extends no protection or supervision to this area of the industry. If you’re securing a loan for an investment property, a commercial building, or for a buy-to-let it will typically not be regulated.
Currently, over half of the bridging finance industry is unregulated, so it’s the normal situation rather than a rarity.
Taking out an unregulated loan just requires you to, like any financial commitment, do your due diligence in order to gain clarity of total charges, and the terms and conditions of the lender in question in order to avoid any expensive surprises.
Commercial Loans Explained
Commercial loans (as the name suggests) are most commonly unregulated loans secured against a commercial property.
This type of bridge financing is used to secure required funds at a faster rate for purchase or in fact release funds from an already owned property.
For example if you were looking to purchase a commercial property under auction conditions which had to be completed within a calendar month, obtaining a commercial mortgage would be a struggle to say the least. However using a commercial bridging loan, the borrower would be able to use this to fund the purchase in a timely manner.
Developmental Loans Explained
Developmental bridging loans form the base of what most property developers use to fund different large scale projects. For example if a developer owns a site complete with council planning permission to build a block of flats they could use a developmental bridging loan to not only spread the costs for themselves or the company over the duration of the build but gather the funds needed to complete the project more quickly & efficiently.
The loan is fully paid off after the term length through either the sale of the flat block, individual flats or by moving the debt onto a longer term finance agreement such as a commercial mortgage.
Residential Loans Explained
A residential loan is a shorter term, interest-only bridge financing option generally used to help an individual meet a pressing financial need when dealing inside the property market. The applications are more commonly decided against the value of the property in question & the planned exit strategy rather than one’s ability to actually meet any payments.
Say you have had an offer accepted on a new house but the buyer for the first unexpectedly dropped out, a residential bridging loan would enable you to proceed with the already committed purchase of the new residence without having sold the first yet.
This means you can temporarily fix the broken chain of sale & pay off the loan in full after another buyer has been found.
Auction Finance Explained
Auction financing is a type of loan used for buying properties at auction, designed specifically to complete a transaction quickly whilst keeping in line with the requirements of the auction house.
Auction purchases generally have to be completed within 28 days & in most cases, sourcing a conventional mortgage (especially if the property is inhabitable) can’t be arranged to meet these requirements in time.
Therefore anyone intending to purchase a property at auction can obtain an auction loan to pay the outstanding balance after paying the 10% deposit & auction fees have been paid at the venue to keep in line with the legally binding requirement of paying off the auctioneers.
This allows them to maintain their legal commitment the set time frame whilst refinancing the debt for a longer period of time elsewhere.
For example, someone attends an auction with the intention of buying in their local area & knows that because of its condition (if bought at the right price) could turnover a good profit.
Then here they could contact a bridging loan company to advance the balance of the purchase so it is done in line with the 28 day terms of the auction house.
Refurbishment Loans Explained
Refurbishment loans are a form of short-term financing given to property investors & landlords looking to upgrade a tired residential or mixed use property before renting it out to tenants.
Much smaller than that of developmental loans, refurb finance is either deemed a ‘light’ or ‘heavy’ refurb & bridging loan companies most commonly structure them to provide the required funds in two installments for the borrower.
Light refurbishments include changes such as new bathrooms, kitchens, new windows, rewiring or redecorating whereas heavy refurbishment refers to changes to a property structurally (perhaps knocking down a wall) which will also require the involvement of planning permission & building regulation.
The lender will issue an initial advance based on a percentage of the price the property was purchased for with the balance released post works & re-inspection. The full loan amount is determined by the project value of the improved property once the renovation has been completed.
For example if an investor buys a property for £200,000 & intends on spending a further £50,000 refurbishing it to increase its value to £300,000, the lender will agree to a sum of £210,000 (70% of the property’s end value).
Initially the investor will receive £140,000 (70% of purchase price) & the other £70,000 will be advanced to the borrower once the work has been completed & inspected providing a nice lump sum of £30,000 profit.
Farm/ Agricultural Loans Explained
Farmers can profit a huge amount from using bridging loans to invest in themselves & in turn help boost cashflow. They can use additional bridging finance to perhaps purchase more land, buy new machinery, diversify their offerings, restructure or make repairs & improvements on outbuildings. It is not just farmers who use this type of loan however, anyone with a large enough space of land can benefit from this kind of offering.
Growing a farm business can mean an economy of sale, but too often farmers find banks simply too slow to approve large scale, agricultural borrowing.
Therefore a bridging loan can help cover the funds needed especially in a line of work where people are subject to facing inevitable face fluctuation income due to weather & shifting markets. Because of these reasons farm financing has become a popular option for those in the agricultural sector.
Refinance Loan Explained
Refinancing or re-bridging loans are used to refinance an existing bridging loan should an individual be looking for better rates or indeed if the loan is reaching the end of its given term.
Investors & borrowers typically explore this form of financing if they believe they could save money moving the loan to a lender with a lower rate or if the repayment deadline is coming to end but the need & requirement for the funding still remains.
The cost of refinancing a loan like most applications is entirely dependent on the circumstances of the borrower.
How do I choose the right loan?
Before you start to begin comparing bridging loa options it is important to think about several factors which will in turn affect the type of loan you’ll be able to take out. These include:
- How much you need to borrow: Bridging finance offers loan amounts of as little as £10,000 all the way up to £10 million & beyond.
- How much the asset you have is worth: This will dictate how much you’ll be able to borrow as well as the kind of rates you’ll have.
- The duration of the loan: Bridging finance offers arrangements as short as a month or as much as 2 years.
- Whether there is a mortgage on the property: This will also affect your available loan amount.
What fees can you expect when using bridging loans?
This part of the process is entirely dependent on the circumstances of the loan but interest is not the only fee to expect using bridging finance. There are some others that a borrower may come across including:
- Arrangement or facility fees
- Exit fees
- Admin/ repayment fees
- Legal fees
- Valuation fees
- Broker fees
But as you’d expect amongst healthy competition these fees vary from lender to lender but our team is on hand to help explain any complex terms & conditions to help you decide the best loan for your needs. Complete our quick & easy bridging loan calculator or get in touch with us today to discuss your options.