How to apply for Bridging Finance
In this straightforward guide to applying for Bridging Finance, you'll learn whether you qualify, what information the bridging loan company will require from you, how to complete the application and the documentation you'll need.
Given the large sums of money involved and the fact that your property may be at risk, It can be daunting to apply for a bridging loan. Armed with a little knowledge of what's involved, you'll be able to move forward confidently with your bridging finance application.
Do I qualify for Bridging Finance?
In order to apply for bridging finance, you’ll need to qualify for a typical lender's criteria.
What are the typical lending criteria for bridging finance?
You need a high-value fixed asset, Typically PROPERTY
Bridging finance lenders require you to have some form of fixed, tangible asset against which to borrow. Most commonly, this is a property, either residential or commercial property or land. Technically it could also be some other form of other high-value asset. Whilst asset-based bridging loans are available, the more obscure that asset is, the harder it is to raise bridging finance. Alternative forms of finance, such as asset finance, are available for non-property assets, such as supercars, lorries, or boats.
You need equity in your property
Bridging finance companies will lend up to 80% of the equity available in your property, also known as 80% loan-to-value (LTV), subject to certain factors. Factors that influence lenders' decisions are:
- Is the property the borrower's home? For example, does the borrower or their immediate family currently reside in or intend to reside in the property, which categorises it as a main residence? Where the property is the borrower's home, then the type of finance will be deemed as a regulated loan, thus restricting the lending to only those who are regulated by the Financial Conduct Authority (FCA). Conversely, where the property is a commercial property, such as an investment property, the loan will be unregulated. This means the lender is not required to be overseen by the FCA. There are more unregulated lenders in the UK than regulated ones, and the marketplace is more competitive for unregulated lending, leading to more flexible terms, although this doesn't often reduce the bridging interest rate. Brokers seeking unregulated bridging finance are able to access the whole of the market, including private investors and family offices, which are typically unregulated.
- What borrowing is already secured against the property? For example, does the property already have a charge against it such as a home equity loan (HEL), home equity line of credit (HELOC), 1st charge mortgage, buy-to-let mortgage, commercial mortgage, commercial finance or any other loan facility where the borrower has already used the equity as collateral? Where the property isn't unencumbered, meaning it is already used as collateral, then this restricts the lending to only subordinate charges such as a 2nd charge bridging loan. This will reduce the maximum LTV and the amount being lent to a small bridging loan, also known as a mini bridge. 2nd charge bridging loans have a maximum of 65% LTV.
- What is the property that the loan will be secured against? For example, is the property a residential dwelling, commercial unit, semi-commercial unit or land? Additional factors such as location, accessibility, aspect, size, style, age, condition, construction method, restrictive covenants, local planning/building regulations and whether the property is located in a conservation area are all considered and affect the overall lending decision.
How much will bridging finance lenders lend on a residential property?
Bridging finance lenders will lend up to 75-80 per cent of the equity, or 75-80% LTV, that you have available in a residential property where there is no existing lending. For example, if you own a residential property valued at £500,000 and have no mortgage on it, you could potentially borrow 80 per cent of £500,000 = £400,000.
How much will bridging finance lenders lend on a commercial property?
Bridging finance lenders will lend up to 65 per cent of the equity, or 65% LTV, that you have available in a commercial property where there is no existing lending. For example, if you own a commercial property valued at £500,000 and have no mortgage on it, you could potentially borrow 80 per cent of £500,000 = £325,000.
How much will bridging finance lenders lend on a semi-commercial property?
Determining the possible lending amount for a semi-commercial property isn't as straightforward as commercial or residential because the lender will want to know the size of the commercial and residential aspects. As a general rule, the maximum LTV is likely to be higher than 65% LTV but not as high as pure residential lending at 80% LTV.
How much will bridging finance lenders lend on land?
Bridging finance lenders will lend up to 50 per cent of the equity, or 50% LTV, that you have available in land that has no planning for development granted or up to 70% per cent of the equity, or 70% LTV if the land does have planning granted for development.
For example, if you own land without planning permission granted valued at £500,000 and have no mortgage on it, you could potentially borrow 50 per cent of £500,000 = £250,000. With planning permission granted, the maximum you could raise is £350,000.
The total loan amount, also known as the gross loan amount, is the total borrowing, the maximum of which is achievable by the LTV criteria. If you choose a retained or rolled-up interest, this will be included in the calculation for the gross loan, so the actual net loan, which is the money you’ll have paid into your bank account upon taking out the loan, will be less the interest.
Who do bridging lenders lend to?
The criteria of who bridging finance is available to is very broad, and there are many types of people who use bridging loans. Bridging finance is available to companies and individuals, including Private companies such as Limited Companies (LTD), Limited Liability Partnerships (LLP), Special Purpose Vehicles (SPV), Unlimited companies and sole traders. Bridging finance is also available to other organisations, including Trusts, Charities and Social Enterprises. Private individuals also qualify for this type of finance, whether it's a single person applying, a joint bridging loan or a multiple applicant bridging loan.
Ex-pats, pensioners and foreign nationals also qualify for bridging finance, as do newly formed companies. Bridging finance lenders are less concerned about the entity borrowing, even in the cases of non-status credit or bad credit history, that ultimately owns the property being used as collateral and more concerned about the risk of the property itself.
What is the exit strategy for bridging finance?
A bridging finance company will need to know what your exit plan is, which means you need a reliable repayment method. Do you aim to sell your property in order to pay back the loan or to remortgage? Or are you going to buy another property, renovate it and sell it, using the proceeds of that sale to repay the loan? Alternatively, do you have funding due to you in future which will cover the loan, such as an inheritance or the sale of a business?
What you’ll need to tell the bridging finance company
Here is a list of the details you will have to provide:
- Your name, residential address, and how long you’ve lived there (or where you lived before, if less than three years).
- Your residential status, National Insurance number, employment status, job title and nature of your work, length of employment, annual income, dependent children and their ages, additional income, date of birth, nationality, marital status and contact details.
- The amount and term of loan required, whether it will be first, second or third charge on a property, any time constraints. The purpose of the borrowing and the exit plan.
- Details of the property that you’re using as collateral – its address, property type (e.g. residential, commercial, semi-commercial or land), details of any rental income, the number of bedrooms, its estimated market value, any existing borrowings on the property and how much equity you hold in the property, its description, the name and contact details of any sales agent, whether it has been used as a place of residence by you or your family members, or whether you will reside there in future.
- Contact details for your legal representative such as a solicitor, and for any firm of accountants that are working for you.
- Credit history, including whether you have a criminal record, whether any court orders have been made against you or a company you own, whether you have been declared bankrupt, been the subject of an IVA or had any arrears on a mortgage or credit arrangements. If you have borrowed significant sums before and repaid them in good time, this is a positive sign. Make sure you mention this to the bridging finance company and provide proof. Bridging lenders want to understand whether the person borrowing the money will repay the loan. The more a lender understands this to be true, the more likely the loan application will be successful and the lower the bridging loan rates will be.
Bridging lenders don't care as much about bad or adverse credit scores, but they will want to know the overall history of the person borrowing. There are two companies that provide online credit reports that you can download and bridging lenders use, these are Experian or Equifax.
- If you have a company, you’ll need to provide details of its address and contact details, registration number and date, directors’ names, the business type and length of trading, and your percentage shareholding. You may need to submit company accounts to the bridging finance company.
What the bridging finance company will want to know
Once you’ve provided all these details, the bridging finance company will assess your assets' and your creditworthiness. They may ask for the last three months of your bank statements.
Second, they will need to satisfy themselves about the value of the property that you’re borrowing against. This could include a formal valuation of the property by a qualified RICS-certified surveyor. If you have already had a survey done, provide this for the bridging finance company. They may accept this valuation, and it could save you from paying for another. However, the specific lender you approach may require the valuation to be completed by one from their preferred panel of valuers.
Next, the bridging finance company will ask you for the purpose of the loan, whether this is to purchase a property at auction because you’re buying and selling at the same time because you want to develop a property or because you have to pay a large bill and need immediate finance.
Understanding the purpose of the loan is to help the finance company tailor its offer to you. For example, it will give them an idea of how long you will need to repay the loan, whether the money will be used as an investment – which could itself help with repayment – together with the level of risk that the finance company is taking.
If you’re taking out a bridging loan for a business investment, the finance company may want to see a business plan to judge how viable the investment is, along with an exit plan. They want to see that your sums add up and that you will be able to afford to repay the loan when it reaches maturity.
Calculating how much to borrow
When you take out a bridging finance loan, you need to factor in all the fees, interest payments and incidental expenses that you will need to pay from the amount you borrow on top of the cost of the asset that you’re buying.
So, for example, if you’re buying a property for £400,000, you might need to borrow £450,000 to cover the property itself, plus the application fee, survey fee, legal and administration fees, along with the interest payments, which could be between £20,000 and £40,000 over the course of 12 months by themselves.
It’s important to go into discussions with bridging finance companies with an awareness of these figures so that you’re prepared and ready to agree on a transaction.
Potential hurdles
As a basic starting point, make sure you have all the above documentation to present to the bridging finance company. This makes everyone’s life easier and allows the process to go ahead more quickly and smoothly.
If you’re living, or planning to live, in the property that you’re buying, you’ll need to take out a regulated bridging loan. This means that the process takes longer than for an unregulated loan because there are more administrative details to complete.
Market conditions can influence bridging loan decisions. For example, if interest rates rise sharply (as they have done in recent months), this may put some bridging loans out of reach for some borrowers or at least alter the amount that they can borrow. On the other hand, rising property prices and values can give borrowers more freedom and flexibility because they have higher levels of equity.
Although some bridging finance companies are less interested in credit rating than others, this factor can play a role in deciding whether someone is offered a loan, particularly if they do not have a track record of borrowing large amounts of money. Some lenders may insist on borrowers having a minimum credit score.
Next steps
Once a bridging finance company has performed its checks and approved all the documents you provided, it will send out a formal offer, along with a legal pack, sent to your solicitor.
Although, in most cases, you can appoint your own solicitor, some bridging finance companies oblige you to choose from a panel of specific, authorised solicitors. If you can select your own solicitor, be sure that they are familiar with bridging finance and can meet the short deadlines that typically accompany this work.
Once all legal work has been completed, the loan is transferred to your solicitor, who then transfers it to complete a property purchase (if this is what the money is to be used for). Otherwise, it is transferred into your bank or company’s accounts.
Whereas traditional mortgages take around five weeks to conclude, bridging finance can be arranged far more quickly, sometimes in as little as 48 hours.
