It can be daunting to apply for a bridging loan, given the large sums of money involved and the fact that your property may be at risk.
So here’s a comprehensive, straightforward guide to the whole process, from contacting a bridging loan company, filling in the application form, collecting your documentation and submitting the application.
In order to apply for a bridging loan, you’ll need to have some form of asset to borrow against. Most commonly, this is a residential property.
Bridging finance companies will lend up to 75 or 80 per cent of the equity that you own in the property, so this is the first calculation to make.
For example, if you own a property valued at £600,000 and you have an outstanding mortgage of £100,000 on it, you could potentially borrow 80 per cent of £500,000 = £400,000. Remember that this is the total loan amount, which if choosing a retained or rolled up interest will be included in the calculation, 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.
A bridging finance company will need to know what your exit plan is. 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?
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.
- The higher your credit score, the more likely it is that you’ll be offered a bridging loan. You can check your own credit score via companies. In fact, many bridging loan lenders will ask you to supply your credit report downloaded from Experian or Equifax. If you are concerned about your credit score, get advice on how to boost it, through adjusting your borrowings for example.
- 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.
Once you’ve provided all these details, the bridging finance company will assess 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.
The purpose of the loan can help the finance company to 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.
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 a transaction.
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.
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.