Bridging Finance Explained
What Is Bridging Finance?
Bridging finance is short term finance, secured against a property or land, and used to bridge a gap whilst a longer term solution is arranged, either by way of refinance or sale. Borrowers can typically loan up to 75% of the value of the security offered.
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What is the term of a bridging loan?
The term of a bridging loan can be from 1 day to 48 months. However, a term is typically 12-18 months and is available to both individuals and companies.
How long does it take to arrange bridging finance?
Finance can be arranged at pace (sometimes within 48 hours), but it typically takes 2-4 weeks. The reason that loans finance can be arranged more quickly than other forms of finance is that loans are typically paid at the end of the term rather than monthly and lenders are predominantly interested on the security asset and the exit strategy. This means that evaluating income and credit history is normally deemed less important in the lenders decision making process.
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Are there different types of bridging finance loans?
There are two types of bridging loans; regulated and unregulated.
Regulated bridging loan - This is where either the applicant or a member of the applicant’s family live/or will live in the property that the loan is being secured against. This would therefore need to be subject to FCA regulations, hence the term. Montpelier Private Finance does not offer or advise on regulated bridging loans.
Unregulated bridging loan - This is where the applicant or their family do not reside, have the intention of, or have inherited in the security property and therefore does not need to be subject to FCA regulations.
What Is Bridging Finance Commonly Used For?
There are a number of reasons for using bridging finance. The below is by no means an exhaustive list:
Buying A Property At Auction
When you purchase a property at auction there are tight timeframes. A 10% deposit is typically put down that day because the moment the hammer goes down, contracts are deemed to have been exchanged and completion on the transaction is generally expected within 28 days thereafter. The speed at which bridging finance can be arranged makes this an ideal solution to guarantee the transaction is completed in time.
Maintaining A Place In The Sale Chain
Where the proceeds of the sale of one property to purchase another, but the timelines mean the sale cannot be completed before or at the same time as the purchase, bridging finance is ideal for plugging the short term gap. Once the sale has been completed then the bridging finance is paid off.
Property Refurbishment
There are times when properties are unsuitable for mortgages, likely due to the poor condition of the property. Bridging finance can be ideal for providing a short term funding solution to purchase the property and then carry out the required works to make the property either eligible for long term finance or ready to sell on for a profit
Raise A Deposit
This can then keep other funds from being tied up, allowing greater flexibility in investing in other projects simultaneously.
For When That Bargain Turns Up
Sometimes a bargain comes along that you just have to go for. Bridging can be ideal because of the pace at which finance can be secured. There are also times when lenders will only lend against the purchase price rather than the open market value and therefore, despite the obvious bargain, bridging may be the only form of finance attainable. This then allows the developer to then decide whether they want to sell the property or refinance with a view to a longer term plan.
Re-Bridging
Going over the term of a bridging loan can be very serious and extremely costly. There are occasions where it therefore may be necessary to re-bridge. This can be because something has not gone to plan and more time is needed to resolve the longer term exit plan, or because you need to refinance and release further funds. There may also be the opportunity to pay back the existing facility to move to a cheaper option. Whatever the reason it is important to understand that bridging is not a long term solution as the pricing reflects the short term nature of the product.
What Are The Costs Involved in
Bridging Finance?
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Interest
This will nearly always be expressed as a monthly rate. Interest will typically be rolled up, retained or deferred meaning that there is no requirement to pay back the loan monthly, rather at the end of the term.
It is also important to note that there will typically be a default interest rate and a concessionary interest rate. Borrowers will be charged the concessional rate providing they do not default on the loan at which point a higher default rate would be charged. This rate will be charged if the loan goes over the term or if the borrower does not comply with the requirements of the loan.
Arrangement Fee
Commonly also known as a facility fee, this is a charge by the lender for arranging the loan. Lenders typically charge up to 2%.
Exit Fee
Some lenders charge a fee when the loan is redeemed. This may be on top of an arrangement fee and is important to be mindful of if lenders appear to be advertising a particularly favourable interest rate.
Legal Fees
The fees for both the borrower and the lender, in arranging the finance, will be charged to the borrower.
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Valuation Fees
Most lenders will require a valuation to be carried out. The borrower will have to pay for the valuation as an upfront fee rather than the cost being added to the loan. This is paid direct between the borrower and the lender or surveyor.
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Administration Fees
Most lenders charge a small admin fee to complete the required paperwork.
Broker Fee
Brokers may charge a fee for arranging the loan which helps to ensure complete independence in any advice given.
What Are The Advantages and Disadvantages To Bridging Finance?
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Advantages
Speed
The primary advantage of bridging finance is that it is faster to arrange than other finance options such as business loans, commercial and buy to let mortgages.
Deferred Payment
Payment is made at the end of the term rather than on a monthly basis, with interest rolled up, retained or deferred.
Types of Security That Can Be Offered
Bridging loans can be secured against all types of residential, commercial and mixed use properties. Even development land can be considered. Freehold and leasehold properties are included and short term leases are typically not a problem. Multiple properties can also be used for security on both a first and second charge basis.
Poor Property Condition
Bridging loans are commonly raised when long term mortgages cannot be raised due to the condition of the property. They may be in need for major restoration or redevelopment.
Lending Criteria vs Other Forms of Lending
The bridging market is highly competitive with many different providers to consider. Whilst all have their own lending criteria, the nature of the short term lending means that lenders are less concerned about credit history, earnings, and affordability, rather focusing on the value of the security offered.
Disadvantages
Interest Rate
Because of the short term nature of the product and the flexibility in what it can be used for, bridging finance attract higher interest rates meaning that it is not a viable long term solution to lending.
Fees
Whilst lenders fees vary greatly, it is worth paying particular attention to arrangement, administration and completion fees. On first appearance, a favourable interest rate, could actually not be the best value when adding on all the extra charges. Montpelier Private Finance will always offer the keenest overall bridging finance solutions.
Collateral
Without enough equity in place to guarantee the loan, there would be no scope to apply for bridging finance.
How Can Montpelier Private Finance Help?
Our Knowledge - With our expertise we will help you cut through the myriad of options to be able to make a well informed decision on what is the right bridging finance solution for you. As a specialist bridging finance broker, will help you understand the whole picture not just the top line rate.
Our Pace - We understand that bridging finance is required quickly and we respond accordingly. You will remove the pressure by sourcing and managing the application through to completion quickly. And we will keep you fully up to date with progress.
Our Reputation - We are trusted by lenders to carry out thorough due diligence, meaning that when your application reaches them you are already at an advantage in successfully gaining your funding.
Bridging Finance Solutions
Auction finance available
All asset classes welcome
1st, 2nd and 3rd charge loans
Non status/credit impaired welcome
Residential up to 80% LTV
Semi Commercial & Commercial up to 75% LTV
Land with planning up to 70% LTV
Terms from 1-36 months
No monthly payments
Interest deducted from loan, serviced monthly or rolled up
