What are Bridging Loans and How Do They Work?

 

Bridging loans are a well-established form of finance in the UK and are an important tool in the world of property finance. By providing borrowers quick and flexible access to funds they allow borrowers to take advantage of time sensitive opportunities.

What is a Bridging Loan:

A bridging loan is a short term loan used to “bridge the gap” between a future cash flow and a current expense. In contrast to a traditional mortgage, bridging loans can be used for a number of different reasons, making them a popular choice for property developers and investors. Bridging loans differ from traditional mortgages in several ways. Firstly, they generally have a term of less than 24 months, although some bridging loans can last several years. Secondly, bridging loans generally carry higher interest rates than traditional mortgages, this is due to their short term nature and the increased risk carried by the lender. Thirdly, bridging loans are provided by a number of different types of lenders, from high street banks to specialist lenders. The result of this is that there are a large number of different bridging products, making it a difficult landscape to navigate. Finally, interest charges on bridging loans can be rolled-up or serviced. Rolled-up interest is where the interest payments are retained and settled at the end of the loan term, allowing the borrower more flexibility with regards to their cash flow. Serviced interest, on the other hand, is where interest payments are made on a regular basis to the lender.

Common Uses of a Bridging Loan:

As previously mentioned, bridging loans are used extensively in the UK property market by developers and investors alike. One of the most common uses of bridging loans is to fund the purchase of a new property prior to the sale of a current property. Investors may require urgent access to finance in order to take advantage of a time sensitive opportunity. In this circumstance a bridging loan could be provided to allow the borrower to purchase the new property before the current property is sold. Once the current property has been sold, the borrower will use the proceeds to reimburse the lender. This is a common use of bridging loans as it provides property investors with liquidity on an otherwise illiquid asset. Another popular use of property bridging loans is for renovations or refurbishments. In this case a property developer will take out a bridging loan to assist with the refurbishment/renovation of their property. Generally these types of bridging loans will be repaid once the work has been finished and the developer is able to refinance the property onto a traditional mortgage.

Advantages of a Bridging Loan:

Flexibility:

Given the short term nature of bridging loans, they can be used for a variety of different reasons, from auction purchases to development projects. Moreover, given the large number of bridging loan lenders, borrowers have access to a number of different types of bridging products, each with their own specifications. This enables borrowers to find a bridging product that is better suited to their individual requirements.

Speed:

Bridging loans generally rely on the occurrence of an event in order to be repaid. This event may the the sale of a property or the refinance of a property onto longer term finance. In addition to this, there are generally fewer regulations governing the use of bridging loans. These two factors contribute to the fact that bridging loans can be acquired much faster than traditional mortgages. This makes bridging loans an attractive option for developers and investors with time constraints.

Cash Flow Freedom:

As previously mentioned, the interest on bridging loans can be rolled up, and paid in one lump sum payment at the end of the loan term. This is an attractive feature for property developers and investors as it affords them a greater degree of cash flow flexibility. Instead of servicing the interest in regular payments, this cash can be invested into the project.

Disadvantages of a Bridging Loan:

While there are a number of advantages to securing a bridging loan for your property project, it is important to understand the potential drawbacks of using a bridging loan. Most importantly, bridging loans generally carry higher interest rates as a result of their short term nature and increased risk profile to lenders. This means that the total cost of a bridging loan will likely be higher than that of a traditional mortgage. Moreover, borrowers should understand the importance of their “planned exit” as this will dictate their ability to repay the loan. It is important to consider the certainty of this event prior to applying for a bridging loan.

Navigating the ever-changing, bridging loan landscape can make it a daunting task, especially for first time developers and investors. With this in mind, the services of an independent mortgage broker can prove invaluable.

Get Cash Fast with Bridging Loans UK - Silver Oak Capital

 

Short-term liquidity is often sought after in the United Kingdom (UK) when looking to complete a real estate deal in an expeditious manner. Bridging loans can serve as a source of this liquidity by providing flexibility suited to address constrained timelines.

This article will detail an outline of how bridging loans work, the drivers of their pricing, who benefits most, key differences in residential bridges, and common pitfalls.

How bridging loans work

A bridging loan is a short-term product secured against a property that offers speed and flexibility by giving the borrower time before selling or refinancing. Consequently, the costs of a bridging loan are typically higher than that of a mortgage or term product. Usually, a bridging loan will hold a first charge over your property, however a second charge is possible depending on how much equity sits in the structure of the deal. As a short-term loan, bridges are typically three to eighteen months in length, although a twenty-four-month bridging loan is not uncommon. Pursuant to its theme of flexibility, the interest in a bridging loan can be rolled up or serviced monthly. This provides room to the borrower if they expect large cash inflow in the future by rolling up the interest to the end of the loan term and repaying the facility when they have stronger liquidity. The leverage provided by a bridging loan often depends on the borrowers’ profiles, credit history, experience, or portfolio composition. A seventy five percent Loan-To -Value (LTV) is common in the UK bridging market, and many lenders also base the level of leverage they are willing to provide on Gross Development Value (GDV). The speed by which funds are drawn down to the borrower can be swift, often in as little as two weeks, with auctions even quicker to meet constrained timelines.

What Drives Pricing

As with any interest-bearing product in the financial market, the rates associated with bridging loans will move in tandem with market rates which largely stems from movements in the Bank of England Base Rate. Notwithstanding, the rates charged for bridging finance rest upon on a variety of other factors, the Base Rate simply exists as a benchmark before pricing in idiosyncratic risks associated with the loan.

One of the major factor’s lenders assess is the exit strategy which centres around how the loan will be repaid. Lenders prefer to see a clear exit strategy with predictable future cash flow to safeguard against the risk of default whether it’s measurable future sales or evidence of refinancing ability. The quality of the asset is another major determinant factored into pricing as the lender likes to see tangible evidence that aligns with the monetary value they are assigning to it. Naturally, as the leverage present in the deal increases, pricing will adjust accordingly with higher rates associated with a higher Loan-to-Value. If speed is a priority for the borrower, the lender will often adjust their pricing to accommodate for the risk stemming from an expediated application as well.

Who benefits most

Those in time-constrained environments aiming to seal a transaction stand to benefit most from a bridging loan. This often includes those needing finance for an auction, developers in need of liquidity to finance refurbishments, conversions, or exit a development loan, individuals or firms stuck in a broken chain (timing gap between expected sale and current purchase requirements), or holders of a portfolio who require refinancing of their properties from existing debt.

Residential bridging

An important distinction to recognise exists when you require a bridging loan secured against your main residence in which occupy. In these instances, the loan becomes regulated resulting in enhanced consumers protections, an increased prescriptive process, and consequently a more complex process in securing the funds necessary. As a result, lenders can become deterred if you require a regulated bridging loan.

Common pitfalls

Bridging loans are attractive forms of financing for many, however, there persists a few scenarios in which consumers are faced with difficulty accessing the financing they need. An unclear exit strategy is a typical misstep causing an obstacle in the application process. Furthermore, borrowers assign optimistic timelines to their projects causing strained cashflow when nearing the end of their loan term. Finally, it is imperative to formulate a comprehensive understanding and organised approach to the legal work to avoid hurdles down the line.

Considering the evidence provided, bridging loans offer solutions to consumers in the UK by serving as a quick form of financing to provide the liquidity you need in pressurised real estate environments. Nevertheless, it is imperative to consolidate your understanding of this attractive product by recognising its pricing mechanics and common stumbling blocks.

How Mortgage Bridging Loans Can Save Your Next Property Deal

 

The stress of securing funding for ripe real estate investments in a time constrained environment is a common predicament that requires a calculated solution. Bridging loans offer the flexibility and efficiency needed to buy time and complete transactions in the expeditious manner necessary. A bridging loan is a short-term financing arrangement secured against your property to help “bridge” a timing gap.

Consequently, bridges prove invaluable in situations where urgent cash outlay is vital to make a purchase, refinance quickly, acquire land for a development, or meet an auction deadline. Bridging finance can be obtained promptly, often in a matter of weeks, to aid resolving the time centred quandary you may be in. The tenor of a bridge lies anywhere between three to twenty-four months depending on the asset and can be secured via a first or second charge on the property. In view of the above, this article will outline the various instances in which bridging loans provide a timely and convenient solution to save your next property deal.

BUY-before-you-SELL (“Broken Chain”)

A common issue one encounters when needing to complete the purchase of land or piece of real estate is lacking the funds at present as they await the sale of another property to release the capital required. This creates what is referred to as a “broken chain”, where there exists a disconnect in the timeline of cashflow. A bridging loan fills this gap by providing the funds needed to purchase now, prior to the cash inflow from selling the existing property. Lenders are willing to finance this purchase given a clear exit strategy exists where the borrower will repay the bridge through the sale of their existing property.

Auction Purchases

Pursuant with mapping solutions to time constrained real estate transactions, a bridging loan allows you to complete the purchase you wish at an auction without enduring the lengthy and tedious process of procuring a mortgage. Upon completion of the purchase, a bridging loan leaves room to refinance onto the necessary buy-to-let mortgage or term facility required. Furthermore, a bridge offers the flexibility of retained interest and fees, allowing you to delay cash outflow during the holding period.

Development Exit Period

As a development draws closer to completion, the term of the finance provided to the developer for the project also nears as the lender expects repayment. The developer often relies on the sale of units from their project to repay their development loan, however the timing of such cashflow can be uncertain. This is where an exit bridge saves you from potential default by allowing you to repay the existing lender and provides the extended timeline needed to facilitate selling units in the property.

Portfolio Restructuring

A bridging loan can also prove beneficial when you hold a portfolio of properties that need refinancing, whether it is because you are locked into a handful of fixed rate mortgages, release equity, or need to transfer portfolio ownership. A portfolio bridge can be structured across multiple assets using cross-charges to raise capital, repay the existing debt and allow the time necessary to roll the portfolio on to the required new long-term products.

Refurbishments and Conversions

In situations where your property cannot secure a mortgage before undergoing structural work or renovation, a bridge can help provide the short-term capital necessary to invest in the assets’ restoration. The interest from such a product can be rolled up and principal provided for acquisition or refurbishment be repaid when work is complete by refinancing on to a long-term buy-to-let or commercial term facility.

Ultimately, the key takeaway is that a bridging loan offers an invaluable option in common time-constrained real estate transactions. By serving as a source of short-term liquidity to accommodate your timeline, a bridge can secure purchases of ripe investment opportunities in addition to equipping you with the means necessary to restructure your portfolio or refinance existing debt.