Jargon-free advice on peak debt facility, also known as a revolving loan. Find out what it is, how it works, how it differs from a development loan...
We explain how bridging loans work, when to use them and how to apply. Read our market insights, need-to-know tips and pros & cons of different lenders.
- How Bridging Loans Work
- Market Overview
- Types of Bridging Loan Lenders
- Smart Ways to Use a Bridging Loan
- Applying for a Bridging Loan
How Bridging Loans Work
As the name suggests, Bridging Loans are designed to bridge the gap between buying and selling, when the scenario isn’t fundable through more traditional finance methods. In the past, they were typically considered a last resort, secured if people were let down by an alternative source or had no alternative option. Now, Bridging Loans are used by successful property entrepreneurs as a powerful tool to facilitate both simple and complex transactions, quickly.
Amongst other benefits, they can allow you to purchase a property before selling an existing one, buy an uninhabitable place in need of refurbishment, or facilitate a quick move when speed is a priority. Interest rates are higher than traditional funding options but cheaper than they used to be, and the potential upsides for the borrower will normally outweigh the increased costs of funding.
Since the financial crash, the bridging market has grown at an explosive rate, with around 100 lenders now competing for their share, contributing to a huge increase in popularity among property investors. In 2012, UK bridging completions stood at £885m, and in 2019, totalled more than £4bn, representing 352% growth in just seven years.
While the benefit to the borrower of market growth is more choice, it’s more difficult to know if you’re getting the best possible deal. It’s also important to understand how your lender is funded, as delays and reversed approvals are costly. Unbeknown to many borrowers you could still be borrowing from a mainstream bank. Some of the bigger, well-known household names provide wholesale funding lines to the smaller boutique lenders, which means they underwrite the loan a second time (after the bridging lender has completed its initial underwrite).
It’s an important nuance to understand as problems can arise with changed pricing, reduced leverage or declined applications when you’re already a long way along through the process. The difference is, the better bridging lenders will still have enough of their own money to execute on deals where the funding line is not available, or have multiple funding lines where risk appetite is diversified. The thin equity lenders are essentially mainstream lenders under a different guise and will provide little deviation from their High Street sponsor’s standard criteria.
To fully understand the bridging market, you need to drill down to the lenders and how they are individually funded. Each lender has their pros and cons, so the key is having an in-depth understanding of the market, and the know-how to select the best lender for your scenario.
Types of Bridging Loan Lenders
Mainstream lenders & private banks
- Good for
- Cheap rates
- Bad for:
- Being slow and risk adverse
- Their lawyers may not often work with Bridging Loans, resulting in delays.
- Private banks may need assets under management.
- Good for
- Ability to transact quickly
- Normally working with lawyers who are experts in Bridging Finance.
- Flexibility, if they still have their own pot of money or thick equity.
- Bad for
- Some are wholesale funded with little autonomy, which could slow things down
- Good for:
- Cheap rates
- (Normally) better leverage than the mainstream lenders
- Bad for:
- Being slow
- Their lawyers may not often work with Bridging Loans, resulting in delays
Individuals/family offices (not funded by wholesale)
- Good for
- Full flexibility and delivering on ‘hard money’ loans
- The quickest option and they rarely reverse lending decisions
- Bad for
- Normally more expensive rates
Smart Ways to Use a Bridging Loan
1. Development entry
Bridging Loans can make development sites you thought were unattainable, a reality. If you need to apply for full planning or revise existing planning, then a Bridging Loan is a perfect way to secure the site before the purchase price increases once planning is granted. Once you have what you want and have fully prepped the site, you can switch to a development loan.
2. Development exit
Development Exit Finance is a short-term Bridging Loan, used to repay outstanding finance against a property development once the project has reached practical completion. It’s a great tool to use if your existing finance is coming to an end and sales won’t be completed in time. Reduced risk means it costs less than Development Finance, it buys time and reduces the need for lowering prices for quick sales, and frees up equity to fund your next project, making it a win-win for developers.
3. To upgrade or downsize
If you’re upgrading or downsizing and have a large amount of equity in your home, a Bridging Loan enables you to borrow to buy a new property, before selling your existing one. If you genuinely think you’ve found ‘the one’, it means you won’t want to miss out, and the set-up fees and interest are worthwhile in the long-term if it means you secure your once in a lifetime property.
4. As a second charge to fund other assets
Second charge Bridging Loans are a great way to access equity in a property without having to replace your first charge in full. This can be particularly useful if you’re looking to pay a deposit for a new development site funded by equity in lieu of cash.
5. To secure finance against mixed asset types
Most lenders will have an asset type they prefer, be it residential, BTL or commercial. Securing a Bridging Loan for a development with mixed assets can be complicated if you start involving multiple lenders with multiple rates, and it just takes one to derail the entire deal. Even larger lenders who can finance different asset types will split the loans across different departments, making communication slow and the process disjointed. With the right contacts however, it is possible to secure one loan against multiple and mixed asset types.
6. If you’re asset rich but cash poor
If you have a strong asset base but are lacking in liquidity, a Bridging Loan can be a great option to provide some breathing space whilst you organise your assets and make a sale. Assets might be in transition and require work before they can be let, so they can be considered by traditional funders. Or, perhaps you want to add value before you sell, so you can achieve the best price. A lack of liquidity normally rules out mainstream lenders, despite the fact there is still plenty of value on the owner’s balance sheet, and a bridging lender will have the flexibility and foresight to recognise this.
7. To purchase property on auction
If you purchase at auction, you are required to pay a 10% deposit and exchange on the purchase on the day of the auction. You then normally have just four weeks to complete, ruling out traditional lenders who cannot operate this quickly. If you’re buying a property to live in, traditional lenders also require a property to be in a habitable condition (connected to the mains with a working kitchen and bathroom), or in a lettable condition, if you’re buying to let. The nature of auction properties means they are often neither, allowing buyers to add value and make a larger profit. A Bridging Loan provides the speed required for auction transactions, as well as the flexibility to lend against properties, whatever their condition.
8. To resolve short-term illiquidity
Anyone can face short-term liquidity issues and if you’re waiting on a property, business or other asset to sell, a Bridging Loan can help provide a solution quickly. If you have defined your exit strategy, i.e. you’re selling an asset and contracts have been exchanged, although completion could still be months or weeks away, a lender will normally provide a better rate as they are confident the loan can be redeemed.
Bridging Loans aren’t as expensive as you think
There’s a common misconception, even among experienced property developers, that Bridging Loans are an expensive form of finance. The increase in popularity however means there’s more choice of lenders on the market, which ultimately leads to better pricing. And if securing a Bridging Loan means you can buy the property that’s right for your portfolio at the right price and relatively quickly, it will prove good value in the long-term.
There’s more to consider than pricing and leverage
Whilst pricing and leverage are key, you need to look deeper to secure the best deals. For larger, and more complex loans, or loans against commercial or transitional properties, the contractual Ts & Cs and loan covenants are just as important. They can be complicated and onerous, so make sure you have a solicitor or broker that knows their way around a Bridging loan offer.
All large Bridging Loans (at least the good ones) are bespoke
If you’re looking for a large Bridging Loan, chances are your financial needs and situation are unique to you. This means the standard finance options offered by the High Street banks aren’t an option, and you need to look to specialist lenders who will take the time to understand your personal circumstances properly and have the flexibility and experience to adapt. If a lender isn’t willing to do this, move on, or work with an expert to pre-empt lender concerns and present your borrowing needs and development plans in the most compelling way possible. Like anything else, the narrative around the deal is key.
Applying for a Bridging Loan
- Put yourself in the lender’s shoes and provide concrete reassurance that you can pay back a loan
- Build your case professionally; being ill-prepared won’t impress anyone
- Gather the information for a well thought out strategy; be realistic and not overly optimistic
- Demonstrate how you can mitigate their risk in as much detail as possible.
Create a short-form presentation in the style of a lender credit paper. Accentuate the positives but address the negatives upfront.
The presentation should include all of these:
- The history of the property
- If you own it; how long you have owned it and what you paid for it. If you’re buying it; who is selling it and why.
- Your expertise
- Prove why you are someone to back. Include all relevant previous experience, preferably for similar schemes.
- Your strategy
- What you are planning to do, how long it will take and why it will lead to a successful outcome.
- Your exit plan
- Whether you will sell or re-finance. The lender’s primary concern is how they will be repaid, so a robust plan is critical to securing a positive lender decision.
- Your detailed budget & cashflow
- If you are doing work to the property, include whether the loan will cover all costs. Consider if the loan term is long enough to complete the works and then sell or re-finance.
- Be realistic
- Lenders will know if you are being overly optimistic and will lose confidence. Be realistic with your costs, timescales and selling prices. If you say you can sell at £800k but a similar property in the area sold at £600k, you’ll lose the trust of a lender pretty quickly.
- Be honest
- In an age of instant data, being economical with the truth isn’t an option. Lenders can check your numbers and your history in minutes, so be upfront from the start. If you have a CCJ caused by a phone bill, chances are a bridging lender won’t care, so be honest and open at all times.
- Maintain contact
- Once you’ve completed a loan, maintain contact, even if things aren’t going to plan. If you’ve built a relationship and maintained dialogue, a lender is more likely to be patient and accommodating if things go wrong. If you disappear and then request more time and money one month prior to redemption, you’re unlikely to receive a positive response.