What is a bridging loan? Here’s our quick guide to bridging loans, how they work and the best way to apply.
We’ve been discussing bridging loans a lot recently at Brickflow, from why and how people use bridging finance, to the benefits and how to apply. Here, we are drilling a bit deeper and asking are bridging loans a good idea?
|What's in this guide
As well as being creative and visionary, property developers need to be savvy when it comes to financing their projects. Previously, bridge financing was considered a last resort for borrowers, but the market has evolved and they are now a key tool for any investor. Therefore, property developers would say a resounding yes if asked are bridging loans a good idea?
Bridging loans provide quick, short-term capital, making them a unique product in the finance market. As such, they create opportunities for developers on properties that conventional borrowing might rule out. This fast-paced lending means bridge financing is not the cheapest borrowing though, and these costs have to be factored into any profit figures.
As well as higher costs, bridging loans require a personal guarantee, meaning the borrower has personal liability for the debt. Typically, bridging loans are secured against high-value assets (property, jewellery, artwork etc.) which lenders can repossess in the event of a default on the loan
Other potential negatives:
- Bridge loans are short-term borrowing (typically 1-24 months), therefore it’s essential to have confident exit plan
- As well as interest rates, fees are usually higher than traditional borrowing – have all alternatives been considered?
- There will likely be even higher default interest rates if the loan is not repaid by the
end of the term
- If opting for retained interest (added to the loan and paid at the end of the term), interest will be compounded
Generally though, property developers are no longer questioning the merit of bridging finance but looking for ways to get the best bridge loans.
Why do people use bridging loans?
Property developers have options when it comes to choosing finance for their project, so with such apparent downsides, why do people use bridging loans? There’s a whole raft of reasons why people opt for bridging finance, but most often it’s used when capital is needed quickly, to plug the gap between buying and selling a property, and to purchase properties that are ineligible for traditional mortgages.
Using a bridging loan for property commonly includes:
- auction purchases, where completion happens in just 28 days and a 10% deposit is required upfront. Some lenders will agree the loan before you buy
- purchasing properties that are not in a liveable condition
- using a bridging loan to buy a house or build new before selling
- preventing a property chain collapse
- funding large-scale renovations that can be completed in a short time
- to take advantage of market conditions, like reduced prices
- buying land pre-planning, or varying existing planning, before selling for profit or converting to a development loan to build the project yourself
- brownfield sites or run-down commercial premises
- buying new business premises before selling the current one to allow an uninterrupted business transition
Since bridging finance is a short-term solution, it’s crucial to have a clear exit strategy when using a bridging loan for mortgage purposes. Typically, the exit strategy is selling or refinancing the property after the works are completed. Of course, knowing what and how people use bridging loans helps in answering why do people use bridging loans? But for the complete picture, you need to know the benefits of bridging finance.
What are the benefits of bridging loans?
Bridging loans allow for an array of seemingly impossible property transactions, but asides from this, what are the benefits of bridging loans? Firstly, bridging loans can be arranged through banks or non-bank lenders, so the lending scale is huge, ranging from £50,000 to £50m (usually limited to 75% gross loan to value). If a developer knows they can complete a large-scale project within 12 months, using bridging finance could get the project started and finished (nothing beats a deadline for motivation!) sooner.
Other bridging loan benefits are:
- can be arranged in as little as three hours – a traditional mortgage can take eight weeks
- interest on bridging loans can be rolled-up and paid at the end of the term, so borrowers lacking disposable income don’t have to meet loan costs from the first month of draw-down.
- lenders often offer flexible bridging loans that won’t incur early repayment charges (though they might carry a minimum loan term)
- can be used for residential and commercial purchases
- can be unregulated, hence lender flexibility
- applications are assessed on property value, project viability and securing assets so poor credit history, low income or cash flow problems shouldn’t prevent loan approval
So, what are the benefits of bridging loans? Clearly there are a number of benefits of using bridging finance, but the best way to determine if it’s the right type of finance is by speaking to a specialist broker who understands the loans benefits.
How do you get a bridging loan?
The next question is how do you get a bridging loan? The first and most important factor in getting a bridging loan is demonstrating how it will be repaid. The more solid the exit plan, like an official offer or agreement in principle for a re-mortgage, the more favourable the rates the bridging loan company might offer. If you apply for a bridging loan to fund an entire development project, you’ll need a full development appraisal, detailing all costings and an accurate Gross Development Value (GDV). Typically, higher deposits and better LTV make getting a bridging loan easier.
Currently, there are over one hundred bridging lenders, so like all development finance, your best chance of getting the right loan at the right price is speaking to a specialist broker. They can also help you understand the contractual T’s and C’s and loan covenants that come with every deal.
At Brickflow we’re working with the best brokers in the UK and we’re making things easier for everyone. By harnessing the power of technology, brokers using Brickflow can compare market-wide loans in a matter of minutes, instantly sourcing the best available bridging deals. Our software continually delivers up-to-date lending criteria, pricing/policy variations and products, all in a single application process.
So, how do you get a bridging loan? If you’re a developer, start by registering with Brickflow or tell your broker about us and make sure they don’t miss out on our incredible software that’s transforming the industry. Or contact us to be connected to one of our brokers.
If you’re a broker, register with Brickflow today, to have a DIP on your desk tomorrow.