What is a bridging loan? Here’s our quick guide to bridging loans, how they work and the best way to apply.
Bridging loans are a quick, convenient way to fund fast-moving property transactions or plug temporary funding gaps, but what are the bridging loan eligibility criteria and what do you need to apply?
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Bridging loan eligibility criteria: what do you need to apply?
As with any finance lender in the UK, the borrower must be a minimum of 18 years old and a UK resident to meet the basic bridging loan eligibility criteria. On top of that, bridging finance will only be considered if the borrower
- is seeking £10,000 or more (but more likely £100k or more for a lender to want to engage)
- has suitable collateral (usually property) that can be secured against the loan
- has a clearly defined exit strategy
- is employed, self-employed or retired
- is an individual, partnership or limited company.
Other elements that can influence a lender’s decision include
- good credit – since bridging loans are asset-secured, credit history is less important than with residential mortgages, but having clean credit can help to secure better rates
- a healthy deposit – most lenders offer 70-75% gross LTV (loan to value - interest and fees will be deducted from the gross loan, unless you're servicing the loan) but the best rates start to kick in around 40% deposit
- proof of income – again, bridging loans are based on the asset value and a fool-proof exit strategy so income is unimportant, but it can help to bolster an application
Since every lender has their own specific bridging loan criteria, there will of course be additions to what’s mentioned here. Filtering out the lenders that can’t meet a borrower’s bridging loan requirements can be time-consuming. Fortunately, at Brickflow we’ve created software that allows brokers to filter out lenders based on eligibility at the start of the process, so time isn’t wasted submitting applications to inappropriate lenders.
Should I apply for a bridging loan?
Most property developers have used bridging finance at some point in their careers, so many people ask should I apply for a bridging loan? For anyone considering bridging finance, it helps to understand the pros and cons.Pros:
- quick to arrange, sometimes in as little as 3 days
- can be unregulated, meaning less time-consuming bureaucracy
- purely residential bridging loans can be regulated, offering the borrower protection in accordance with the Financial Conduct Authority (FCA)
- can be used for both commercial and residential properties
- no early repayment charges past a minimum period (typically 1 to 3 months)
- higher interest rates than regular mortgages
- loans are secured, so defaulting risks the assets being repossessed
- no borrower protection when taking unregulated finance
Whilst bridging loans are typically more expensive than regular mortgages, they offer a fast, flexible solution that gives more options and opportunities for property purchases. Also, each bridging loan application is based on the property value and viability of the project rather than the borrower’s capacity to make the repayments.
So, if a developer presents strong business plans when starting the bridging loan application process, low income or bad credit (providing it’s declared upfront) shouldn’t prevent them from securing funding. However, whilst many bridging loan lenders can cater for borrowers with bad credit, issues can arise if the exit strategy is refinancing on a long-term mortgage, which is less flexible with lending criteria.
Should I apply for a bridging loan? The short answer is weigh up the risks and assess alternative options too, such as a buy-to-let mortgage or a personal loan. Of course, this depends on what the bridging loan will be used for.
What do you plan to use the bridging loan for?
With there being advantages and disadvantages of bridging finance, deciding if it’s the right option depends on one thing – what do you plan to use the bridging loan for? Bridging finance has been around for decades and was most commonly used to prevent the breakdown of residential property chains. However, the market has expanded and there are plenty of circumstances when someone might use a bridging loan to buy property. As well as allowing homeowners to secure their dream home before selling their current one, other uses are;
- auction purchases where completion is just 28 days and an upfront deposit is required
- to build a new home without selling
- purchasing uninhabitable properties (no working kitchen and bathroom facilities) and therefore ineligible for regular finance
- quickly responding to a good deal
- as an alternative to remortgaging to release equity
- property renovation
- purchasing land prior to obtaining planning permission
- for commercial cash flow shortages, like buying new machinery or stock, or paying tax obligations
- borrower liquidity for another reason (a different asset purchase, business investment, unexpected bill, etc.)
Using a bridging loan for property also applies in commercial purchases, like when a business wants to upsize its premises without selling the current one, to allow operations to continue running. A bridging loan could also be used to purchase a commercial property that the borrower will use as their own business premises, with the exit strategy being a commercial term loan. Having a clear idea of what you plan to use the bridging loan for is essential to assess if it’s the right type of finance for your project. Knowing how to apply is the next step.
How to apply for a bridging loan?
Ready to get your property project moving and want to know how to apply for a bridging loan? Whilst it might seem like the most straightforward approach is going directly to a lender, it’s pretty unlikely this will lead to the best deal or a product that fits every requirement. Going through a broker who specialises in bridging finance is the best way to search the whole of the market. Plus, they can help you get to grips with the contractual T’s and C’s and loan covenants that come with every deal.
Whichever bridging loan company is used, the most important factor in getting a bridging loan is having a sound exit strategy, which typically involves a sale or re-mortgage. Understanding the plan for repaying helps lenders assess their level of risk. The more solid the exit plan, like an offer on the table or agreement in principle for a re-mortgage, the more favourable the rates might be.
If you plan to apply for a bridging loan to fund an entire development project, the lender will be keen to see a thorough development appraisal and development schedule. These must detail all costings and demonstrate an accurate Gross Development Value (GDV).
It might seem like a daunting process, but at Brickflow we’re making things easier for everyone. By harnessing the power of technology, brokers who use our platform can compare loans from across the whole of the market in a matter of minutes. Our software continually delivers up-to-date lending criteria, pricing/policy variations and products, all in a single application process. So, how to apply for a bridging loan? Register with Brickflow today.