We’ve been discussing bridging loans a lot recently since property developers are increasingly realising the benefits of financing certain projects...
After 2022’s soaring housing market, things are cooling throughout 2023, meaning less competition and good opportunities for savvy investors. There are various funding options for property purchases, so we’re discussing the reasons why you should use a bridging loan.
|Table of Contents|
Reasons why you should use a bridging loan
Bridging loans are a fast and flexible form of finance. They can be arranged in as little as three days, giving them a unique place in the property finance market, and allowing developers to act fast to secure competitive sites. This offers an advantage over those opting for longer-term finance, which can take weeks to arrange.
When using bridging loans for residential property, they can be regulated or unregulated. If unregulated, lenders have less constraints so they can lend against properties that would be ineligible for traditional mortgages. A common example is housing classed as uninhabitable, or properties with poor EPC ratings (Energy Performance Certificate). Bridging loans for commercial property are always unregulated, so there’s no criteria for commercial sites to meet before finance will be considered.
Another reason for using bridging finance is that lenders make their decision based on how the loan will be repaid and not borrower affordability. Therefore, a solid exit strategy, whether selling or refinancing after completion, means low income or bad credit history won’t always prevent loan approval. Borrowers have to provide personal guarantees though. This means if they default on the debt and the lender is unable to cover their outstanding loan balance, borrowers risk being forced to sell or refinance background assets.
Why do people use bridging loans?
It begs the question then, with other assets at risk, why do people use bridging loans? If the borrower is confident in their project, the risks are outweighed by the opportunities that bridging finance offers. Bridging loans can give developers access to funding ranging from £50,000 to £50 million (usually limited to 75% gross loan to value). Unlike mortgages, bridging loans are short-term (typically between 1 - 12 months), so borrowers have a definitive repayment plan and the pressure of a short timescale to motivate project completion. As before, debt always carries an element of risk - properties can be repossessed when mortgage repayments are missed.
Using a bridging loan for property development allows borrowers to choose how they repay the interest; either monthly, rolled-up (paid at the end of the term) or retained (borrowed upfront and added to the loan). So borrowers lacking disposable income don’t have to meet loan costs from the first month of draw-down.
One of the most frequent uses for bridging finance is property auction purchases, where a 10% deposit is required immediately and sale completion is just 28 days – regular mortgage lenders are unlikely to arrange a loan in this short timescale.
Aside from property investors, people secure their dream homes by using a bridging loan to buy property before selling their current home or to prevent a property chain breakdown. Essentially, residential property buyers are using a bridging loan for mortgage purposes, until they can arrange a longer-term finance solution.
So, why do people use bridging loans? This outlines just a handful of the reasons, but speaking to a broker can determine if it’s the right type of finance for your project.
Who offers bridging loans?
Anyone considering using this quick cash injection will want to know who offers bridging loans? Much like development finance, there’s a similar funding structure in the bridging market with banks and non-bank lenders. Since regulations around banking tightened after the 2008 crash, less high-street banks offer bridging finance, and those that still do often don’t outwardly promote it. The big names (Barclays, HSBC, RBS, Nationwide to name a few) can offer a bank bridging loan, but usually just to existing customers and in restricted circumstances. Banks are generalists, rather than specialists, so bridging will be such a small part of the overall business, that they aren’t set up to deal efficiently with this type of specialist loan.
Non-bank lenders have less regulation to adhere to, so they can be more flexible, and are generally set up as specialists, so their people and processes can deliver fast and flexible finance. These alternative bridge loan companies deal with a myriad of property situations and borrowers and are undeterred by borrowers asking for ridiculously fast completion timelines or loans against uninhabitable property. Alternative lenders, which have diverse funding structures, may still have access to money that is not linked to the base rate or other underlying indices, so they may offer cheaper bridging finance.
It’s important to shop around when searching for a bridging loan to buy property and knowing who offers bridging loans is a good starting point. Specialist brokers understand the market and understand that two lenders who may have had very similar rates throughout 2022 may now be a good few percentage points apart this year depending on their funding structure.
How can Brickflow help?
If bridging finance seems like the right choice for your next property purchase or development, how can Brickflow help?
Brickflow is a digital marketplace for property development finance and bridging loans. This means that brokers using our platform can search over eighty bridge loan lenders in minutes, and compare the best loans available from across the entire breadth of the market.
Developers can use our software to run the numbers from potential projects and assess their financial viability, prioritising the most profitable sites. Getting a bridging loan can be a challenging process when going through the wrong channels and when you’re not regularly shopping for these types of loan. Brickflow makes the market more accessible by publishing the rates and eligibility criteria of lenders, allowing brokers to hone their focus on lenders who can match their client’s needs.
A broker using our software managed to achieve a DIP (Decision in Principle) in 17 minutes, probably an industry record. The nature of bridging finance is fast transactions and at Brickflow we're supercharging the process.
Searching the whole market ensures you find the right lender and the best value loan for your project, which means reduced borrowing costs and increased profit. So how can Brickflow help? By saving you time and money and getting your project off the ground sooner. When you’re ready to apply for a bridging loan, search the market with Brickflow or tell your broker to get in touch.
If you’re a broker, sign up today and have a DIP on your desk tomorrow.