A quick look into some of the key differences between commercial and residential bridging loans, and other variations of bridging finance.
There are numerous ways to finance property investments and bridging loans have become a key component in a developer’s financial toolkit. Here we look at some of the pros and cons of bridging finance.
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What are the benefits of bridging loans?
So let's begin with the all-important question - what are the benefits of a bridging loan?
The most notable bridging loan benefits are:
- quick arrangement, from 3 days to 3 weeks
- alleviates funding gaps
- provide borrowers with an immediate cash injection
- can be unregulated, meaning less bureaucracy to get through
- allow purchase of properties that would be ineligible for regular mortgages, such as uninhabitable housing (no kitchen and bathroom facilities)
- homeowners won’t miss out on their dream home due to a broken property chain
- can be used for both commercial and residential properties
- allow for auction purchases where completion time is short at just 28 days
- no early repayment charges (although some carry a minimum loan term)
Accessing this kind of fast, flexible finance offers property investors more opportunities. Most people are aware of the UK’s housing shortage - bridging loans can get development moving and add property options to the market. Uninhabitable properties that sit neglected for years can be transformed in months if developers can access the right finance. And as a short-term solution (between 1 and 24 months), bridging loans promote quick turnaround of sites, getting the property to the market sooner. Bridging finance also allows developers to grab a good deal, like when a prime site is reduced for a quick sale. Moreover, bridging loan lenders approve applications based on the property value and viability of the project rather than the borrower’s capacity to make the repayments. So, if a developer has prepared a viable financial plan, low-income or cash-flow shortages shouldn’t prevent them from securing funding and completing a scheme.
What are the cons of bridging loans?
With such an extensive list of benefits of bridging loans, it’s also good to know the flipside, and ask what are the cons of bridging loans? Naturally, there are a few bridge loan financing cons.
Arguably, the biggest drawback is higher borrowing costs. They are a quick and convenient finance arrangement, so lenders charge accordingly. However, whilst the interest rates tend to be high in comparison to other funding, borrowers have options for repaying the interest. This includes paying monthly or rolled-up interest that’s paid at the end of the loan.
Secondly, bridging loans are secured, which means the loan is secured against an asset, usually property. Additionally, all bridging loans require a Personal Guarantee, which means the borrower has personal liability. If the borrower defaults on the loan, the lender can force the asset to be sold. Furthermore, if there’s a shortfall between the property selling price and what the lender is owed, they can call on the personal guarantee. Meaning the borrower could lose other assets as well as those they borrowed against.
Another potential negative is that sometimes bridging loans are unregulated. Accessing an unregulated loan is also listed as a benefit because it allows for fast completion times, flexibility and applicants with less-than-perfect credit. But it’s important to understand that unregulated borrowing arrangements are riskier. A bridging loan process that is regulated by the Financial Conduct Authority gives borrowers protection if they are sold an unsuitable product or given incorrect advice from lenders or brokers. Compensation is possible when eligible. Unregulated finance offers none of this protection. Whilst the answer to ‘what are the cons of bridging loans?’ is shorter in comparison to the pros, they must be considered by anyone taking out bridging finance.
What are bridging loans commonly used for?
The question that interests most developers is what are bridging loans commonly used for?
Bridging loan finance is a highly versatile form of funding that can be used for a multitude of purposes, whether residential, commercial or semi-commercial properties. Most commonly though, they are used to bridge funding gaps between buying and selling property – hence the name. Typical examples where bridging loans for residential property would be used include:
- buying or building a new home before selling the current one
- broken property chains
- auction purchases, where the time period for completion is usually just 28 days
- uninhabitable properties (no working kitchen or bathroom) that are ineligible for traditional mortgages
- funding substantial property renovations that can be completed in a short time, rather than applying for a full development finance package
- to take advantage of market conditions, like a reduced price on land or sites
- buying land pre-planning, or varying existing planning, before selling for profit or converting to a development loan to build the project yourself
There are also some additional uses where a bridge loan mortgage could be applied in commercial transactions:
- brownfield sites or run-down commercial premises that might not be eligible for traditional mortgages
- buying new business premises before selling the current one to allow an uninterrupted business transition
- funding a start-up venture
- providing a business with working capital
- buying equipment and machinery
- financing tax liabilities
Whilst this list is by no means exhaustive, it definitely puts a dent in the question of what are bridging loans commonly used for? Experienced developers will, however, use bridging loans in whatever way suits their individual situation.
How to get a bridging loan?
The number of lenders offering bridging finance has increased to meet the growth of the market, so it’s essential to understand how to get a bridging loan. Most bridging loans are limited to a maximum of 75% loan to value (LTV), with the amount loaned depending on the property type and business plan for that asset. Typically, higher deposits and better LTV make getting a bridging loan easier, and usually with better terms. The key to any application is providing concrete assurance to lenders that it can be repaid, i.e. there’s a valid exit strategy. Therefore, the borrower must know from the outset whether they will sell or refinance after the works are completed.
To apply for a bridging loan, decide whether residential, commercial or semi-commercial is the most appropriate type of bridging finance. Prepare a careful presentation showing relevant experience and exact details on how the loan will be used to deliver a profitable outcome. Building costs, timescales and selling prices must be realistic – lenders know the industry, so fudging prices will lose lender trust (and interest). If the loan doesn’t cover all costs, provide cash flow information to show how the exit strategy will be reached.
There are many factors to consider, and over one-hundred lenders, so talking to a specialist bridging loan broker is the best way to start navigating the market. At Brickflow we’ve created a tool for brokers to search and compare the market in minutes, helping to source the best bridging finance deals out there. We can connect you with the UK’s best brokers quickly and easily. So register with Brickflow or tell your broker about us, and see how we can help with getting a bridging loan.