Bridging loans are a great way to finance property ventures, but they are not entirely without downsides. So, what are the pros and cons of a...
Property developers are increasingly realising the benefits of financing certain projects with bridging loans. So we’re looking at what are bridging loans being used for, any qualifying criteria and who can get a bridging loan.
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Who can get a bridging loan?
Before delving into the depths of bridging eligibility, we’d best start with who can get a bridging loan? In general, bridging loans are available to individuals or companies that need short-term finance to cover a gap between the purchase of a new property and the sale of an existing one. As well as bridging loans for house purchases, businesses can get bridging finance for expansion and investment.
Bridging loans are a short-term solution, usually between 1-12 months, that typically have a higher interest rate than conventional mortgage loans, and will require a viable exit strategy.
Bridging loans are secured against the property or properties, and the borrower will also have to offer recourse, normally a personal guarantee. In the event of a default, where the lender cannot recoup their loan against the secured assets, the lender can force a borrower to sell other background assets, under the personal guarantee.
The typical categories of people who take bridging loans include:
- property developers/investors - often used by developers who want to move quickly on a site or property purchase, or buy something that wouldn’t qualify for traditional finance (perhaps a property in disrepair or site without planning).
- homeowners/property buyers – property bridging finance is where the name originates, as homeowners have often needed short-term funding to uphold the purchase of a new home without selling their current one, hence, it bridged the funding gap between property transactions.
- businesses – can be used to fund new equipment or machinery purchases to upscale production and business turnover. The subsequent increase in profit would validate an exit strategy.
The specific eligibility criteria for bridging finance on property or business investment will vary a lot between lenders and products.
What is the criteria to get a bridging loan?
So, what is the criteria to get a bridging loan? Whilst it’s not possible to cover the small-print T&Cs for every lender and product, there are some common bridging loan criteria:
- a solid exit strategy – unlike mortgages, which can be repaid over 35 years, bridging loan finance is short-term. Therefore lenders will need to see a definitive plan for repaying the loan, whether through selling or refinancing.
- security – as mentioned, any bridging loan will require the borrower to provide high-value securing assets that are sufficient to cover the loan amount. Typically, it would be property or land, including the one being financed, but could potentially be artwork, jewellery, cars etc.
- minimum lending requirement – bridging technically starts at any level but realistically lenders will be more interested in engaging in loans of £100,000 or above.
- creditworthiness – lenders will check borrower credit history to assess their capability of repaying the loan. However, it’s less important than with residential mortgages since bridging loan approval is based on the exit strategy and the loan security, but having clean credit can help secure better rates.
Other elements, not necessarily bridging loan requirements, but might influence a lender’s decision include:
- 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 better rates can 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.
As mentioned, every loan and every lender will have comprehensive bridging loan eligibility criteria, contractual terms and conditions, loan covenants and lending parameters. That’s why we created Brickflow’s comprehensive eligibility checker that saves brokers (and borrowers) the mammoth task of filtering out lenders with unsuitable criteria.
What can a bridging loan be used for?
Specifically in relation to the property market and property development, what can a bridging loan be used for? As a flexible, quick-to-arrange form of funding, whether using bridging loans for residential property or commercial, developers can capitalise on many opportunities that would otherwise be unattainable.
The most common uses for bridging loans:
- Meeting transaction deadlines – bridging can be arranged in just three days, so if, for example, a prime location site comes up, a buyer with immediate liquidity has an advantage
- Chain Break Finance – a bridge loan mortgage can prevent the complete collapse of a property chain
- Property Auctions – completion on auction properties is just 28 days and a 10% deposit is required upfront. Some lenders will agree the loan before you buy
- Property Refurbishment – where a developer can complete renovations in a short timescale, they can ‘flip’ and sell the property within the short term of a bridging loan
- Uninhabitable properties – bathrooms without working kitchens and bathrooms, or EPCs of D or lower for buy-to-let, don’t qualify for traditional finance
- Landlords Looking to Expand – whether securing another buy-to-let at auction or an uninhabitable property for renovation
Some other uses that developers may require bridging finance are:
- buying land pre-planning – obtaining planning permission, or converting existing planning, means the site can then be sold for profit or refinanced onto a development loan
- brownfield sites – sites that were previously used for industrial work can be expensive to prepare for development and may not meet criteria for development finance; bridging loans can be an interim solution
- run-down commercial premises – much like uninhabitable housing, many lenders won’t consider commercial premises that are not immediately useable
How do you get a bridging loan?
Bridging finance is pretty useful, and though it tends to have higher interest rates than long-term finance, it’s worth knowing how bridging is used and eligibility criteria so you can weigh up options. The next thing to know is how do you get a bridging loan? There are over 100 bridging loan providers between banks, non-banks and specialist lenders, so to find the best loan for your circumstances and experience the most efficient market navigation, use a specialist broker.
The best brokers in the market are the ones using Brickflow’s incredible software. They can search over 90% of the market in minutes, sourcing the best loan at the best price, that perfectly fits your criteria. Contact us to be put in touch with one of the brokers that are leaps and bounds ahead of the rest.
Once you’ve found a lender, the application process has a few key stages:
- apply for a bridging loan – for the best chance of loan approval, provide a professional application presentation that details the property or site and what you plan to do with it.
- provide documentation – lenders will require supporting documents, such as ID and proof of address, as well as detailed costings of the works you'll undertake
- Lender professionals – the lender will carry out a valuation of the property, and depending on the amount of building work, may also appoint an Independent Monitoring Surveyor (IMS) at your expense
- receive the loan offer – if the lender approves your application they will provide you with an official loan offer, with the loan T&Cs
- accept the offer and complete the legal work to receive the funds – both sides need separate legal representation and you will pick up the bill for both sides. Once both lawyers are happy, the loan contract will be signed and funds will be released
If getting a bridging loan seems like the right choice for you, let Brickflow do the legwork and search the whole of the market to secure the best deal. Register with Brickflow today, or tell your broker about our incredible tech that they’re missing out on.