The bridging loan industry in the UK is well established, with hundreds of lenders each offering their own products. While bridging lenders offer an important service to property investors and developers, it is important to understand how they work prior to approaching a bridging lender.
What are bridging loans?
Bridging loans are a popular type of short-term finance used across the UK by property investors and developers alike. While bridging loans can be used for a number of different reasons, both property and business related, the most common use is for the purchase of a new property prior to the sale of an existing property. The way in which this works is that the property owner will use their existing property as security for a bridging loan. The bridging loan funds will then be used to purchase a new property, enabling them access to liquidity on their otherwise illiquid investment. Once the new property is purchased and the old property is sold, the borrower will repay the bridging loan with the proceeds of sale from the previous property. As you can see, bridging loans are able to provide borrowers with quick access to capital, enabling them to take advantage of a limited time opportunity.
When to use a bridging loan?
Short term: One important characteristic to understand when it comes to bridging loans is there short terms. Where traditional mortgages generally run for over 20 years, bridging loans can last anywhere between 1 and 36 months, with some lenders offering longer terms. It is important to understand that, due to the fact that bridging loans have higher interest rates, they are generally not a suitable form of long-term property finance. In fact, bridging loans are designed specifically to provide property investors with a short-term alternative to traditional mortgages.
Clear Exit Strategy: Another important characteristic of bridging loans is the way in which they are repaid. Where traditional mortgage facilities are often repaid over the term of the mortgage, in small regular payments, bridging loans are generally repaid in one lump sum payment. The lump sum payment is often made by the borrower after the occurrence of an event, either the sale of a property or the successful completion of a mortgage. As a result of this, bridging finance lenders will often heavily scrutinise the repayment event in order to ensure that it is highly certain. With this in mind, when applying for a bridging loan it is crucial to ensure that you have a clear, certain and defined exit strategy in place as this will give both yourself and the lender peace of mind.
Time Sensitive: Perhaps one of the most attractive aspects of a bridging loan is the speed at which it can be arranged. Where traditional mortgages often take months to be arranged, a bridging loan can be arranged in a matter of days, sometimes hours. Given the fact that the lender will take security in the form of a first charge on the asset, and that they have some comfortability in the fact that they have a clear repayment strategy, bridging loans can be arranged quicker. Furthermore, where traditional mortgages, offered by high street banks, are subject to intense regulation by the FCA, bridging loans are afforded more flexibility in the way that they are regulated, enabling them to be arranged must faster than a traditional residential mortgage.
A guide to bridging loans in the UK?
Interest rates: Bridging loans in the UK can be characterised in a number of ways, perhaps one of the most definitive characteristics is the interest rates that are associated with bridging loans. Where traditional mortgage finance can be arranged at a very small margin above the Bank of England base rate, bridging loans often come at a much higher margin and often range into double digit interest rates. One of the reasons for this is the fact that UK bridging loans are more risky than traditional mortgages given their shorter term and flexibility. Security package: The security package taken by UK bridging lenders can differ from lender to lender, but generally it will involve a first charge over the security property, a personal guarantee from the borrower and potentially an assignment of rental income/insurance policies.
Flexibility: Another important factor to consider when analysing UK bridging loans is their flexibility. Where traditional mortgage providers are often constrained to certain LTVs, income thresholds and borrower profiles, UK bridging lenders are afforded a greater degree of flexibility, enabling them to lend to a wide variety of borrowers.
Lenders: It is also important to understand who the UK bridging lenders are and how they work. Where traditional mortgages can be obtained from a high street bank or challenger bank, bridging loans are generally offered by specialist lenders. While borrowers can approach these lenders directly, it is advised that they use a specialist bridging finance broker, who can ensure that they have access to the best possible products for their situation.
In conclusion, the UK bridging loan landscape can be complex and difficult to understand, especially for first time borrowers. With this in mind, the services of a skilled specialist finance broker are crucial in understanding and navigating the bridging loan landscape.