Bridging loans are a well-established form of finance in the UK and are an important tool in the world of property finance. By providing borrowers quick and flexible access to funds they allow borrowers to take advantage of time sensitive opportunities.
What is a Bridging Loan:
A bridging loan is a short term loan used to “bridge the gap” between a future cash flow and a current expense. In contrast to a traditional mortgage, bridging loans can be used for a number of different reasons, making them a popular choice for property developers and investors. Bridging loans differ from traditional mortgages in several ways. Firstly, they generally have a term of less than 24 months, although some bridging loans can last several years. Secondly, bridging loans generally carry higher interest rates than traditional mortgages, this is due to their short term nature and the increased risk carried by the lender. Thirdly, bridging loans are provided by a number of different types of lenders, from high street banks to specialist lenders. The result of this is that there are a large number of different bridging products, making it a difficult landscape to navigate. Finally, interest charges on bridging loans can be rolled-up or serviced. Rolled-up interest is where the interest payments are retained and settled at the end of the loan term, allowing the borrower more flexibility with regards to their cash flow. Serviced interest, on the other hand, is where interest payments are made on a regular basis to the lender.
Common Uses of a Bridging Loan:
As previously mentioned, bridging loans are used extensively in the UK property market by developers and investors alike. One of the most common uses of bridging loans is to fund the purchase of a new property prior to the sale of a current property. Investors may require urgent access to finance in order to take advantage of a time sensitive opportunity. In this circumstance a bridging loan could be provided to allow the borrower to purchase the new property before the current property is sold. Once the current property has been sold, the borrower will use the proceeds to reimburse the lender. This is a common use of bridging loans as it provides property investors with liquidity on an otherwise illiquid asset. Another popular use of property bridging loans is for renovations or refurbishments. In this case a property developer will take out a bridging loan to assist with the refurbishment/renovation of their property. Generally these types of bridging loans will be repaid once the work has been finished and the developer is able to refinance the property onto a traditional mortgage.
Advantages of a Bridging Loan:
Flexibility:
Given the short term nature of bridging loans, they can be used for a variety of different reasons, from auction purchases to development projects. Moreover, given the large number of bridging loan lenders, borrowers have access to a number of different types of bridging products, each with their own specifications. This enables borrowers to find a bridging product that is better suited to their individual requirements.
Speed:
Bridging loans generally rely on the occurrence of an event in order to be repaid. This event may the the sale of a property or the refinance of a property onto longer term finance. In addition to this, there are generally fewer regulations governing the use of bridging loans. These two factors contribute to the fact that bridging loans can be acquired much faster than traditional mortgages. This makes bridging loans an attractive option for developers and investors with time constraints.
Cash Flow Freedom:
As previously mentioned, the interest on bridging loans can be rolled up, and paid in one lump sum payment at the end of the loan term. This is an attractive feature for property developers and investors as it affords them a greater degree of cash flow flexibility. Instead of servicing the interest in regular payments, this cash can be invested into the project.
Disadvantages of a Bridging Loan:
While there are a number of advantages to securing a bridging loan for your property project, it is important to understand the potential drawbacks of using a bridging loan. Most importantly, bridging loans generally carry higher interest rates as a result of their short term nature and increased risk profile to lenders. This means that the total cost of a bridging loan will likely be higher than that of a traditional mortgage. Moreover, borrowers should understand the importance of their “planned exit” as this will dictate their ability to repay the loan. It is important to consider the certainty of this event prior to applying for a bridging loan.
Navigating the ever-changing, bridging loan landscape can make it a daunting task, especially for first time developers and investors. With this in mind, the services of an independent mortgage broker can prove invaluable.