How Does Bridging Finance Work?

Posted by Alfred James Financial on 26th August 2021 -

There is such a big variety of lenders in the market that bridging is no longer what it used to be – it is much more dynamic.

Bridging used to be seen as the go to option when “there was no other option” because it was “expensive”. Before we go on with the rest of this article, I want you to leave the preconceptions at the door. Today bridging is a strategic move many people choose to use as a vehicle to “get the job done”.

Bridging loans can be used for commercial/business capital raising, temporary refinancing of an existing facility and temporarily refinancing existing portfolios.

In this article we’re going to talk about:

• Scenarios of when you might use a bridging loan
• What you need to apply for a bridging loan
• The difference between regulated and unregulated bridging
• The 2 different types of bridging.

If you have never applied for a bridging loan before, then this is a great self help guide to get you started.

Remember: I am sharing information that is to the best of knowledge based on today’s date. Bridging is fast paced – it changes all the time because lenders’ lending appetite changes. Please use this article as an introductory guide which will require a further in depth discussion case by case.

When could I use a bridging loan?

Bridging finance could be used for lots of reasons. These include:

• Buying a property
• Property development
• Buy-to-let investment
• Business ventures
• Paying a tax bill
• Divorce settlements
• Auction

Bridging loans are also used by property developers at auction. This is because they often need to pay a deposit to secure their purchase at short notice.

What do I need to apply for a bridging loan?

A lender may ask you to provide the following when you apply for a bridge loan…

1. Proof of exit strategy

In another article, we have gone into detail about the importance of exit strategies. Your broker should always help you to plan for the exit. This is beneficial for you and the lender. As bridging is short term finance (for a maximum of 12 months), then your lender will want to know HOW they will get their investment back hence you need to prove the exit strategy.

2. A valuation report

This doesn’t usually need to be conducted ahead of time as most lenders will have it carried out via their own panel of surveyors. A minority, however, might request that you foot the valuation bill yourself. This of course is to be able to demonstrate to the lender what type of security they will be securing their loan against.

3. Proof of ID

Proof of address (and residency, if applicable) will also be requested.

4. A business plan

If there is a commercial element to this investment, then the lender’s underwriters will want to assess the viability for this transaction. After all, they are the one typically putting in up to 75% of the loan to value therefore they want to calculate the risk.

5. Evidence of your experience in property

This will only be requested by some lenders if the applicant’s plan is to develop a property. They may ask to see evidence of previous projects to examine your track record in the industry.

6. Proof of income

The exit strategy is of greater importance over the income, however if you plan to service the loan with monthly repayments, then the income is vital. However if the exit strategy is ‘sale of property’ at the end of the 12 months for example, then the income is less relevant.

The difference between regulated and unregulated bridging

1. Regulated bridge

This is when you’re raising a bridging loan on your main residence for personal reasons i.e

Example 1: John and Jill live together and have put their property on the market for sale They have found their dream home and would like to take this property off the market, however, they haven’t sold their property yet so they are stuck in the chain. Their broker suggests that they can use a regulated bridging loan to secure the onward purchase whilst their current main residence will be on market waiting for a buyer. The exit strategy is for their main residence to sell that way they can pay back the bridging lender.

Now of course, a lot more assessment will go into this application by the underwriter, but that is the gist of a regulated bridging loan.

Example 2: Sam is currently living alone at the age of 90. They are on the waiting list for a care home because they are going to need more attention and care. Sam’s children receive the call. The care home has got an opening and it won’t be long till they give the space away. All of the family wealth is tied up in this family home so they can’t afford the care home fees yet. They take out a bridging loan to ensure the finances come through quickly in order to be able to secure the home whilst in the meantime the family home is put on the market for sale.The exit strategy, to repay the bridging loan, would come from the sale of the property.

2. Unregulated bridging

Unregulated means that it is strictly for investment and business use, not personal.

Example 1: Ash is looking at purchasing a property at auction. They have a 25% deposit ready and an eye on a particular property in the brochure. The price is agreed and Ash has won the bid. They now have 28 days to come up with the remainder of the funds – 75% to be precise. Ash approaches a broker, like myself, to be able to facilitate this auction finance deal. Ash plans to flip and sell the property without living it – making this an investment property.

The 2 different types of bridging

Open bridge loan

The term ‘open’ implies that you will be able to pay back the funds when the funds become available. There is no end date although typically the lender will review after 12 months.

Closed bridge loan

These have a fixed end date. This date is usually based on when you know you’ll have funds available to pay back what you know. They’re usually short-term bridging loans, lasting just a few weeks or months.

Open bridging loans are usually more expensive than closed bridging loans because they’re more flexible. Whichever kind you choose, you need an ‘exit route’ – a way to repay your bridging finance.

Other questions you may be asking that I can answer

1. How long does a bridging loan take to come through?

It can be as quick as 3 days however, in most circumstances it’s an average of 3 weeks.

2. Can I apply for a bridging loan online?
Yes services are available for you to do this, however, getting your application checked by a human eye is always a good idea.

3. Can I apply for a bridging loan anywhere in the UK?
Most lenders in the UK will cover the vast majority of postcodes but not ALL. For example, not all lenders will look at Northern Ireland or certain parts of Scotland. It is best to check with a broker which property you need a bridging loan for so that they can find you the lender most suited to that area.

4. What other fees can I expect?
The lender will typically charge an arrangement fee. Also, if there is a survey requirement then this will also need to be covered by you, the applicant. Another service that will be required is the use of a solicitor. Please note that some mortgage brokers will charge for facilitating this application, we don’t.