A brokers Essential Guide to Bridging loans

Bridging finance is a growth market, with some commentators reporting gross annual lending of over £5bn.

Traditionally bridging was used for auction finance or to rescue a broken chain, it’s now a sophisticated product used for a variety of reasons, including:

• Broken property chains

• Downsizing

• Unmortgageable property

• Renovations / conversions

• Lease extensions

• Planning permission

• Auction purchases

A bridge loan is a short-term interest-only loan that usually has a maximum term of 18 months.

Bridging loans can be as short as one week but are usually between 1 and 12 months.

Bridging can be arranged for almost any borrower raising funds against a UK based security.

This includes the ability to raise funding for foreign national clients purchasing or refinancing property in the UK.

In addition we are able to raise bridging finance for individuals, UK limited companies or offshore entities.

There are many reasons your client may need a bridging loan and there are many benefits to this type of finance.

Bridging loans are secured against assets either being purchased or owned by the borrower - and can include houses, flats, commercial buildings (such as shops or industrial units), buy-to-let properties; and they can be individual assets or a portfolio of properties.

For example, if your client is a property developer, they could secure a bridging loan on one or more properties depending on the amount they wanted to borrow from the lender.

Clients can even borrow against a plot of land - whether it has planning permission or not.

A bridging loan can be regulated or unregulated – depending on whether it will be the borrower’s main residence. See “How is bridging regulated?” for more detail.

The most important factor when taking out a bridging loan is the exit strategy. How is the bridging loan to be repaid?

Satisfying the lender that there is a sensible, achievable plan in place to redeem the loan is key.

Typical methods are through sale of property, or refinance onto a longer-term form of finance. See “An untapped opportunity: When is the best time to use a bridge?” for illustrative examples.

Broken property chains

A bridging loan can fix a broken property chain.

For example, if your client has found their perfect home and are waiting on the sale of their current property to complete, but the buyer suddenly pulls out, they can get a bridging loan to purchase their new home.

That way, they have more time to sell their property and can use the proceeds of the sale to repay the bridge.

Unmortgageable property

If a property is unmortgageable, such as a house without a kitchen or bathroom, borrowers can use a bridging loan to purchase it.

They can undertake the renovations required to transform it into a mortgageable property, which will allow them to change the finance to a mortgage or sell the property.

They can repay the bridging loan with these funds.

Renovations / conversions

A bridging loan is an option if a borrower’s goal is to renovate a property with the aim of adding value to sell at a higher price.

Lease extensions

Purchasing a property that has less than 80 years left on the lease can be challenging, as the banks may decline the mortgage.

This is where a bridging loan could be convenient, as borrowers can purchase the property with a short lease, to then extend the lease so that the mortgage will be approved.

Once they had secured the purchase with a lease extension, they can either sell the leasehold for a profit (it is usually a lot less to extend a lease than the increase in the value) or re-mortgage and use the funds to pay off their bridging loan.

Some lenders will also fund the cost of the lease extension if needed.

Planning permission

If your client wanted to purchase land or property for the sole purpose of getting planning permission (or a use change) and then re-selling, a bridging loan could finance that transaction.

Land with planning permission granted commands a higher value, so they could sell on for a profit or alternatively develop it themselves, exiting on to a development finance facility.

Auction purchases

When purchasing a property at an auction your client will usually have to pay a deposit of 10% of the full purchase price on the day of the auction - and will have up to 28 days to pay the remaining funds.

A bridging loan can be very helpful when they need access to money fast, so many people use bridging loans for this purpose and then repay the loan once they have the mortgage.

There are many benefits to bridging loans such as speedy application, quick transfer of funds and broader lending criteria – to name a few.

Let’s look at these and others in more detail.

Speedy application process

The application process for a bridging loan is usually much quicker than a mortgage or second charge application.

The process usually takes anywhere from 5 – 14 days with the rare case taking just 24 hours! Bridging loans are taken out by people and businesses who need money fast, for reasons such as buying a property at auction, so bridging loans need to be available quickly.

Once the application has been processed and approved, the funds are immediately released to the applicant’s solicitor and ready for use.

Adaptive lending criteria

Bridging lenders look at the case scenario rather than individual affordability criteria.

This leads to more ‘pragmatic’ underwriting; as long as the property and exit strategy are solid, a lender can agree to the deal.

Repayment options

There are two main ways lenders will charge interest; retained and rolled-up interest.

With loans taken out on a retained interest basis, the borrower isn’t required to make any monthly interest payments.

Instead, at outset, the lender adds all the interest to the balance of the loan and effectively pays the interest itself when it falls due at the end of each month.

With loans taken out on a rolled-up interest basis, the borrower once again isn’t required to make any monthly interest payments (often in bridging, you’ll have noticed, borrowers want to be free of any regular payments during the term of the loan).

Instead, and as with retained interest above, the lender rolls up the interest and adds that interest to the balance of the loan at outset.

Condition of security properties not a factor

The property your client uses as security against the loan does not have to be up to a certain standard.

It can be in disrepair or needing major refurbishment, but as long as it has a value, it can be used as security.

Be aware that bridging lenders will lend against the lower of the purchase price or the current value in the market as established by a qualified surveyor.

Using an established specialist finance distributor such as Enterprise Finance has multiple benefits including;

We can help save borrowers and brokers time researching through the many choices and help them find the bridging loan better suited to their needs specifically.

If bridging finance is a financial area you’re new to, this process could feel overwhelming.

Through Enterprise, you will be accessing a wide range of bridging finance lenders to ensure the client obtains the best possible terms.

This research and product selection would be carried out on your behalf as part of the service we offer.

With nearly 20 years’ experience of specialist lending - our large business volumes mean we are close to lenders and we’re sometimes offered exclusive rates that other providers and intermediaries can’t access.

These long-term relationships mean we have an understanding of the underwriting requirements for each lender and will be able to get deals accepted and offered quickly, an essential feature of bridging finance.

You also can choose to let us handle your client’s application from the initial enquiry stage all the way through to completion. You can choose to be as hands on or off in this process as you wish.

1. Exit Strategy

Each client must have a solid plan in place to pay off the loan. This is known as an ‘exit route’.

A viable exit route is a must on all bridging loan applications. This is as important as the client’s status, property valuation and LTV.

• Refinance – this could be refinance of our security or another UK security, this would need to be evidenced based on the clients current financial position
• Sale of Property – this could be sale of the security address or another UK security
• Equity Release
• Inheritance (with evidence
• Investments
• Pension

It’s possible to have more than one exit strategy, and the more exit strategies a borrower has in place the better.

For example, if they cannot sell the property, they could release equity from another property to repay the loan.

2. Repayments

It may seem obvious but make sure your clients know the date the payment is due each month and that there is nothing on the horizon that could delay that payment.

It is paramount the borrower understands the consequences of non-payment. They could lose their property to repossession if they do not keep up their payments. Ensure to stress to clients the importance of this.

3. Application Process

The lender has a clear application form and detail their requirements in terms of paperwork.

Sending the completed form, with the client’s ID documents will allow them to get started underwriting the loan.

It is good practice to have all the paperwork and documentation the lender needs kept together and sent as one, rather than it be sent gradually.

There may be additional documents requested afterwards but at the start it is good to have everything in order before sending to the lender.

We tend to see three main exit routes for bridging finance.

1. Sale of property – The client will sell the property that the bridging finance has been secured against within the term of the finance to pay the bridging loan back.

This can also be the sale of an alternative property to the security. For example, in a chain break scenario, often the bridge is secured against the property that the client is looking to purchase, but the exit comes from the sale of their existing property.

2. Refinance – The client will access another form of finance to remortgage the security to pay back the bridging loan.

This allows the adviser to introduce the client to Enterprise to obtain the bridging loan, and then source the traditional finance market to exit the loan within the term, essentially creating two pieces of business for the adviser within a twelve-month term.

3. Cash redemption – The client will need to evidence a definite cash sum will be made available during the term of the loan, substantial enough to redeem the loan.

This could be a pension lump sum, investment or share portfolio maturity. There are other exit routes that can be considered alongside these, as long as we are able to obtain evidence they will occur within the term and are deemed viable by the lender, a consideration can be made.

Retaining interest into the loan is a common feature of bridging finance. It gives the clients the option of borrowing the interest payments as part of the loan agreement.

This means they then do not need to make monthly payments to the loan provider (which can be substantial), nor prove their affordability at underwriting stage.

If your clients choose to retain interest into the bridging loan, it is important to note what impact this will have on the net loan amount available to the borrower.

If the client is looking to achieve the maximum loan to value available, interest and fees can only be added up to 75% maximum.

If the loan exceeds this threshold once interest and fees are added, they will be deducted from the loan instead.

For example, your client wants to borrow £100,000 at 75% LTV and interest rates will be 1% per month.

With a 12-month term and after 2% fees, the net loan amount will be £86,000 As the monthly interest payments of £12,000 and the fees will have to be deducted from the gross loan to ensure the entire borrowing does not exceed 75% loan to value.

In the situation however where the loan to value does not present this issue, the fees and interest will be added to the loan.

In the example above, if the loan required was at 50% LTV, the total borrowing would be £114,000 to encompass the fees and interest payments.

It is important to note that the client will only ever pay for what they use. If they elect to retain interest into the loan, but are able to repay the loan before the end of the term, they will receive a refund of unused interest.

Again, using the scenario above, if the client where able to repay the bridging loan in month six, and not require the full 12 month term originally applied for and for which interest payment where calculated, they would receive a refund of six months unused interest payments; £6,000 in this example.

A regulated bridge is if you’re securing funds against what is or will become your main residence.

Unregulated is if you’re securing funds against any property which is not your residence and will not become in the future. In terms of length, regulated bridging loans are up to 12 months in term and normally paid-back in 7-9 months (and as little as a few days in some cases).

Also, it’s worth nothing that some bridging lenders themselves are unregulated and can’t offer FCA regulated bridging loans.

As mentioned above there are two types of bridging loan - regulated and unregulated.

A bridging loan will be ‘regulated’ if the loan is secured against a property that is (or will be) the borrower’s main residence or will be occupied by any member of their immediate family All other deals would be unregulated.

If your client was a landlord and tenants were living in their property, this would be an unregulated loan. This is because it is not your client’s own home or occupied by any of the borrower’s immediate family.

There are two types of regulated bridging loans – first charge and second charge. A first charge bridging loan is the first loan that has been secured against the property and would generally be restricted to a maximum loan-to-value of 75%.

If there is any equity after the first secured bridging loan, your client can then take out a second charge loan, restricted to 70% loan-to-value. This can be with a completely new lender and will sit behind the first charge loan.

The Financial Conduct Authority will regulate the loan on someone’s home because of the risk they may lose it if they are unable to keep up the payments. A bridging loan is regulated in the same way as a residential mortgage.

For regulated bridging loans your most competitive rate starts at 0.48% per month, for unregulated bridging rates start at 0.44% per month (as of 16th March 2020).

The great flexibility of bridging often ties into the associated expense of bridging loans.

Most lenders will allow borrowers the flexibility to pay the loan back at any time without penalties, as well as retaining interest into the loan so that cash outflows can be managed, and to secure on most types of properties including houses, flats, commercial units, land with planning, uninhabitable, and un-mortgageable properties.

Unlike a standard, high street residential mortgage, bridging loans are underwritten with less focus on formal criteria, affordability and credit checks and more focus on the strength, viability and plausability of the client’s exit strategy to pay off the loan and the quality of the asset offered as security - rather than the client’s ability to pay.

This is partly why they can be achieved so much faster. Although bridging loans can be achieved quickly, most bridging lenders operate with a prudent, conservative, lending criteria and a rigorous underwriting process.

Of course, there will still be formal identification checks in order to prove identification of borrowers to lenders.

If your client reaches the end of their loan term and has not been able to repay the bridging loan they could be charged. For unregulated loans interest rates will increase in line with the terms of the loan agreement where the loan remains unpaid after the agreed term date.

This will likely add to their costs or could see them losing some or all of the profit they would have made from the deal.

This late or non-payment can occur if they are relying on the sale of a property to repay the loan.

While it may be difficult to gauge the property market 12 months from the start of a bridge, the borrower needs to be certain that they will be able to realise their desired value at the term end in order to ensure that their property sells should this be the exit strategy to repay the bridging loan.

Speaking to an estate agent about the current housing market would be advised.

Expense should be considered in terms of how much the overall cost will be for your client. This can often be categorised in two ways;

1- Financial benefit – e.g. your client purchases an unmortgageable property for £100,000 at auction.

With use of a bridging loan, they are able to complete renovation works of a new bathroom and kitchen, the property sells for £150,000.

Once costs have been taking into account from the £50,000 return on the sale, it eliminates the perceived expensive nature of the bridging finance used. It is no longer expensive finance, but the only finance available to achieve this opportunity.

2- Emotional benefit - A landlord client’s Buy-to-Let mortgage lender pulls out at the last minute and they are already in their notice-to-complete period, having already exchanged.

With the flexibility of a bridging loan, a case can complete in days – saving the landlords deposit and avoiding losing the investment property as they can still complete on the new purchase and then have a period of 12 months to arrange traditional finance on the property to replace the bridging loan.

The expense of bridging reflects the risk the lender is taking in the lending decision. They operate minimal underwriting and often secure against unmortgageable, unmarketable property that finance could not be obtained for through traditional routes.

Bridging carries no redemption penalties also, so with some lenders, once the first month’s payment has been made, the client is free to redeem the loan.

This all contributes to the higher interest rate the client will be charged above traditional finance.

Ideally, this shouldn’t happen as the exit route will be a major part of the underwriting of the case at outset.

The ability to repay the loan is a fundamental element to the loan being granted in the first instance, but circumstances can change during the loan – if they do and the exit cannot be achieved within the timescales, there are two options. You will need to give at least a minimum months’ notice in order to arrange something else:

1 – Going back to the existing lender to extend the term. This will incur a new set of fees in line with arranging the original loan.

2 – Rebridging to another lender – however, this will typically be more expensive because the client wasn’t able to exit the bridge in the 12 months and is therefore riskier. This may mean a penalty, more expensive interest rate.

• A bridge is a short-term interest-only loan that usually has a term of up to 1 year.
• This type of finance is extremely flexible.
• Bridging loans are secured against the assets owned by the borrower, this includes residential and commercial property, plus any type of land – with or without planning permission.
• A bridging loan can be regulated or un-regulated.
• Regulated bridging loans are secured against properties that are occupied by the applicant or a close family member. They are regulated by the FCA.
• The exit strategy is key for a lender when deciding whether to approve the loan. The more exit strategies there are the better.
• If you need any assistance with this process, Enterprise Finance will be able to help. We can also help secure loans for limited companies and foreign investors.