Bridging loan FAQs

What is a bridge loan?


Why are bridging loans so expensive?


What are viable exit routes for bridging finance?


What happens if the client doesn’t exit the bridge in twelve months?


What does retained interest mean?


What’s the impact of retained interest on a bridging loan?


What’s the difference between regulated vs unregulated bridging loans?


What interest rates can I expect with bridging loans?


How flexible are bridging loans?


How are bridging loans underwritten?


Why choose a specialist finance distributor instead of going direct to the lender?

 

What is a bridge loan?

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.

Why are bridging loans so expensive?

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.

What are viable exit routes for bridging finance?

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.

What happens if the client doesn’t exit the bridge in twelve months?

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.

What does retained interest mean?

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.

What’s the impact of retained interest on a bridging loan?

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.

What’s the difference between regulated vs unregulated bridging loans?

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.

What interest rates can I expect with bridging loans?

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).

How flexible are bridging loans?

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.

How are bridging loans underwritten?

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.

Why choose a specialist finance distributor instead of going direct to the lender?

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.

bridging loan FAQs