Q3 2021 saw 7.72bn in bridging finance being lent, according to data gathered by Ernst & Young Global. Throughout the past decade property investors and developers have been a major percentage of the borrowing pie using bridging finance for property development, land deals, refurbishments, property acquisition and auction purchases – but can it help you?
What exactly is bridging finance?
Bridging finance is a short-term loan that bridges the financial gap between the borrower not having the capital to purchase an asset, such as property, and completing that transaction. Bridging finance is short-term, typically no more than 12 or 24 months, and because its short-term it has a relatively high interest rate when compared to traditional financing such as mortgages. The typical key characteristics are:
- Short-term: Between 1 to 24 months, with most averaging between 9 to 12 months.
- Security: Land, Residential, Commercial & Mixed-use property.
- LTV: Up to 80% for residential, 65% for commercial, 50% for land without planning permission & 70% for land with planning.
- Loan amount: Typically above £25,000 for unregulated loans with no upper limit, though less than 20% of loans exceed £600,000.
If it’s a high interest rate why would I use it?
There are three stand-out reasons why people choose bridging finance.
Speed
The key benefit to bridging finance is its rapid speed. Bridging finance can be arranged within a matter of days, not weeks, which means it has a huge advantage over traditional financing such as mortgages in instances where the borrower requires quick access to funds.
Versatility
As bridging finance is secured against an asset, such as property, there isn’t a strict list of loan uses nor conditions attached to the lender’s terms. You can use bridging finance for almost any legal purpose.
Credit history
In many cases lenders are not as concerned about a borrower’s credit score as the loan is both secured against an asset and also, an exit strategy will have been agreed prior to the loan being agreed.
Closed or open bridge finance, what are they?
Bridging loans can be classified as either open or closed.
A closed bridging loan has a predetermined exit strategy and timeline. Closed agreements are valued by both lenders and borrowers because of the certainty they provide.
The timelines and potentially even the source of repayment are less apparent with an open bridging loan.
How do you repay bridging finance?
Bridging finance is typically repaid by one of three mechanisms:
Sale of the asset
The sale of the asset that is being used as collateral.
Refinancing
Refinancing might include extending the loan term with the same lender or refinancing with a different lender using another short-term debt or equity based finance, or traditional longer-term mortgage.
Liquidity event
The sale of an asset that isn’t being used as collateral.
What kind of lenders offer bridging loans?
Bridging finance is available from numerous different types of lenders.
Bridging finance, like most other types of lending, has traditionally been the domain of the high street bank, but since the 2008 financial crash, the risk appetite of banks has somewhat decreased. Banks are unlikely to fund projects considered high risk, niche, complex or specialist.
There has been an influx of lenders into this bridging finance space left by the banks. There’s a few large companies, with group revenues in excess of £378m but for most most, revenues are in the single or double digit millions. Many family offices, small funds and private investors have also moved into the specialist lending space, ready and willing to underwrite niche projects that some of the larger lenders aren’t too comfortable with. These lenders focus on giving high-interest loans to get above-market returns.
Is bridging finance regulated?
The FCA regulates some bridging loans in the UK, but not all. The Mortgage Code of Business (MCOB) regulates any facility involving the borrower’s or a close family member’s house and protects the borrower from improper advice or mis-selling.
The majority of bridging loans for property developers and buy-to-let landlords are unregulated. This is due to the fact that commercial lending is assessed differently. For example, repayment will be determined by the project’s development value or rental potential rather than the borrower’s household income. The FCA is also the reason why unregulated bridging finance lenders will only lend above £25,000 as this is the threshold set by the FCA.
What are the requirements of a bridging finance lender?
There’s a few key considerations for a lender, these include:
Security
Arguably the most important factor in whether a lender will offer you a bridging finance facility is what assets you’re able to provide as security and the remaining equity available in those assets. On commercial property, lenders normally aim for a maximum loan to value ratio of 65%, and on residential property it’s up to 80%. For land with planning it’s 70% and without planning its 50%.
Exit strategy
In order to apply for bridging finance the borrower must have a viable method of repaying the loan, this is your exit strategy.
Credit history
Any credible lender will first seek to satisfy itself about the borrower’s creditworthiness before deciding whether or not to lend. A good credit history and if the facility is for property development, the lender will be looking for prior property development experience. Proof that the borrower knows how to successfully complete a development will help you achieve a quick agreement and the best rates.
How much will bridging finance cost?
Bridging finance is primarily priced based on the lender’s perception of the risk of its capital. As the money is only lent for a short period of time, the real income for the lender from interest alone is quite small, even though the headline rate appears to be quite high.
It’s because of this that an arrangement fee, also known as a facility fee is often charged. Valuation fees, legal fees and early redemption fees are also common. You can use a bridging finance calculator to help you get an indicative understanding of the total costs involved.
Summary
In conclusion, bridging finance is a flexible, short-term facility that can help you take your land, property investment or development project from one stage to the next. The funding can typically be arranged fast, which is the primary benefit.