Master Bridging Finance Solutions: Read our Expert Guide
What are the benefits of using bridging finance solutions?
Bridging finance solutions offer quick access to funds, bridging gaps in cash flow, enabling timely property purchases or business deals. They are flexible, with short-term repayment options, making them ideal for urgent financial needs where traditional loans may not be viable due to time constraints.
Miles Wallace, Commercial Finance Director, outlines why commercial landlords, property developers and even private buyers should always use an independent broker to manage their short term finance deals.
As a commercial finance broker, we continually receive a number of requests for bridging finance. Bridging finance loans continue to play a vital role for those looking to develop land, purchase property, finance currently unmortgageable properties and convert existing buildings for another purpose.
Bridging finance provides individual and portfolio landlords, property developers or home owners with the necessary funds to bridge the gap to buy land or property for development, while waiting for longer term funds to become available either through a property sale or the completion of a development scheme.
Reasons for Bridging
In truth, there are so many different reason for needing bridging including; paying a tax bill, financing a divorce settlement, buying a business, paying off a shareholder or bank, buying your new home before the existing one is sold, or adding value to a property via development, which makes it eligible for other finance options.
Using bridging loans for auction properties offers several advantages. The quick access to financing allows borrowers to make competitive bids and increase the chances of winning the auction. Bridging loans also provide the flexibility to refinance the loan or sell the property after the purchase usually with no early repayment charges, providing additional options for repayment.
With access to the whole market of lenders, understanding how bridging loans work and the various types available is a crucial role finance brokers play to assist clients in navigating the complexities of this specialised form of lending. Brokers can guide borrowers through the application process, helping them find – and secure -the best deals, and ensuring they meet the necessary eligibility criteria.
This essential guide will provide comprehensive information on bridging loans, including their definition, the benefits they offer the different types available, the application process, eligibility criteria, and if necessary alternative financing options.
Bridging Finance from Lenders reaches record high
Bridging finance is on the up as conditions in the market place make short-term loans a necessity.
According to data published by Bridging Trends, lenders provided £831 million of bridging loan finance in 2023, making it the highest recorded annual gross lending figure in the decade since these records began in 2015.
This record figure represents a 16% increase on 2022 figures (£716.2m).
This sum is in some way explained as in addition, in 2023 the average time for a developer to agree the sale of a new-build property was estimated to be around 65 days, which represents a massive 68% increase from last year.
Obviously, this delay in selling- and generating funds- has a massive impact on developers; the costs of borrowing on developer finance are relatively high, with either retained or rolled interest mounting up over this period and if the build project was extended or over budget, then these compound costs, along with possible extension fees paid on the borrowing for the build costs can seriously eat into profit or cash flow.
In these situations it makes sense to look for refinancing through a bridging loan which can increase the borrowing amount for other sites, reduce the costs of borrowing, providing a longer sales window, which means developers can avoid fire sales and hold on for the right price.
But it’s not just an increase in commercial lending we have seen. While bridging loans remain popular with developers and landlords, last year investment loans (20%) were surpassed by private borrowers seeking to prevent a break in their residential chain (22%).
As the figures and number of deals increase, it is vital that anyone looking for a short term loan arrangement, whether for commercial or residential purposes ensures the feasibility of their planned project and understands the implications and risks associated with this type of borrowing.
Understanding Bridging Finance Solutions
A bridging loan, also known as a bridge loan, is a short-term loan that helps borrowers bridge the financial gap between purchasing a new property and selling an existing one. It provides the necessary funds to cover the period between the purchase and sale transactions, typically lasting from a few weeks up to 12 months. Bridging loans are often used due to the speed and flexibility of the products available or when borrowers – or their projects- have specific situations that may not meet the criteria of traditional lenders.
The short-term nature of bridging loans aligns with the timeline of property development projects, as developers aim to complete projects and sell or refinance the property within a relatively short period. Bridging loans offer flexibility and customisation, allowing developers to tailor the loan terms to suit their specific project requirements.
What are Bridging Loans?
Bridging loans, then serve as a temporary financial solution for individual buyers and businesses seeking to purchase or refinance a property or piece of land. These loans are particularly useful for refinancing development projects, purchases of properties bought at auction, property refurbishment and acquiring land for development purposes. They are also used in situations where traditional commercial mortgage lenders have stricter criteria or longer processing times.
One of the common uses of bridging loans is in the purchase of commercial properties. Commercial properties, such as office spaces, retail units, and warehouses, often involve complex purchasing processes that can take longer to complete. Bridging loans provide the necessary funds to acquire these properties promptly, ensuring that businesses can secure the ideal location without delays.
Similarly, individuals looking to purchase new residential properties to add to their rental portfolios can benefit from bridging loans. Whether it’s buying a newly created housing block or acquiring properties for development or renovation, bridging loans offer a flexible and convenient financing option during the transition period.
Benefits of Bridging Finance for Property Development
- Bridging loans offer flexibility and quick access to funds, allowing borrowers to take advantage of time-sensitive opportunities
- Bridging loans can be used for various loan amounts, depending on the anticipated value of the finished project and the borrower’s experience and financial situation
- Repayment terms for bridging loans are typically shorter, ranging from a few months to a year, allowing borrowers to repay the loan quickly and move on to more long-term financing options
Types of Bridging Finance
There are different types of bridging loans to cater to different needs. The two main types are first charge bridging loans and second charge bridging loans. First charge bridging loans are secured by a property that is not already mortgaged, while second charge bridging loans are secured by a property with an existing mortgage. These distinctions affect the priority of repayment in case of default.
First charge bridging loans
First charge bridging loans are secured by a property that is not already mortgaged. The lender holds the first legal charge over the property as collateral. The loan amount is determined by the value of the property, and a valuation is required to assess its worth. First charge bridging loans are suitable for borrowers who own a property outright or have significant equity in their property.
Second charge bridging loans
Second charge bridging loans are secured by a property with an existing mortgage. The lender holds the second legal charge over the property, meaning that the first mortgage lender has priority in case of default. Second charge bridging loans are suitable for borrowers who have equity in their property and require additional funds. The loan amount is determined by the equity available in the property. Monthly payments may be required to cover the interest on the loan, and the repayment terms are typically shorter than traditional mortgages.
Open bridging loans
Open bridging loans are a popular choice for property developers and investors who require short-term financing to seize opportunities or complete projects, but who don’t yet have a set date for paying off the loan maybe because of uncertainty regarding the timeline of a project and therefore the eventual sale of a development. These loans often come with higher interest rates compared to secured loans, as they do not require collateral and are considered riskier for lenders.
Closed bridging loans
Closed bridging loans have a fixed repayment date, making them suitable for borrowers with a specific completion date for the sale or refinance of a property or development project. These loans are often used when the borrower has a guaranteed source of funds to repay the loan, such as a pending sale of another property. Closed bridging loans typically have lower interest rates than open bridging loans due to the reduced risk. Borrowers must meet specific requirements and provide an exit strategy, such as evidence of the planned repayment source to qualify for a closed bridging loan.
Fixed or variable interest
Bridging-loan interest rates can be either fixed or variable. With a fixed rate you’ll know exactly how much you’ll be charged, and your monthly repayments will be the same for the duration of the loan. With a variable rate bridge loan, the interest rate can change. In most cases the interest applied to Bridging Loans is ‘rolled up’, meaning that no monthly payments are made to the lender during the loan period. Instead, the lender will add any interest amounts accrued and fees onto the loan which are then repaid at the end of the loan period along with the principal loan amount.
The Process of Applying for Bridging Finance
Applying for any bridging finance requires gathering necessary documentation, such as proof of income, proof of address, and bank statements. Lending criteria for any bridging finance solution may also vary among lenders, but generally, borrowers must meet requirements related to their net income or wealth, their experience or track record in the sector, the project’s viability and the borrower’s ability to repay the loan. Factors such as the projected gross development value, (GDV) which is the forecast revenue, based on the anticipated sale value once the development scheme is completed is also a key consideration during the approval process.
We typically send financial proposals to at least six lenders that we feel are best placed to offer the right bridging finance solutions. It is important to provide accurate information at this application stage to increase the chances of loan approval. Working with a broker like The Commercial Branch can simplify the application process by connecting borrowers with suitable lenders and guiding them through the necessary steps.
Bridging Finance Calculator for Property Developers
Key to any commercial finance deal is the projected ROI (Return on Investment) of any project.
To help understand the projected costs, returns and repayments of any scheme, we use a bespoke Bridging Calculator to demonstrate to developers, landlords and property investors, exactly how much they’re going to pay in interest and fees. This calculation is effectively to determine whether a development has, or will, turn a profit at completion.
Potential profit is established by assessing these costs of development versus the Gross Development Value (GDV) of a project. GDV is the forecast revenue or sale that is anticipated from the completed development scheme. A total profit value can then be calculated in percentage terms.
Part of our job in recommending any bridging finance solutions is to assess each project with a view to its potential profit margin to make sure that the deal stacks up and that what the client has planned is actually going to make them money once they pay off their lenders.
So, before we accept any deal, we liaise with all the other professionals involved in a project including the lender, the lender’s solicitor, the surveyor, the quantity surveyor, structural engineers, architects, the client’s solicitor, the estate agent, the insurance broker, planning consultants to assist with the planning process and planning permission applications, building regulations and building control to assess all other costs associated with a scheme as well as making sure it all fits and works the way everyone needs it to.
If there are stumbling blocks, we can overcome them as quickly as possible so the borrower can move forward with the deal.
Approval and disbursement of bridging finance
Once the application for a bridging loan is approved, the lender will provide a formal loan offer to the developer. The developer can then review the offer and, if satisfied, accept it. Once the loan offer is accepted, the lender will disburse the funds to the developer based on the agreed terms and conditions. The disbursement can be made in stages, with the developer receiving the funds as needed for land purchase or construction costs. This drip feed approach means the developer is only accruing interest on the funds actually drawn down, not the whole amount. In this way, it’s important for developers to carefully review the loan offer and disbursement process to ensure that they understand the terms and conditions and can effectively manage the funds throughout the project.
Interest Rates and Charges on Bridging Finance
Interest rates for bridging loans are typically higher than traditional bank loans due to the short-term nature of the loan and the higher risk involved.
Depending on the structure of the deal there are different ways in which this interest can be repaid.
Firstly, there is retained interest, which is a popular interest type in bridging finance. Secondly, you can have the interest, rolled up, which is also known as capitalised interest. A third option is serviced interest.
Retained Interest
Retained interest means that interest paid on a loan isn’t paid monthly. Instead, all of the interest that is due to be repaid over the term of the loan is added up and subtracted from the initial bridging loan sum. Consequently, you would be expected to pay back the full amount you originally applied for at the end of your term.
Rolled up interest
Rolled up interest on a bridging loan is applied to the balance owed each month. If you take the loan over 12 months, for example, the rolled up interest is calculated at the outset and applied on a monthly basis. This compound figure is then deducted from the initial loan sum. This Rolled up interest model is sometimes referred to as capitalised interest.
Serviced Interest
A serviced interest agreement, can be a combination of retained and rolled-up interest charges on a loan that you pay off on a monthly basis. The lender will agree a term over which the interest is repaid in monthly instalments but may offer a mixture of retained and rolled-up interest charges.
Risk Factors of Bridging Finance Solutions
While bridging finance offers flexibility and quick access to funds, there are certain risk factors associated with these loans. Failure to repay the loan within the specified terms can result in property repossession by the lender. Borrowers should carefully consider their financial situation and the feasibility of any scheme which will impact their ability to meet the loan obligations before applying for a bridging loan.
The Role of a Broker in Bridging Finance
As a Commercial Finance Broker, The Commercial Branch plays a crucial role in securing bridging loans, as we connect developers, landlords or investors to a whole market of lenders to help find the best deal. Some 87 percent of all commercial finance deals are done through brokers, so banks will generally be more inclined to work with a broker rather than directly with a client. This means we have the negotiating power that developers just won’t have. It means, even if they have an existing relationship with a bank, they may not get the same favourable rates we can secure. Plus, we understand the lending criteria and requirements of different lenders, making the application process smoother and more efficient.
Benefits of using a Commercial Finance Broker
Put simply, commercial finance brokers save you time and money.
We have direct access to a wide range of lenders and products and can quickly research the market to find the best deals for their clients.
Understanding the intricacies of these loans can make a substantial difference to the success of a property purchase or development project. While they offer benefits like quick financing and easy approval, it’s crucial to be aware of the risks involved, such as higher-interest rates and possible fees.
Whether you are a first-time developer, have bad credit, or are working on a property that is otherwise unmortgageable, it is important to understand that there are bridging loan options available but that a broker will be crucial to finding the lenders that are prepared to work with you.
The real value add for many clients however is the work we do with all of the other professional services associated with a development or building project, which means we are able to navigate the application process efficiently while accurately predicting future costs and potential revenues generated from the completed scheme, helping lenders – and developers -make informed decisions that align with their criteria and ultimate goals for successful new development.