How do bridging loans work?
Overview
Bridging loans have diverse applications and are frequently utilised by both individuals and companies in need of short-term finance for activities such as acquiring a new home, investment property, refinancing existing loans, or renovating and developing properties.
A bridging loan is a credit product which is typically secured against assets such as houses and commercial properties and serve as a short-term financial solution for those in need of quick funds, allowing the borrower to 'bridge the gap' during financial situations. While predominately secured against properties, bridging finance can also be secured against high-value items like watches, cars, and jewellery.
Foreign buyers, Landlords, homeowners, and property investors utilise these loans for diverse purposes, including:
Acquiring a new property under tight deadlines or where mainstream term finance is unsuitable
Refurbishments
Investing in buy-to-let investment opportunities
Managing tax payments such as VAT (VAT Bridge)
Refinancing existing mortgages
Refinancing of unsecured liabilities
Property development
Exercising option agreements
Below market value purchases
Property investment strategies like BRRR, HMOs and commercial-to-residential conversions
A Bridge loan is a short-term loan used until the time a person or company can secure permanent financing or dispose of the asset.
Interest and fees are commonly deducted from the loan in advance rather than being serviced by the borrower’s income – repayment hinges on the property being sold or rented and refinanced, repaying the loan, fees and interest on exit.
Being short-term loans, typically 8 to 12 months bridging loans require a clear strategy and financial plan. Lenders will want to know about your situation, how you are going to exit, and your current financial position.
Bridging loans typically range from anywhere between £25,000 to £25m and are provided by specialist lenders. Highstreet Banks such as HSBC, Natwest, Bank of Scotland, Barclays, Halifax, Lloyds, RBS, Santander do offer bridging loans, however, they may only be available to certain clients or through specialist intermediaries as they often do not work directly with the public or have specialist partners for facilitating bridging loans.
What is a unregulated Bridging Loan?
Unregulated Bridging Finance refers to a Bridging Loan where the loan is secured against an investment property and not the residential address of the borrower or where the borrower intends to live.
Unregulated loans are not under the protection of the FCA as there's an assumption that individuals or companies receiving the loans are knowledgeable about the contracts and finance they are entering into and their functioning, thus a lower level of consumer protection is required.
Unregulated bridging loans are known to allow borrowers to complete their transactions much faster than traditional mortgages due to much lower due diligence and affordability requirements. The inherent flexibility of these loans allows for personalised structuring to meet individual borrower requirements, effectively alleviating many of the constraints associated with regulated bridging loans. These types of loans are not protected by the FCA, which means they are unregulated.
Although many bridging lenders are a part of professional bodies such as ASTL and FIBA, which ensures lending is conducted to the highest standard possible.
What is a Regulated Bridging Loan?
Regulated Bridging Finance is a bridging loan which is secured against a property that the owner occupies or will be intending to occupy in due course, this also applies to immediate family members.
Regulated Bridging Loans are more bureaucratic in nature and require more checks, this often means the process is not as time-efficient as unregulated bridging loans. These types of loans are regulated by the FCA, if unsure reach out. clarify about not being advice
Since bridging finance offers a short-term solution, it's imperative to devise a long-term plan accordingly. In property investment, two common exit strategies prevail: refinancing with long-term financial options such as mortgages, or selling an asset to cover the bridging loan. Bridging lenders prioritise assessing applications based on the proposed exit strategy so it's essential to have a clear plan in place.
If your exit strategy is sale it is important to clarify when the property will be placed onto the market and the price the property will be marketed at.
If this is a refinance exit, the lender will often ask for a decision in principle from the mortgage lender who will repay or redeem the bridging loan.
How much can I borrow with a bridging loan?
Lenders offer bridging loans ranging from £25,000 to hundreds of millions, with the borrowing amount dependent on the asset provided as security, your financial situation, and your expertise and background.
Typically, lenders provide loans up to 75% of your property's value, although some may offer up to 80% in specific situations. While there may be advertising promoting even higher Loan-to-Value ratios (LTVs), these are often marketing tactics and are unlikely to materialize.
First-charge bridging loans typically offer higher borrowing amounts compared to second-charge loans and can be more cost-effective depending on the loan size. It's essential for borrower to assess the overall costs of different financing options and choose the most suitable structure before finalising any decisions. In some cases, consolidating all loans and refinancing onto a single first-charge facility may lead to long-term savings compared to maintaining multiple charges over time.
What LTV can I get with a bridging loan?
In the Bridging Market, Loan-to-Value Ratios (LTVs) typically range from 70% to 80% depending on the lender, while Loan-to-Cost Ratios (LTCs) can range from 65-100%.
It's important to dispel the misconception that loans with 100% or 95% LTV or 100% Loan-to-Purchase (LTP) offers are readily available; such claims are often made by brokers and lenders to attract clients but in reality, the majority of these transactions never materialise as this strategy exposes the lender to significantly higher risk. Essentially, providing such high LTV loans would mean lenders are purchasing the property on behalf of the borrower.
To qualify for LTV ratios between 95% to 100% of the purchase price, borrowers must adhere to stricter underwriting criteria. This includes holding an option agreement or proving the capability to acquire the property below market value (BMV). However, this high-risk approach carries the potential for repossession upon repayment as valuers often anchor to purchase prices, underscoring the importance of borrowers comprehensively grasping the associated risks. Thus, these strategies should only be used by prudent professionals who are well-versed in risk management to explore such opportunities.
No Valuation bridging loans typically cap at 70% LTV, but we have lenders on our panel who can go up to 85% LTV for specific deal types, including refurbishments or below-market-value purchases. This gives you more flexibility and access to greater funding options tailored to your needs.
Bridging loan providers
High street banks like HSBC, Natwest, Bank of Scotland, Barclays, Halifax, Lloyds, RBS, and Santander do offer bridging loans, but they may only be accessible to specific clients or through specialist intermediaries. These banks often don't directly engage with the public for bridging loans and may rely on specialist partners to facilitate such transactions. Their specialist partners are often their own entities and brands, and the bank acts as a brokerage introducing you to these entities/providers and you can approach them directly instead of working trough the bank.
It's worth noting that high street banks may not be the optimal providers within the market. They tend to be less flexible and have a lower appetite for this sector compared to non-bank counterparts. Regulatory constraints and expertise play a significant role in this differentiation.
How do i apply for a bridging loan?
When searching for a bridging loan in the UK, while it's feasible to approach a lender directly, we advise consulting with a specialist broker.
The bridging loan market in the UK is extensive, witnessing approximately £7 billion in transactions annually across thousands of different products and structures. Additionally, the market is highly fragmented, with numerous lenders catering to various niches so it is difficult to navigate the industry as a consumer.
When selecting a specialist finance broker, it's essential to consider the fees involved. While finding the cheapest lender is crucial, it's easy to overlook the broker's fees. Commissions for bridging loans can reach up to 20% of the total loan cost, whether disclosed or undisclosed, meaning the broker receives a significant portion of the loan.
Our fixed fee structure ensures transparency from the outset. Unlike brokers who receive commissions of around 2% from lenders for each transaction, we operate on a fixed fee basis, starting at £599-£999 per application. On average, clients could save over 0.2% per month on Bridging Finance, amounting to approximately £6,000 per application. Whether you require a Refurbishment loan, Bridging finance, or Development finance, our fixed fees provide access to the most competitive lenders in the market.
Even if you decide to approach a lender directly, it's worth exploring whether we can negotiate better bridging loan rates on your behalf. Some lenders offer commissions to brokers, which may not be accessible to direct clients. Working with a broker can increase your chances of securing favourable terms for your bridging loan.
What information do i need for a bridging loan?
All lenders are going to request the following information (not limited to):
Full property details
Address
Value
Development value
Refurbishment costs
Detailed summary of the transaction and what you are trying to achieve
Your details
Home address
Date of birth
Your background (CV)
Company information (incorporation details, no outstanding filings)
Companies House link
No outstanding accounts
No outstanding confirmation statements
If your company is being liquidated or has notices, provide a full and accurate explanation - the lender will find out the real reason and decline your case if it is not in line with your explanation.
Current borrowings
Which bank
Redemption statement
Which other debts do you have outstanding?
Which debts are being repaid?
What is your strategy?
Buildings Insurance
How long is left on the term?
Is it fit for the purposes of the loan?
Is the reinstatement value correct?
Is the address identical to your other documentation
Exit
Refinance or sale
Refinance exit DIP