Raising Finance

A guide to bridging lending

4 min read

15 November 2017

All bridging loans are typically secured against a commercial or residential property or sometimes a business.

A bridging loan is used to help you purchase something with a tight deadline. It is commonly used for buying property where there is a lot of competition or a time restriction in place. Instead of being caught up in a long mortgage application or property chain, borrowers look for bridging finance as a way to borrow up to £25m within the space of two to three weeks.

All bridging loans are typically secured against a commercial or residential property or sometimes a business. There is usually a very clear exit strategy and the borrower has an idea of when they are going to repay their loan within six, 12 or 18 months.

Common uses for bridging loans

The most common reason for using bridging is to purchase a property. For homeowners that have found another dream house to move into but have not sold their original one, they can apply for a bridging loan in order to purchase their new house, getting the property completed within the tight deadline. Then, once their original house sells, they can simply pay off their bridging loan.

For property developers, especially in buy-to-let, they use bridging finance in order to purchase an office, house or flat. The funds are used to fix up and refurbish the property and then the loan is repaid or refinanced once it has been sold for a higher price or rented out to tenants.

When buying a property at auction, you have around 28 days to come up with 90 per cent of the agreed sale price. Hence, this type of loan can help you “bridge the gap” within the time limit.

For fast-growing businesses, a bridging loan can be used to fund your period of growth. If you need to buy a new office, hire staff or pay for advertising, you can use this type of funding, provided there is something put down as security.

The fees

Interest is charged on the loan term starting from 0.44 per cent per month up to around six per cent and this fee depends on the criteria, the opportunity and lender’s terms. The maximum loan duration is typically around 12 to 18 months, depending on the lender.

However, the interest charged is not the only fee involved with a bridging loan. Other costs include:

• Surveyors and valuation fees ranging from £400 to £1,000
• Procurement fees ranging from 0per cent-2.5 per cent for the lender
• Broker fees of up to 2 per cent if you apply via a broker
• Legal fees for your solicitor starting from £1,000
• Exit fees for repaying early will depend on the lender and agreement

About the industry

The bridging industry is worth an estimated £4bn in the UK based on around 40 bridging lenders. The main lenders in the industry include Precise Mortgages, West One Loans, MT Finance and Masthaven. There are hundreds or potentially thousands of bridging brokers that package deals for the lenders in the sector.

The amount you can borrow ranges from £50,000 to £25m, with some lenders able to offer more than this based on criteria. The industry is regulated by the Financial Conduct Authority and whilst there are around 33 regulated lenders, there are several non-regulated providers too. Regulated lenders can lend on first charge mortgages and have to run credit and affordability checks on every application. The unregulated or non-status lenders are no obligated to run credit checks and can only lender on second charge mortgages and those properties for residential buy-to-let.