When utilised properly, bridging loans are among the most effective commercial finance products. We try to answer a few burning questions about such loans in this post.
If you operate in the property market, you already know that time is of utmost importance. A good deal can become unreasonably expensive if you can’t close it in time. Worse yet, someone else is almost always ready to swoop in and steal the deal from you.
In short, if you can’t move at a rapid pace, you’ll only make things difficult for you.
But then again, it’s never easy to get property deals worth hundreds of thousands of pounds through without having some time to think, consult with people and arrange for funds. The last part – that of raising money – eventually turns out to be the bottleneck.
Breaking that bottleneck so that investors, developers, landlords and regular buyers can ‘realise’ their dream deals is the prime focus of all bridging finance products.
Before We Start – A Quick Look At What Bridging Finance Really Means
There are quite a few myths that regularly float around bridging loans, especially amongst first-time borrowers. For now, we will just try to clear the air by defining what bridging loans are.
What Are Bridging Loans?
Bridging loans are short-term loans taken (usually) by commercial entities to help ‘bridge’ the gap between required funding and available (or soon to be available) funding.
It’s common for people in the property market to use the terms ‘bridging loans’ and ‘short-term loans’ interchangeably – but that’s not always correct. An easier way to differentiate between the two is this: all bridging loans are short-term loans, but not all short-term loans are bridging loans.
Let’s say you are a property developer. You already have an active project that’s nearing completion. You expect it to complete within next 10 months. For now, you’ve come across a good buy to let opportunity that you don’t want to miss out on. The only problem is, the seller wants you to make an initial deposit of £200,000. You already have active development finance on your project, so you know it’ll be tough to get a buy to let loan.
In this case, a bridging loan can be the most ideal way out. You can, for instance, take a six-month bridging loan with a fixed interest rate. This loan will cover the initial deposit for your new project – and can be paid back once the active project gets completed (i.e. your exit strategy will hinge on the competition of your active project).
Here’s how the numbers would typically work out for such a case:
- The market value of the property to be used as security: £400,000
- Maximum LTV offered by the lender: 80%
- Maximum amount that can be borrowed: £320,000
- Actual amount borrowed: £250,000
- Initial deposit to be made: £50,000
- Balance bridging loan amount: £200,000
- Applicable interest rate:5% per month
- Loan term: 12 months
- Payable interest: £1,250 per month
Why Are Bridging Loans Used? Who Are They Aimed At?
There’s really no limit to the number of reasons people and businesses use bridging loans for.
Even though, at Commercial Finance Network, our bridging finance services focus on the property market, it’s important to note that bridging loans are used across all industries and sectors. They may take different names and forms, but the idea remains the same.
Bridging loans are aimed at people who are looking to enter the property market via any of the regular channels (buy to let, convert, develop or invest). Essentially, if you are a property developer, landlord or investor, you can and should use bridging loans as a viable financing option.
Here’s Why Bridging Loans Are Popular
- Easy To Get: Bridging loans are easier to get if you have your business and personal credit history in good health. Even when you don’t, lenders on our panel might be interested in your application. You can get a loan for an amount as high as £200,000.
- Fast: There’s no need to waste time. When you work with an industry-leading whole of market broker like Commercial Finance Network, you get a decision on your bridging loan application within 24 hours. More importantly, we make sure that the lender releases the funds to you swiftly.
- Flexible: Bridging finance is incredibly flexible. It’s just a short-term loan, but can well be extended up to 12 months, should you feel the need to. Moreover, most lenders are willing to offer interest-only repayments (subject to the viability of your exit strategy).
- Cheap: Bridging loans we broker come with lower-than-market interest rates. Some of our lenders offer interest rates as low as 4% per month. It should, however, be noted that bridging finance is more expensive than long-term mortgages.
When Should You Consider Applying For A Bridging Loan?
Bridging loans are a specialty commercial finance product. Therefore, to make the most of what they have to offer, you need to know and understand when they are a good option.
Here are some common scenarios that are tailor-made for bridging loans:
Buy To Let Projects
Buy to let projects are well served by bridging loans – especially when your existent credit line/loan is fully invested in another active project.
Residential/Commercial/Mixed Use Development
Development projects, more often than not, end up stretching your budget too thin. There are a million fronts to fight on, and it’s not at all uncommon for developers to run out of money. Such situations – before the project starts or is already in progress – can be taken care of using a customised bridging loan.
If you want to undertake conversion/refurbishment projects, you can take out a bridging loan to cover the costs.
Important: Know What Your Exit Strategy Is!
Bridging loans are incredibly useful when your back is against the wall. That, however, doesn’t mean that they can replace conventional, long-term financing options.
A bridging loan is best viewed as a temporary arrangement – one that saves the day.
Therefore, before you get into a bridging loan contract, it’s important for you to know how you’re going to exit. Common exit strategies include:
- Selling the property (being used as security)
- Getting a more robust, long-term development finance package or buy to let loan
- Placing a mortgage on your new property
Bridging Loans Timeline
A traditional mortgage would take weeks to ‘realise’. Bridging loans, thankfully, are faster.
When you work with us, we make sure that you get a decision from lenders within 24 hours. Once you decide to go ahead with a particular quote, the lender will proceed with the valuation of your property and assessment of your credit file. Everything said and done, a commercial bridging loan can go through within a matter of days.
Finally, How To Apply For A Bridging Loan?
If you don’t want to involve a broker in the process, you can approach lenders directly. This, however, is an approach fraught with risks. When you aren’t familiar with the lender’s approval criteria, you always have a very high chance of getting multiple applications turned down. This puts a dent in your credit score, making it even more difficult for you to get approved.
Such hassle can be avoided with ease, and for a very reasonable cost by working with a leading whole of market broker like Commercial Finance Network. We have on board a panel of UK-wide specialist lenders who are known to offer low interest rates and high flexibility of repayment.
Applying for a bridging loan is easy – just complete this form or call us on 03303 112 646 to get started.