Bridging Finance is one of the best solutions available if you are looking for a way to secure a property investment project.
What Exactly Is Bridging Finance?
Bridging finance is actually a short-term loan that will last for about 12 to 18 months and will cover the overall time difference between the transactions between one property and another. Consider it an aspect that literally "bridges the gap".
There are a number of scenarios in which bridging finance might be a good solution.
Generally, the need for bridging finance will arise when there is a need to purchase one property before the sale of another property has been completed. When working with property development loans, bridging finance is quite common as an interim facility to help secure a property or generate an additional cash flow while the longer term finances are put into place.
Let's look at a couple of examples:
As a property investor, you notice an incredible purchase opportunity at the local auction. The general intention will be to refurbish the property for buy-to-let, until a more permanent finance is arranged. Bridging finance will used in the interim to finalize the purchase and begin the refurbishment.
In another scenario, a property developer has managed to get their project almost completed. Throughout the development, they have managed to secure various lines of finance, which have become rather difficult t manage and cost more than anticipated. Through the use of a short-term bridge loan one has the ability to consolidate all of the borrowing into one location until the sale has been finalized.
Consider the part-time property investor who is looking for a way to generate short-term business cash while seeking permission to convert a commercial property into a residential one. A bridging loan can be taken out to provide pre-construction financing until a developmental loan can be achieved when the planning has been fully granted.
Open Or Closed?
In some situations, a bridging loan will be referred to as open or closed.
A closed bridging loan is will have a definite exit plan in place with specific timings. For example, if the contracts have been exchanged, but the completion on one of the transactions is delayed for a reason. Closed arrangements will typically be preferred by borrowers and lenders simply due to the fact that the general certainty exists.
Whereas an open bridging loan allows for more uncertainty in terms of timing and repayment.
How Is A Bridging Loan Repaid?
Bridging loans will be repaid when one of the properties within the transaction have either been refinanced or sold.
What Type Of Lenders Offer Bridging Finance?
There are a number of various lenders in the market that are able to offer bridging finance.
Generally, bridging finance, like many other types of lending, was under the general guidance of the banks. However, after numerous financial difficulties, they have reduced their interest in these new projects.
In place of the bank, we now find specialist property lenders, who have on-hand experts available with a number of skills and resources to create a plan perfect for the property in mind. Case managers, underwriters, and business development managers will all work hand in hand to offer a fast decision on a loan application.
The market is comprised of a number of small investment funds, high-net-worth individuals, and companies that are all focused on making an above market return through the offering of high-interest loans.
Are Bridging Loans Regulated
The vast majority of bridging loans are regulated throughout the UK by the FCA. Any facility that involves the family member or borrower's home will be regulated under the MCOB or Mortgage Code of Business rule and will protect the borrower against misrepresentation or bad advice.
It is important to keep in mind that bridging loans that are designed for buy -to-let landlords and property developers are not regulated. This is due to the fact that commercial lending is subjected to a unique set of assessment criteria. For example, repayments are based upon the developmental value or potential of rent as opposed to the borrower's household income.
What Will A Bridging Finance Lender Require?
When deciding upon whether a loan should be granted or not, a reputable lender is going to want to first determine the overall creditworthiness of an individual. Having previous experience in property investing and development as well as a good credit history will help to secure lending in a quicker fashion.
General security is also going to be a depending factor. Lenders are generally going to look for a maximum loan to value ration of at least 65% on a commercial property and 0% for residential properties.
The lender is going to want to first charge on a property that will be sold or re-financed. It is important to realize that some lenders, typically the ones we discussed earlier are going to seek out some form of equity in the development for their cash. This can very well happen if you need to borrow more than what would be the maximum loan to value ratios on the offer.
What Is A Bridging Loan Going To Cost?
Loans will be priced according to the typical risk that the lender believes as well as what revenue needs to be generated for a profit.
Bridging finance generally in an open scenario is going to be considered a much riskier option as opposed to other forms of lending, this is due to the fact that the money will be lent out for a shorter period of time and in this case the only income for the lender will be in the interest which is going to be rather small.
With this in mind, it is quite typical to see an interest rate in addition to an arrangement fee. This could be legal fees, repayment fees, security fees, as well as valuation fees. These are all very legitimate fees and it is essential that you fully understand all of the costs that will be involved in the agreement before you sign. If you do not fully understand the fine print, it has the possibility to impact the overall profitability of your project.
We have a bridging loan calculator available which will help you to fully understand the complete cost of the facility that is being considered.
Of course, there are other things other than interest and fees you should consider. Once they have been paid you will also have numerous implications for the general cash flow. Property investment will not typically generate any positive cash flow until the project has been completed, therefore all finance costs will need to be budgeted for and you will need access to cash for regular payments. Interest roll-up in which interest is to be repaid at the end of the term as opposed to regular installments will be possible in some short-term arrangements.