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Categories: bridging loans | guides | development finance
Bridging loans are short-term loans that help property developers (amongst other people) “bridge the gap” between one property transaction and another. These loans usually last for anywhere up to 2 years and can help with the commencement or completion of a renovation project.
Should you consider a bridging loan for buying a property, or for renovations/refurbishments? Is it the right option for you and your current or upcoming project?
Let’s find out.
In this guide to bridging loans, we’ll answer all of the following questions and more:
Bridging loans are short-term loans used for auction purchases, renovations, and other cases where traditional mortgages are not applicable. Monthly interest is charged for borrowing the money (usually between 0.5% and 1.5% of the loan amount) and you can borrow over 3-18 months. For property developers in need of money in a short space of time, they’re one of the best solutions.
The key aspects of a bridging loan
- Secured loan: Bridging loans are secured loans, which means you agree with a lender that if you are completely unable to repay your borrowing, the lender can take possession of your property to sell it, in order to cover the cost of your debt (just like a mortgage).
- Short-term: These loans are taken out on a short-term basis. You can get bridging loans over 3-18 months.
- Wide availability: Bridging loans are available to all sorts of borrowers, whether you are borrowing in personal name or through a limited company.
- Regulated versus unregulated: If the property you are borrowing against is intended to be sold on for profit, rented out (whether to a residential tenant or you have a business premises you will rent to a company) or is a business premises you will run your own company from, then you will need an unregulated bridging loan.
Unregulated bridging loans do not have the same consumer protections as regulated bridging loans. This is because it is expected that someone undertaking the types of project described have a good understanding of what a bridging loan is, how it works and what the risks are.
Regulated bridging loans are subject to consumer protection by the Financial Conduct Authority (FCA). They are appropriate when the property you are borrowing against is a house you are going to live in.
Each product does similar things, they are simply suitable for properties with different end uses. - Processing speed: The application and approval process is much quicker than that of a typical mortgage and lenders are usually more accommodating.
- Finance requirements: Whether you’re buying, refurbishing, or consolidating, a bridging loan can help you to meet your borrowing goals in the short term, but you must have a robust plan on how you will pay it back.
- Loan amounts: You can use a bridging loan for property development big and small, borrowing anywhere from tens of thousands to tens of millions.
- Repayment: Bridging loans accumulate interest on a monthly basis, but the money doesn’t have to be paid back until the end of the loan period. You can choose to pay monthly, or at the end of the term. Paying monthly is referred to as a serviced bridging loan, of the two options this allows you to borrow more. Paying it back at the end of the terms is called a retained interest bridging loan.
What types of bridging loan are there?
There are two ways of paying back a bridging loan. ‘Serviced’ – which means making monthly payments or ‘Retained interest’ – which means paying the interest when you pay off the loan.
If you initially take out the loan over 12 months, but finish the project sooner and pay back in, say, month 8, you are only charged the interest based on 8 months of borrowing. So, if you can complete the work you are doing this can achieve a saving on what you initially expected to pay back.
If you take a 12-month bridging loan at a rate of 0.9% per month, that’s the equivalent of 10.8% over the course of the loan.
Assuming the loan amount is £500,000, you would pay £4,500 in monthly interest, equal to £54,000 in total interest.
Always check the full cost of the loan before agreeing to any terms.
How much can be borrowed with a bridging loan?
The maximum amount you can borrow with a bridging loan depends on the lender. The overall maximum offered amongst all lenders is up to £25 million, with a minimum loan amount of around £25,000.
The typical interest rates on a commercial bridging loan
Bridging loans are considered to be high-risk, and the interest rates are usually reflective of that. Commercial bridging loans for property developers range from around 0.7% to 1.2%, but these rates are charged monthly and not annually.
If you’re not sure how much you will repay and what type of rate you can afford, check out this bridging loan calculator. Just enter the loan amount, term, and interest, and it’ll give you an idea of how much you will repay.
What’s required to be considered for one?
As with all loans, there are a few steps you need to take—and a few conditions you must meet—to qualify for a bridging loan for property development:
- Show a clear exit strategy
- Pass credit history checks
- Meet the minimum loan-to-value ratio
- Provide deposit details
Read on for more details on each of these bridging loan requirements.
What is an exit strategy on a bridging loan?
The exit strategy is arguably the most important aspect of a bridging loan. It’s the process that outlines your plan, showing the lender how you’ll repay the money and giving them confidence in your ability to do so.
It is very important to give yourself plenty of time to repay a bridging loan, because the penalties for not repaying on time can be quite high.
Depending on your circumstances, an exit strategy may include one of the following outcomes:
- Property sale: Assuming the property is worth more than the amount you borrowed, you can sell it to pay back the bridging loan. Your property investment strategy might be flipping property, which is where you buy a property, do it up and sell it for a profit. A bridging loan is ideal for this.
- Refinancing: Mortgages take time to arrange, so bridging loans can be used when financing is required but time is short, or you may need to renovate a property before it will be possible to secure a mortgage on it. So, exiting to a mortgage which is used to pay back the bridging loan is commonplace and allows you to retain ownership of the property.
- Another source: Lastly, you could repay the bridging loan with cash from another source, such the sale of an asset, income from a business etc.
Credit history
Your credit history isn’t as important with a bridging loan as it is for a mortgage. As a result, bad credit isn’t usually a deal-breaker.
However, credit history may be considered if you’re applying for a high loan-to-value (LTV) or if the eventual repayment of the loan is dependent on you being approved for a mortgage.
What deposit is needed?
Deposits of between 25% and 40% will give you the widest choice of lenders—the more you have, the better your options will be. High-risk ventures such as hotels and restaurants may require a deposit of 50%, equivalent to an LTV of 50%.
By contrast, some medical practices may be eligible for amongst the highest loan to value ratios (70%-75%).
Financial status
Lenders focus more on the property and plan to repay rather than your financial status, but under certain circumstances, your income and financial obligations will still be considered. It’s not quite the same as applying for a mortgage, though.
If you are taking out a bridging loan with retained interest (paid at the end of the term), there is less need for the lender to pour through your bank statements and outgoings. This is because the interest you are due to pay is covered by the loan, which you have demonstrated you can repay with your exit strategy.
If you are taking out a bridging loan with serviced interest (paid monthly), then the lender is more likely to conduct an affordability assessment, because the interest is yet to be paid. You exit strategy will make clear how the capital lump sum is to be repaid.
If you are exiting to a mortgage, you will present your bridging loan lender with your mortgage decision in principle. This tells the bridging loan lender that you have shown the mortgage lender you can afford a mortgage, and that mortgage is going to be used to pay back the bridging loan.
Similarly, if you are selling your property development, the bridging loan lender will use the estimate of the gross development value to ensure it will cover the cost of repaying the loan.
What situations are best suited for a bridging loan?
As a property developer, there are a few times when you may way want to consider a bridging loan:
- You are renovating: If you need to invest a lot of money in the property to bring it up to spec, a bridging loan can help.
- You need money quickly: If you need to move quickly, a traditional mortgage takes longer to arrange than a bridging loan. You can use a bridging loan to take advantage of timed offers and rapidly changing market conditions.
- You are buying at auction: An auction purchase requires you to settle purchase costs typically within 30 days of the hammer falling. A bridging loan can be used to cover these costs, giving you the time and opportunity to arrange a mortgage wait for it to be approved.
- You are developing a dilapidated property: Traditional mortgages are rarely approved for old and dilapidated buildings that need a lot of work. You will also be refused if the building is missing a bathroom or kitchen, as the property is not fit for human habitation. A bridging loan will cover the purchase costs and renovation work costs and you can then arrange a mortgage or sell the property to pay off the loan.
- You need to secure planning permission: You may be buying land or a property and need to change its current use to something else (e.g. seeking planning for converting a commercial property to residential) and require planning permission to do so. You could take out a bridging loan to fund the purchase and works involved with the change of use, which wouldn’t be allowed under long-term finance.
What’s the best way to get a bridging loan?
Usually, the best way to get a bridging loan is to secure it against the property that you are buying and make the term as short as you can. But it really depends on your situation—why do you need it, will your circumstances change, and do you have any experience or additional assets?
Regardless of how you answer these questions, we can help you to get the best possible deal.
Request a call-back here to speak with one of our brokers and we can guide you through the process.
FAQs about getting a bridging loan as a property developer
If you don’t repay your loan within the specified time, you could be hit with penalty charges. As it’s a secured loan, continued failure to pay may result in your property being repossessed.
Yes, the exit plan is how you prove to the lender that you will be able to repay the loan, so you need to have one in place. This may be long term finance, such as a mortgage, or to sell the property and use that money to repay the loan.
As well as being essential in the eyes of a lender, you need to be sure you can pay back a bridging loan to remain financially secure, so a robust exit plan is vital.
Bridging loans work the same way in Scotland as in England and Wales, they are just as straightforward. The only challenge would be securing finance off the mainland. You can often get loans of up to 75% LTV.
Bridging loan interest can be paid monthly (this is called a ‘serviced’ bridging loan) or the interest can be calculated monthly but not paid until you pay back the loan in full (this is called a ‘retained interest’ bridging loan). The benefit of serviced payments is that you can borrow more than on a like-for-like retained interest loan.
