Bridging finance FAQs

A bridging loan is a type of a short-term, interest-only loan which is typically borrowed for 1 to 12 months. Bridging finance can sometimes go by different names, often being described as; short term finance / loan, auction finance, refurbishment finance and other names reflecting the purpose of the loan. As bridging can be quick to complete, bridging loans are often used for situations with time-sensitive deadlines.

Bridging loans may be recognised as an expensive form of short-term finance with costly fees and high interest rates. Much of this is a result of the lender taking on more risk in lending. With bridging, lenders tend to adjust their underwriting process to focus more on the plausibility of the exit route and quality of the security, and less on the ability of the client to pay. This means the borrower can access more flexibility, often securing against unmortgageable or unmarketable properties which could not be achieved through traditional, High Street lenders. Bridging loans are also flexible in overpayments and are mostly without early redemption penalties, meaning once the first month’s payment is made, borrowers can choose to pay off the loan in full.

Bridging loans tend to remain a popular choice for short-term finance because when weighing out the expenses, not using a bridging loan may prove more costly in either losing an opportunity or missing out on a profit which could be made.

Bridging loans are commonly exited in these three ways:

1. Sale of property. Either the borrower sells the property they have secured the bridging finance against to repay the bridge, or the bridge is secured against a new purchase and they sell their existing property to repay.

2. Refinance. The borrower accesses another form of finance, typically longer-term, such as a remortgage of the security to pay back the bridging loan.

3. Cash redemption. If the borrower knows they will access a sum of cash during the loan term to repay the loan, they will have to evidence this. This is often seen through a pension lump sum, investment or share portfolio maturity.

This is not the expected outcome of bridging if the exit route is well considered. However, as with anything circumstances can change. If the borrower is not able to exit at the end of the term, there are two options which are typically taken;

• Asking the lender to extend the term, this involves new arrangement fees.

• Re-bridging with another lender. As the client will now have a history of not repaying in time and presents more of a risk, the lender will pass on a higher interest rate.

Retained interest enables the borrower to add the interest payments to the total of the loan agreement and avoid making monthly payments to the lender. This alleviates some of the financial pressure throughout the term and eliminates the need for assessing affordability in the underwriting assessment.

Regulated bridging loans are when the borrower secures funds against their existing or intended main residence and they are up to 12 months in term. Unregulated bridging loans are when the borrower secures funds against property which is not their existing main residence and will never be. Some lenders are not FCA regulated and therefore unable to lend FCA regulated bridging loans.

Regulated bridging loan interest rates tend to start at 0.48% per month. Unregulated bridging loan interest rates tend to start at 0.44% per month. This will vary across the market. (Rates as of 29 April 2020).

Bridging loans are considered an extremely flexible source of finance, and this is why they come at an expense. Many bridging lenders offer their borrowers the borrowing flexibility of no Early Repayment Charges (ERC) and the option to retain interest. Most notably, bridging loans can be secured on most types of properties which includes houses, flats, commercial units, land with planning, uninhabitable and unmortgageable properties.

Underwriters approach bridging loans with a slightly different approach to the process for a traditional High Street mortgage. This approach focuses heavily on two things; firstly, the strength and plausibility of the borrower’s exit strategy in order to pay off the bridging loan, and secondly, the quality of the asset offered as security. In order to minimise risk, the majority of bridging lenders operate with a prudent, conservative lending criteria and thorough underwriting process (including formal ID checks).

Right at the start of the bridging process, master brokers such as Vantage Finance can save both brokers and the borrower time of researching the bridging loans on the market – instead, narrowing down and presenting the best bridging loan terms to match their needs.

As a result of operating in the specialist finance market for over 15 years and our large business volumes, we have strong partnerships with a panel of bridging lenders who sometimes offer exclusive rates to us. Because we also have a better understanding of lender’s specific underwriting requirements, we can process applications a lot quicker.

And if you would prefer to pass your client’s application to us to handle, you’ll be welcomed by our team of 5-star rated experts who have a wealth of experience dealing with all sorts of complex cases.

Not forgetting, your broker lifetime guarantee - meaning if your client returns to us, you'll always get a referral.

Do you have any questions or cases on your desk you'd like help with? We'd love to talk. Get in touch with us today, drop us a line or give us a call on 01753 883 195.