Bridging finance is a type of short term finance which is used to ‘bridge the gap’ between the purchase of something usually within a tight deadline. It is most common for those looking to buy or invest in property but have a short time to complete, perhaps due to purchasing at auction or due to competition from other buyers.
With bridging loans lasting around 6 to 24 months, it is considered a fairly expensive form of finance but offers incredible flexibility. Since funds are accessed from specialist bridging lenders, one can break traditional property chains and avoid the lengthy mortgage process of going through an advisor and bank. Successful applicants will typically receive funds within 2 to 4 weeks of applying, making it a strong alternative to mortgages and bank finance.
About the industry
According to the Association of Short Term Lenders, there are around 33 bridging lenders in the UK and hundreds of brokers that are driving them business. Some of the largest lenders in the industry include Octopus, Precise Mortgages and MT Finance. In 2011, the industry had an estimated value of £750 million but recent figures show that the amount of money lent out in 2017 reached around £7 billion.
The industry is regulated by the Financial Conduct Authority but several lenders are able to offer unregulated bridging loans also known as ‘non status.’ The main terms are that lenders cannot give funds to someone for a property that is their primary residence. It also means that there are no credit checks involved, however, non status lenders may cover the risk through higher interest charged.
When is bridging finance commonly used?
Property developers – Buy to let investors and property developers are the most common customers of bridging finance. Rather than apply through their local bank, they are attracted by the opportunity to skip the traditional process and acquire funds fast. They will typically use the funds to purchase land or property, renovate the premises and rent it out to tenants or resell at a higher value.
Moving house – For households and homeowners that are looking to move house, bridging finance can help those who have not sold their existing property. If they have their eye on another property and feel that they might lose the deal, they can use bridging finance towards their deposit and once their original property has sold, they can repay the loan.
Businesses – For high-flying and fast-growing businesses, bridging loans can be used in order to support a growth period. Money can be borrowed, secured against your property or offices to purchase new inventory, hire staff or pay for advertising. Once the high growth and revenue has been achieved, the loan can be settled. You could also look into invoice financing, as offered by companies like Business Expert.
What are the terms?
The interest charged by bridging lenders ranges from 0.44% to 2% per month. Additional fees can be incurred for surveys, administration fees, early exit fees and broker fees tend to be around 2% of the loan value.
Bridging finance is always secured against a property or asset and is available as a first charge or second charge loan.
How do repayments work?
There are several repayment options available. The most common is to roll up all the costs until the end of the loan term. This should help customers manage their cash flow more effectively, especially if they are looking at a big pay out once the property has sold.
Other options include paying in monthly instalments or interest only so that you borrow less, but interest is not accrued.
Very typically, once the loan term has reached the end, borrowers will look to refinance under new terms. This may perhaps give them some breathing space in case the development was delayed or they are still looking for a sale.