What is a bridging loan?
Bridging finance is a short-term loan typically lasting from six months up to 24 months that helps borrowers bridge the financial gap between purchasing or refinancing a new property while you add value or release funds for other purposes.
Bridging loans are often used due to the speed and flexibility & have specific situations that may not meet the criteria of traditional lenders.
Bridging loans offer flexibility and customisation, allowing developers & property investors to tailor the loan terms to suit their specific requirements.
What are bridging loans for?
Bridging loans are particularly useful for refinancing development projects, purchasing properties bought at auction, properties bought for rental purposes before the tenants and leases are in place or property refurbishment and acquiring land for development purposes. They are also used in situations where projects are not eligible for traditional mortgages or where lenders have stricter criteria or longer processing times.
How much can I borrow with a bridging loan?
Typically no more than 75% (80% in certain special occasions) of the loan to value of the project or current value. This is typically the gross loan retaining the interest and fees. You can use our bridging calculator Link here to that page to calculate your net loan. If you can prove affordability of servicing the interest monthly then lenders will consider giving you the full 75% / 80% upfront.
How do you work out what you can borrow
There are different ways to calculate the loan to value figure, typically these are:
- Your lender: different lenders will have different criteria and lending limits.
- Your financial circumstances: lenders like working with applicants with a good financial track record and available funds in the bank.
- The valuation of your asset by the lender: The value of your property will generally directly affect how much you can borrow. See our guide to property valuations to understand the different types of valuations lenders can use and how this may affect your valuation and therefore how much you can borrow.
- Loan to value (LTV) ratio: Typically a lender will not want to lend more than 75% to 80% loan to value.
- The location of your property or project: the more demand a lender perceives there is for your property or end value, i.e. High demand, good location, next to commercial property can have a detrimental effect on the borrowing amount or number of lenders who will consider this type of property, the condition of the property, restrictive covenants or defect titles.
What is the typical interest rate for Bridging Finance at the moment?
It can be as low as 0.74 percent per month, up to 1.5 percent a month*
*(values correct as of May 24)
What fees are associated with Bridging Loans?
Typically, the fees you will pay are:
- 2% lender fee (added to the loan)
- lender’s legal fees (paid upfront through your solicitor)
- Your own legal fees
- Valuation fee (paid upfront)
- Potentially depending on the nature of the project there may also be title indemnity insurance or search indemnity insurance costs, which will to allow you to complete quicker so you don’t have to wait for the local authority or land registry to come back with the information.
- Broker fee usually 1%
- Admin fee to the lender from £495 to £1,500
How do I apply for bridging finance?
The best way to apply for a bridging loan is to use a Commercial Finance Broker. Brokers will have access to lenders who will not deal directly with the applicant. Brokers will also be able to assess the best deal and the right lender for your property and overall criteria.
During the application process, we will also liaise with the various professionals that will be involved with the project.
The specific documents required may vary depending on the lender and the nature of your project, but commonly requested documents include the following:
- Personal identification documents (passport, driver’s license)
- Proof of address (utility bills, bank statements)
- Business plan or project proposal
- Purchase and sale agreements or contracts
- Valuation reports or property appraisals
- Planning permission or permits (if applicable)
- Asset, Liability, Income & expenditure proving your net worth (personal and business)
- Bank statements (personal and business)
- Tax returns (personal and business)
- Proof of income (payslips, rental income, pension if applicable)
Depending on project feasibility, profitability, and financial standing, lenders will assess your application. The lender will provide a formal loan offer with detailed terms and conditions if approved.
What might be the hurdles I encounter when applying for bridging loan?
A bridging loan can only be secured against any type of property or land, although some lenders will consider second charges, typically at a lower LTV.
If the property is massively undervalued, compared to the agreed purchase price stated in your application this can also be a barrier to funds. We work with surveyors and use software to ensure you don’t waste your time and money on valuations before we submit the application, to ensure the figures you are providing are achievable.
A clear barrier to your application is being unable to demonstrate your net worth, to prove that you have enough funds to back personal guarantees and for the purchase of any works required.
A possible barrier could be if there are any agricultural ties or covenants on the title, the land or property you are trying to purchase. It is best to consult your solicitor to understand if anything on the title needs to be raised with the lender before paying fees. We liaise with solicitors on behalf of clients to ensure this is not the case.
As this is short term facility, you may also encounter barriers if you don’t have a clear exit strategy in place in order to repay this finance and any accrued interest, in full, at the end of the loan term. At The Commercial Branch, we work with you to ensure you have a suitable exit strategy.
What are the Eligibility Requirements for Bridging Finance?
Lenders all have different criteria and are prepared to lend different amounts, depending on the deal, the net worth of the client, their experience and the type of property.
Lenders assess your financial situation, including income, assets, and credit history.
Lenders also consider the property value you are considering and offer loans up to a certain percentage of its value (Loan-to-Value ratio).
Can I get bridging finance for both residential and commercial property development?
Yes, you can raise bridging finance for both residential and commercial property.
We offer development finance with flexible terms for various properties, including residential (on a regulated basis, buy-to-let, HMO, commercial investments, trading businesses where they own their own commercial properties, where the yield is not strong enough for commercial mortgages.
We also provide financing options for light refurbishment, heavy refurbishment and development finance such as purchasing land or properties where you can add value, typically you need to have a minimum of 15% Net profit.
How long does it take to get approval for bridging finance?
The approval process for bridging finance can be fast. It is often possible to gain quick access to capital, with turnaround times as quick 7 days, if all the legal work & valuations have taken place already, this normally happens when another lender has had all the information but has decided not to lend. Starting the process from scratch normally takes 1 month plus.
Once you submit your application and the necessary documentation, the approval process can be completed within a week, but then professionals have to be instructed such as solicitors & surveyors and quantity surveyors (if you are doing works to the property) work which needs to be completed. However, it’s important to note that the actual timeframe may vary depending on factors such as the complexity of the project, the lender’s requirements, and the completeness of your application.
Can I get bridging finance with bad credit?
It may be challenging to secure bridging finance for property development with bad credit. Lenders typically assess creditworthiness during the application process, and a poor credit history can be a significant obstacle.
However, it’s still possible to explore options by working with a bridging finance broker specialising in dealing with lenders who consider applicants with bad credit. They can help you navigate the process and find suitable solutions based on your circumstances, even if you’re a first-time developer.
Are there any other professional services involved in bridging finance?
To provide detailed information about your plans and financial needs during our initial consultation, and to make sure the proposed project can work and all communication is smooth to get to your desired completion date for the funds, we liaise with:
The lender, The lender’s solicitor, The surveyor, The quantity surveyor, Structural engineers, Architect, The client’s solicitor, The estate agent, The insurance broker, Planning consultants and Building control.
What is a below market value (BMV) purchase price?
Often caused by fire sales, you might buy a property or a piece of land for £1million, but it’s actually worth £1.25m. In this circumstance, the lender might be prepared to go to 90%, sometimes even 100% Loan to Value based on the BMV, because the true value is a lot higher.
But we need to understand the circumstances as to why this is an under market value transaction, as the surveyor, solicitor and lender needs to be comfortable around this, as the vendor can make a claim in the future if this is a forced sale.
What is an AVM?
An automated valuation model (AVM) is a software-based tool that’s used in residential and commercial real estate to determine property value. The service uses mathematical or statistical modelling with a combination of existing databases to determine the value of a particular property, therefore negating the need for a surveyor to physically visit the property, only in certain circumstances can this be done, but if possible this can save multiple weeks off the time to complete the finance.
What is GDV?
The Gross Development Value (GDV), is the forecast revenue expected based on the anticipated sale value once the development scheme is completed.
Who can you secure Bridging Finance for?
At the Commercial Branch, we can lend to limited companies, complicated group structures where the UBO, (Ultimate Beneficial Owner), is quite far removed, LLPs, individuals, overseas entities, trusts.
We can support foreign nationals and overseas clients, we can look at anything, but it just depends on which lender considers those types of structures.
Repayment of Bridging Finance
The exit or repayment method is perhaps the final, most important aspect of a bridging loan. At the end of its term, lenders will require that borrowers have a realistic exit but it does not have to be in place when the bridging loan draws down. For example, if the loan is to be repaid by the sale of a property, contracts do not have to be exchanged. It is usually enough that the property is being marketed.
Secure your bridging finance
At the Commercial Branch, we have access to all the best bridging loan providers, plus a range of exclusive facilities that are useful for applications that fall outside general lending criteria. If you would like to know more about financing a property purchase or property investment through bridging finance, contact one of our experts today who can go over exactly what you need and find the best bridging loan for you.