Bridging Finance
Bridging finance can be used for a number of reasons with property, with the 2 main reasons usually being listed as 'speed and flexibility'. That sounds great, but what does that actually mean and what are some examples of where bridging could be used?
Bridging can be used for any legal reason really, although its most common uses would be for;
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Chain Breaks
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Downsizing
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Flips/Flipping (property refurbs before selling for profit)
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Refurbishment
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Change of use on a property (going from commercial to residential for example, or a HMO conversion)
Bridging finance is assessed on the exit strategy, which can be seen as a lump sum of money coming in which will repay the loan. This lump sum could be from many things but the main examples are the sale of a property, the refinance of a property or the maturity of some form of savings or investments.
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Bridging finance is usually taken on a rolled or retained interest basis. This is calculated by working out what loan to value % (LTV) a lender is willing to lend you, working out what that is in real money terms, making room for the fees and interest and then sending you the balance which is left over.
In practice, if you borrow 75%, you may only receive 65% or so, as this difference means that throughout the term of the bridge, you wont have to make any interest payments, as the room for the interest to be applied to your loan is already built in.
Please have a play around with the bridging finance calculator provided below and then please submit an enquiry to discuss if you could benefit from using a bridging loan. If you would like to learn more about bridging finance, we have written some blog posts here.
Bridging Loan Calculator
Rolled Interest
Lender Fee (2%)
Total Interest
Gross/Total
Monthly Payment
LTV %
LTGDV %
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Bridging Finance FAQs
What is 'bridging finance'?
Bridging loans are a form of short term finance, which is used to 'bridge the gap' between two time periods, with the second period being a repayment or 'exit' strategy of the bridge. For example, you may buy a property which is currently not 'mortgageable' with a bridging loan, complete a refurbishment which now makes the property mortgageable and then you pay the bridging loan off with a residential mortgage. Speed and flexibility are what make bridging finance really shine as a financial product and they are often the stop gap which should be utilised to solve problems with properties. If you plan on purchasing, renovating and then selling any property, bridging finance will probably be for you, but its always best to discuss with a broker.
Do I need a good credit rating to get bridging finance?
Not necessarily, no. Bridging Finance is assessed on the 'exit strategy', which is a finance-y way of saying 'how is the bridge going to be paid off'. Bridging Finance lenders work on a much more common sense basis than mortgage lenders. A bridging loan lender's stance would be: 'If a property is going to sell for an amount comfortably higher than the balance of a bridging loan, why does your credit rating matter?'
Can I get a bridging loan in a limited company?
Yes, Limited Company SPVs (special purpose vehicles) are increasingly common when it comes to purchasing property and taking property finance. There can be many tax advantages to purchasing property in a limited company, so its best to speak to a tax advisor to understand this in more detail. We can put you in touch with a property tax specialist if this is something you would like.
If I can get a mortgage instead, will it work out cheaper?
Again, not necessarily no. Whilst the initial instinct when comparing bridging finance to mortgages jumps to bridging finance being more expensive, this is most of the time not the case. The answer to this question depends on what you plan to do with the property and more importantly, when. As a rule of thumb, bridging is expensive to set up and the rate is high, but if the short term nature of bridging allows you to pull some money back out and increases your rental income, bridging usually offers more flexibility and manoeuvrability. For more information on how bridging finance can actually work out cheaper than a mortgage - check out this blog!
How much does bridging finance cost per month?
This ones a great question, but its often a little misplaced. It's only natural to think about property finance like a mortgage, with monthly payments coming out, making you think about your mortgage as X amount per month. With bridging finance you will most likely take rolled or retained interest, which means you wont have a monthly payment coming out of your bank account. Secondly, most lenders charge their interest daily meaning, unless you are guaranteed to pay this loan off in an exact amount of months, you are going to owe the lender the initial loan, the fees and then X amount of days worth of interest on top of this figure. With some lenders this interest may compound, with some lenders it may not.
Are there any early repayment charges with bridging loans?
This ones a little bit tricky to answer as it depends on the product, but generally speaking lenders may have a minimum interest period of 1-3 months. Unlike a traditionally mortgage, you will not be penalised if you settle the loan before the end of the product, in fact it will mean you save money and it is in your interest to do so.
What is a net loan and what is a gross loan?
As said above, bridging finance is usually taken on retained or rolled interest, meaning that there are no monthly payments for the borrower. The lender will place a charge on the property for the percentage of the property value they are lending you, for example, if you are borrowing 75% against a property valued at £100k, the lender will place a charge on the property for £75,000.
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This figure is known as your gross loan and it is what you would owe back to the lender at the END of your bridging loan term. Your net loan is the amount you actually receive on day 1, which is lower. The lender (or a good broker) run a calculation to find out what figure would grow into the £75,000 once interest and fees have been added to it. Lets say for round numbers that a £70k loan would carry £1k in fees and £4k in interest over the term of the loan, in this example £70k is your net loan and this is the amount that you receive on completion.
Do I always need to pay back the full gross loan?
As long as you redeem the loan within its term, you will probably not pay back as much as the gross loan. Whilst the lender will place a charge on the property for the gross loan, they structure this as you 'pre-paying' the interest, so instead of you paying a £30k deposit with the example above, you are actually paying a £25k deposit and the other £5k covers the cost of the bridging loan, upfront.
What this means is that if and when you redeem your loan, if you have only used the loan for 100 days, you will owe back the lender the initial loan, the fees added and 100 days worth of accrued interest. Even though you may have £75k outstanding, your balance with them may be something like £72k, which you will pay back to them with your exit strategy and they will 'refund' you the other £3k for unused interest.
That can sound like you will receive a refund into the bank, you wont, they will just take the £75k charge off of the property for £72k.
What happens if I don't repay a bridging loan?
Much like other forms of finance, if you fail to repay your debt, you will 'default' on the loan. With bridging finance, lenders are aware that with the short term nature of it, plans wont always meet their deadlines. With this in mind, some lenders are willing to be flexible with this but not all. Some bridging lenders will charge a large fee if you fail to redeem the loan in time, this could be between 3% and 5% of the balance outstanding.
I can't repay my bridging loan, what can I do?
Being open and honest is always best and can help you out of a scenario like this. If you have a good broker on your team, they will help talk through your options, potentially find options you did not think of, and they will be able to lean on their relationships with lenders in order to help you.
Things haven't gone to plan, can I re-bridge?
Yes, you can take another bridge to repay an existing bridge. Most of the time, even if things haven't gone to plan, it makes sense to finish the original plan and execute your exit strategy. Whilst you should not plan for this, it is possible to do. In this scenario, its always best to discuss with your broker.