What is a bridging loan?
Read our definitive guide to help you understand bridging loans
What is a bridging loan?
A bridging loan is a type of short-term loan.
The general length of a bridging loan is between 3-18 months, and the loan is repaid in full at the end of the term.
People or companies use them until they secure permanent financing or sell another asset.
Bridging loans can help people who are moving home to deal with a gap between the sale and completion dates in a chain.
People use bridging loans when planning a quick turnaround on a renovation project. They also use them when buying real estate at auctions.
They ensure borrowers can meet current obligations by providing immediate capital.
Most of the time they use some form of collateral as security, such as real estate or stock inventory.
Repayment terms are far more flexible. This is because they include options such as delaying repayment until the end of the term.
Why use a bridging loan?
Bridging lenders can move far more quickly than a bank when a borrower needs funds to buy a property. Generally, they only need a few days to complete a deal and send the funds required.
In comparison, a mortgage can take 30-45 days on average to be approved, sometimes longer.
This potentially places a great deal of stress on auction buyers in particular, who have to pay in full for any purchases within 28 days.
Another potential benefit is the flexibility available when repaying the loan – Most companies offer “serviced” repayments. This is where the borrower pays monthly interest.
“Rolled up” repayments are when payment is delayed until the end of the term.
A mixture of both payments are generally allowed as well.
Repayment of the loan is called an “exit plan”.
What can you use a bridging loan for?
Most bridging loans are used for residential or commercial purposes.
Here are a few situations where people could use a bridging loan:
- Buying a property at auction
- Purchasing a property whilst selling another
- Adding to a property portfolio
- Buying a run-down property for renovation with a quick sale in mind
- Moving office / factory / warehouse
This is not an exhaustive list however, and that is the clear advantage of using a bridging loan – they are flexible enough to adapt to almost any situation where short-term finance is needed.
NB – it is important to have a clear exit strategy in mind or already in place.
So how does a bridging loan actually work?
When you apply for a bridging loan, the lender adds a charge to the property you are using as security.
This is needed in order for them to secure the loan against that property.
There are two types of charge, first and second.
First charge loans are where the loan is the first, or only borrowing secured against your property. Mortgages are an example of first charge loans.
Second charge loans are where there is already a loan or mortgage listed against the property, so you add a second.
For example, if a property was repossessed and sold to pay off any outstanding finance, a first charge loan would have to be repaid before a second charge loan could be paid back.
The process will vary from lender to lender, however here at MFS we follow six simple steps…
- Loan enquiry is received
- Indicative terms are issued (as quickly as within 4 hours), subject to credit approval and receipt of information
- Decision in principle (DIP) issued, subject to valuation, due diligence and legal terms
- Valuation instructed, commitment fee received, and solicitors instructed
- Legal paperwork issued and commitment fee refunded
- Loan drawn down (funds issued)
How are rates and terms decided?
Lenders do not usually have set guidelines for deciding rates for bridging loans.
Here at MFS, the approach to underwriting is guided by “does it make sense?”
The amount someone can borrow, and the terms of the loan vary on a case by case basis.
However, they will generally consider three main factors:
- The market value of the asset
Lenders will apply a Loan-to-value (LTV) rate that depends on the size of the loan.
At MFS we offer up to 75% LTV. This means a borrower could take a loan of up to 75% of the value of their asset.
- What the bridging loan will be used for
Whether it is a residential or buy-to-let investment, a commercial property purchase, or refurbishment project, the loan use will be taken into consideration when applying a rate.
- Whether it is a first or second charge loan
This refers to the order of priority for two different sources of debt.
If someone has an outstanding loan on a property, and then secures a second, they will always make repayments to the first debt before the second.
Our underwriters are flexible, and empowered to make decisions on the spot. This is especially useful in complex cases, where we can decide terms depending on individual circumstances, or the merits of each case.
The Exit Plan
Borrowers will need to have an exit strategy, to show how they will pay off the loan.
Common ways of paying off a loan include selling an existing property or asset, or long-term refinancing with a mainstream lender.
Management of the loan
Borrowers need to ensure they are prepared for any unforeseen costs.
For example, those unexpected costs during refurbishment projects – badly distributed funds could lead to cash flow problems later in the project.
Choosing the correct lender
There are hundreds of lenders in the bridging market, so choosing the right one for your project can be difficult.
It’s important to focus on a lender with a strong track record, high quality service and transparent fee and rate structures.
Why choose MFS as your bridging lender?
With a 13-year track record in quality bridging loans, and highly experienced underwriting staff, we view each case on its merit.
We can turn enquiries into bridging loans within three to ten days, with no hidden charges.
We also thrive on complex – so if you have special circumstances or think your requirement may be outside of the norm, please contact us to discuss it.
Access to fast funding, avoiding property chains and securing time sensitive deals i.e. auctions, repossession prevention, and bargain properties
Offers the perfect financial product to renovate or refurbish a property to a standard in which a lender will approve a mortgage application due to their stringent tick box criteria
Property investors can capitalise on high return opportunities, by accessing funds quickly for conversions and extensions which can significantly improve the value of the property
The ability to raise more capital quickly by securing the debt against any existing assets in a property portfolio and avoid missing any deadlines
Managing short term cash flow issues such as tax liabilities, repairing adverse credit and supporting business cash flow where mainstream banks are not as flexible