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.

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.

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…

1. Loan enquiry is received
2. Indicative terms are issued (as quickly as within 4 hours), subject to credit approval and receipt of information
3. Decision in principle (DIP) issued, subject to valuation, due diligence and legal terms
4. Valuation instructed, commitment fee received, and solicitors instructed
5. Legal paperwork issued and commitment fee refunded
6. Loan drawn down (funds issued)

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.

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.