Bridging loans and bridging finance still cause some confusion among a lot of the people and businesses we speak to. This short guide explains the basics of what may be a very suitable finance product for your situation.
Bridging finance is usually a type of short-term business loan. It’s best thought of as a temporary loan which gets you from A to B, until you can either clear the loan in full or secure a more permanent form of finance. That’s where the “bridge” idea comes in – finance to get you from one step to another.
In theory, they differ because they are for a specific short term purpose, whereas term loans often have more general commercial purposes. In reality, the speed of getting the cash in your account is the main difference. It can take weeks for some lenders to complete a term loan, but a bridging loan can be ready in 24-48 hours.
Lenders that offer bridging loans usually do so for the purchase and renovation of property — it's a form of property development finance. They can be both commercial and residential, and the works can be ground-up property developments or just adding a bathroom to a flat.
You can also use bridging finance for other short term commercial purposes, as long as you have a clear exit in place — although it depends what appetite the lender has for your plans.
Exits are what lenders say when they mean how you are going to either clear the bridging loan in full (with the interest costs) or move it onto a more permanent type of finance, like a term mortgage.
You might hear us speak of closed bridging loans and open bridging loans. Closed loans are a line of credit with a fixed exit date in place. For example, the sale of the property to pay back the loan is already in place at the time of taking the loan. Open loans are given without the exit yet fixed, so you are given “up to” a certain period. We can discuss your options here and which lenders best fit your needs.
Given the specialist nature of the loan – i.e. it’s for a specific short term purpose – the interest rates can be higher than traditional term loans.
You can sometimes choose to have the interest payments 'rolled up', which means you don’t have to pay monthly but instead pay a lump sum at the end of the agreed term. This makes it useful for those without the required funding at the early stages of receiving the loan.
Bridging loans form the crux of what property developers use to fund their projects. Let’s say a developer owns a site and has planning permission from the council to build a small apartment block. A good solution for this property development, to spread the costs for the company, may be to get a bridging loan for 3-6 months, which gives them the funds to complete the work. This loan is fully paid off after the period either by the sale of the apartment block or individual apartments, or by moving the bridging loan onto a longer term finance product like a commercial mortgage.
Bridging loans can sometimes be used in other commercial areas where a short term temporary loan may be required. This is providing there is a clear 'exit' from the loan.
This depends on the circumstances of the loan — in general, there will be a fee for arrangement of the loan and there are administration fees as with all products. This varies from lender to lender, and our team are on hand to explain any complex terms and conditions so you know what to expect.
It’s a good product for renovations and refurbishments because you get funds really quickly to allow you to start the works immediately.
In fact, bridging loans are often used to convert properties into a state where a lender can provide a commercial mortgage. Not all properties are eligible for certain types of mortgages — you can use bridging finance to get the work done and get the property into a state where you can exit into a full term mortgage.
Yes, lots of buyers at auctions use bridging loans to assist with the purchase, rather than go to a traditional provider where the process is much lengthier – after all, you often only have up to 28 days to bring the funds to the table at auctions, making a bridging loan ideal. Read here for more about auction finance and what to expect, or our guide on buying property at auction.
If the property you're securing the loan against doesn’t have any other loans secured against it, you’ll go for a first charge bridging loan. However, if, for instance, you already have a loan against the property as its mortgage is outstanding, a second charge loan will apply.
The lender will take a few things into account before making a decision. Property will usually be required as security and depending on the terms of the loan, you may need to provide proof of income. If you’re taking a bridging loan out for commercial purposes, you may also have to show evidence of a business plan.
The amount you can borrow will depend on how much the property or properties you are using as collateral are worth. Broadly speaking, you can borrow between £5,000 and £250 million. The Loan-to-Value (LTV) tends to be between 65% to 80%.
You can use the Funding Options platform to search for a bridging loan. High street banks, mortgage brokers and alternative specialist lenders offer bridging finance. The process is quick—you’ll typically receive a decision within 24 hours and it takes around two weeks for the money to be transferred.