Bridging Finance Guide

First and second charge bridging loans for all purposes, including acquisition, conversion and refurbishment.

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Bridging Finance Guide

Author: Darren Ferguson – Mortgage Specialist & Owner

Published: 4th May 2023

Updated: 24th August 2023

Read Time

Read Time – Approximately 9 Minutes

Our bridging finance guide should be helpful, but it’s always best to speak with an adviser to discuss your own personal circumstances and to get the best advice. Call us on 01604 212879 should you have any questions.

What is Bridging Finance?

Bridging Finance is a short-term loan. While a mortgage might be for 25 years, a bridging loan typically lasts from 1 month to 24 months.

The loan is secured against an asset, typically land or property, with a plan to repay the loan within the agreed term, usually by either selling the property and clearing the balance from the sale proceeds or refinancing the bridging loan onto a longer-term mortgage, such as a buy to let mortgage if the plan is to let the property.

When would you use Bridging Finance?

Bridging is typically used when a transaction needs to be completed quickly, or where a property used as security might be unmortgageable because it’s not in a habitable condition, or perhaps being changed from one use to another, for example, commercial offices to residential usage.

Where a standard mortgage can take 2 to 3 months, a bridging loan can be completed in as little as 2 to 4 weeks, in certain circumstances in days where legal work may already be in the advanced stages.

 

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Uses For Bridging Finance

  • Auction Purchase
  • Refurbishment
  • Bridge to Let
  • Break a property chain (need to purchase before you have sold)
  • Tax Bills
  • Inheritance Tax Settlement
  • Property Conversion
  • Short-term cash flow needs
  • Divorce Settlement
  • Short lease scenarios
  • Meeting a tight deadline

 

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How is Bridging Finance structured?

Closed and Open Bridging Finance

Closed bridging is the most common type of bridging finance and is where the finance will be taken out over a set period, for example, 12 months, and the loan must be repaid by the end date, with a clearly defined exit strategy in place.

Open bridging is less common, the loan has no specific end date, and the exit strategy may be unclear or the repayment date unsure. These loans are considered higher risk and, therefore, at a higher cost.

Regulated and Unregulated Bridging

Bridging loans are typically regulated when the loan is secured against the applicant’s primary residence (the home they live in), the most common scenario being to break a property chain and enable the purchase of a new property before the current property has sold. In this scenario, the loan is regulated, much like a residential mortgage would be, and therefore falls under the supervision of the Financial Conduct Authority (FCA)

Most other types of Bridging loans are unregulated and therefore do not fall under the supervision of the FCA.

Whilst most bridging loans are unregulated, we would always recommend that for any bridging loan you wish to enter into, you should deal with an FCA regulated broker.

First and Second Charge Bridging

A first charge will be the lender’s preference. This is where no other borrowing is secured against the subject property; therefore, the lender will have the primary charge over the property.

If there is already a first charge over the property, such as an existing mortgage, bridging finance lenders can take a second charge to sit behind the first charge. This will be subject to the amount of the first charge and the remaining available equity within the property. Ideally, the existing 1st charge would be no more than 50% of the property value.

Equitable Charge

In some instances, where an applicant has an existing first charge on the subject property, the lender who has that charge may not grant consent to a 2nd charge. In these instances its possible to secure an ‘equitable’ charge over the property, which will not require consent from the first charge lender. (subject to LTV)

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Bridging Finance Criteria

We have access to many bridging lenders, all of whom will have different appetites and criteria, but typical criteria is detailed below:

Who Can Apply?

Whilst mortgage lenders are concerned about income and affordability, bridging lenders are primarily concerned about the asset they are lending against and when and how they will be repaid. This means they are generally a little more flexible about who they will lend to so long as the deal makes sense and the exit(repayment) strategy) is viable.

Who can apply:

 

  • Individuals
  • Limited Companies
  • Partnerships
  • Foreign Nationals
  • Impaired Credit
  • EX-Pats
  • Offshore Companies

What Deposit Is Required?

This depends on the scenario in question.

Most bridging lenders will not lend more than 75% LTV, but this will vary depending upon the reason for the bridging finance and the type of security used, for example, residential, commercial or land. There are a small number of lenders who can potentially lend as high as 85% LTV. Second charge bridging LTVs will be lower.

It’s important to note that the maximum LTV will be the Gross LTV, including fees and interest. This means the net amount you receive will be less (subject to how long you need the bridge, and if you choose to service or roll up the interest)

It is possible to secure 100% of the funding required by using other property, such as your home, or a buy-to-let or commercial property as additional security. The additional security being used would need to be mortgage-free or at a low loan-to-value, ideally no more than 50% LTV already.

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What is the maximum loan size?

Loan sizes from £25,000 to £50,000,000 are available.

What term can I borrow over?

The loan term depends on the bridging finance required and the reason for the bridge.

For Regulated Bridging – the default and maximum term will be 12 months, and the loan must be repaid by the end of the term.

For Unregulated Bridging – the term can be anywhere from 1 month to 36 months.

How is a bridging loan repaid?

Apply for a bridging loan, and the first thing a lender will ask is how you intend to repay the loan, or to use lender terminology, what is the ‘exit strategy?’.

Examples of an exit strategy might include:

 

  • Sale of the property to be bridged (for example, once works are complete)
  • Refinance onto a mortgage (BTL, Commercial etc.)
  • Sale of another property elsewhere (in this instance, the bridging lender may also want a charge over this property)
  • Re-bridging the bridging loan (where you repay the original bridge by taking out another bridge)
  • Other asset sales

What type of property can be used?

Bridging Lenders are generally happy to secure against most types of assets, including:

 

  • Residential (Homeowner and BTL)
  • Commercial
  • Semi Commercial
  • Land (with and without planning)

Interest Rates & Charging Methods

Interest rates for bridging finance will be higher than those of regular residential borrowing. Bridging finance interest rates are also charged monthly as opposed to annually.

Depending upon the bridging loan and the scenario, rates could be anywhere from 0.55% to 1.5% per month. To put that in an annual context, anywhere from 6.6% to 18% per annum. (as of July 2023)

When you take out a bridging loan, you must decide how you intend to repay the interest, and lenders will generally offer three methods of doing so.

Rolled Up Interest

Rolled Up

You do not make any monthly repayments to the loan.

The interest is rolled up each month that you have the loan. The loan, including accrued interest, is cleared in full at the end of the term.

 

  • Good from a cashflow perspective as there are no monthly payments to be made.
  • Interest is compounded monthly.
  • As the interest is rolled up, there are typically no affordability checks required from the lender, which can help speed up your application.
Serviced Bridging Loan

Serviced Monthly

You pay the monthly interest, so only the amount you initially borrowed is owed at the end of the bridge, plus any fees that may have been added.

 

  • This can help achieve a larger net loan at the outset, as interest is being paid from day one and not added to the loan, affecting the LTV (lenders will generally go to 75% inclusive of interest and fees)
  • Affordability checks will be required if servicing the loan
Retained Bridging Loan

Retained

Again, you do not repay the loan monthly, and the initial amount borrowed plus interest is paid at the point due.

 

With retained interest, you are effectively borrowing the interest due rather than on a rolled-up basis where the interest is compounded monthly.

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Why do business with us?

Its not easy to source bridging loans online and the fees are not always clear. We’ll source the market and find the best bridging deal for you

What other costs are there with a bridging loan?

As well as the interest there will be a number of other fees you will have to pay when you take out a bridging loan.

Lender Arrangement Fee

This is usually the most significant fee, ranging from 1% to 3% of the total loan amount, depending on the lender.

Exit Fee

You may have to pay an exit fee to the lender when you repay the loan. Not all lenders will charge this. Like the arrangement fee, it will typically be a percentage of the loan amount or an amount equal to 1 to 3 months of interest.

Some lenders may not have an exit fee but charge a higher arrangement fee.

Valuation Fee

A lender will require a valuation for every property they are to take a charge over. The type of valuation required will depend upon the security in question and the loan to value of the deal. If its a low loan to value the lender may be comfortable doing an automated valuation (desktop valuation), which can save money. If not, a physical valuation will be required, the cost of which will be confirmed by the lender on submission of an application.

Legal Fees

Much like a mortgage, you’ll also need a solicitor or conveyancer to handle the legal work for the transaction. When you take out a bridging loan in most cases you’ll need to cover the cost of your own and the lender’s legal work. 

Broker Fees

Many brokers will also charge a broker fee for arranging the bridging loan. This fee will vary from firm to firm.

At Adept Mortgages, we do not currently charge a broker fee for arranging bridging finance.

How To Apply

Its simple to apply, just call us on:

01604 212879 and we’ll handle everything for you.

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Let’s talk you

It’s not just about the property. You’ll need to meet specific criteria, so it’s important we understand a little about your background to make sure we find the best option for you. Time spent at the front end is time saved at the back end!
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Let’s talk property

We’ll need to know all about the property, such as value, type, location, income and ultimately, your plans. The more we know, the better, and we’ll guide you through what we need to know.
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Let’s talk options

Time to piece it all together and talk about your options. We’re firmLets get movin believers in straight talking, so we’ll tell you what can and can’t be done and present you with options best suited to your requirements.

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Let’s get moving

If you’re happy with the options discussed, it’s time to get things moving and get an agreement in principle. We’ll handle everything and support you along the way to help ensure your application is as smooth as possible.

Types of Bridging Loan

There are many scenarios for using bridging finance, and below, we go over the most common reasons in a little more detail to help you decide what type of bridging loan might be best for you.

Regulated Bridge Chain Break

Regulated Bridging Loan

A regulated bridging loan is typically the most common for standard consumers who do not fall into the usual property developer scenario.

This is because, more often than not, it is used in chain break scenarios, where someone is moving home, has found a property they wish to purchase, but has not yet sold the current property they own, and therefore cant utilise the tied-up equity within that property to enable the purchase of the new one.

This type of bridging loan is regulated by the Financial Conduct Authority (FCA) and will, therefore, be subject to enhanced underwriting from the lender.

As it’s secured against your primary residence, you must seek legal advice before completing the loan.

Regulated bridging loans are not always used for chain-break scenarios and can be used for many other purposes where you need to raise funds quickly and are happy to use your home as security for the loan.

It’s important to note that regulated bridging has a maximum 12-month term. Therefore, you must be confident it can be repaid within that time.

Purchase Bridging Loan

Purchase / Auction Bridging Loan

A purchase bridging loan is the most straightforward type of bridging loan.

This type of bridging finance is typically used to purchase a property where speed is essential, for example, under a tight deadline to complete the purchase. This could apply to auction purchases, where typically, there may be a requirement to complete within 28 days.

Given the tight timelines involved with Auction purchases, you must start the process as soon as the purchase is agreed. It’s often worthwhile speaking to us beforehand to get an agreement in principle before going to auction. 

  • Maximum loan to value, dependent upon security, will generally be 75%.
  • The lender will calculate LTV based on the lower of the purchase price or valuation.
  • So, if the purchase price is £200,000 and the value is £250,000, the lender will lend 75% of the purchase price of £200,000 as this is the lower figure.
  • Available for residential and commercial property
Market Value Bridging Finance

Market Value Bridging Loan

A market value bridging loan works differently from a purchase bridging loan in that the lender will lend against the property’s market value rather than the purchase price.

This can work particularly well for below-market value purchases (BMVs). Finding property being sold below market value is difficult, and they are hard to come by, as no one ideally wants to sell a property for less than its worth. Still, it does happen and represents a great investment opportunity and also a good lending opportunity.

Whilst you might have an opinion on the property’s open market value, it’s important to understand that all lenders will want a valuation of the property, and it’s the figure the surveyor values the property at that will be used by the lender. 

A few lenders are prepared to lend off the open market value (OMV) of the property, which can help reduce the deposit requirement substantially.

An example of how this might work is shown below:

Let’s say a buyer secures an agreement for a below-market value purchase price of £200,000, on a property with an OMV of £250,000.

Different lenders will work in different ways, but as an example:

 

  • The lender might lend the lower of 90% of the purchase price or 75% of the OMV.
  • 90% of the purchase would be £180,000 and 75% of the OMV would be £187,500.
  • Therefore the lender can lend 90% of the purchase price, as this is the lower of the two figures, meaning only a 10% deposit is required, where typically it would be a minimum of 25% of the purchase, which in this example would be £50,000, therefore saving £30,000 on the deposit.
Refurbishment Bridging Loan

Refurbishment Bridging Finance

One of the most common bridging loans is a refurbishment bridging loan. This is where the lender helps fund the purchase and the cost of any refurbishment. They are ideal for borrowers who may only have sufficient funds to purchase the property but limited funds to do the work required.

Lenders can often lend 100% of the refurbishment costs, subject to a maximum loan to value based on the Gross Development Value or GDV of the property. GDV is the property’s expected value once all the works have been completed.

Typically, lenders will lend up to 65% to 70% of the end GDV (inclusive of interest and fees)

A lender will want to understand the level of refurbishment that will be undertaken, which they’ll categorise as either ‘light’ or ‘heavy’ refurbishment.

Light refurbishment might include:

  • New kitchen or bathrooms
  • Rewiring
  • Plumbing & Heating
  • New windows
  • Other cosmetic work

Heavy refurbishment might include:

  • An extension to the property
  • Internal reconfiguration
  • Loft conversion
  • New roof
  • A project that requires planning permission

The terms received from the lender will be subject to the type of refurbishment undertaken. 

If the project is sizeable with a lot of heavy refurbishment involved, you might need to consider development finance instead of bridging finance, as development lenders are more comfortable with heavy refurbishment projects. 

 

An example of how a refurbishment bridge might work is shown below:

  • Applicant purchases a property to convert to an HMO property.
  • The purchase price is £525,000, and the anticipated work cost is £250,000, of which the full £250,000 is required.
  • GDV or value when complete is £950,000
  • Lender funds no more than 65% of the GDV (toward the purchase and cost of works) – 65% of the GDV is £617,500.
  • Client needs full £250,000 works funded – £617,500 minus £250,000 cost of works leaves £367,500 to put toward the purchase.
  • Customer to fund the deposit of £157,500 for the purchase (£525,000 – £367,500 funded by the lender)**

**The above figures are illustrative of the process only, do not include deductions for interest and fees, and do not constitute an actual illustration. Actual net amounts will be less after the deduction of fees and interest.

 

Cross Collateral Bridging Loan

Cross Collateral Bridging Finance

A cross-collateral bridging loan is where the bridging lender secures the loan against multiple properties.

This is most commonly used when insufficient cash funds are available to finance the loan using a single property.

Each property will have a separate legal charge, but it will be one loan. Additional property can help reduce the loan to value, thereby securing a better rate or by increasing the loan amount required.

Depending upon the equity in the additional property or properties being used, it’s possible that 100% or more of the funds required could be raised.

To consider using other property as additional security, lenders will ideally want the property to be used to have at least 50% equity after any existing borrowing is taken into account.

With some lenders, the properties may need to be purely residential, whereas others can accept mixed uses such as residential and commercial / semi-commercial units.

 

  • Lenders generally lend up to 75% on the primary security and 70% on the additional security, which could mean the ability to borrow up to 100% of the funds required.
  • Consent from the current lender for a 2nd charge on the additional security will be required if there is an existing 1st charge. If consent is not given by the first charge lender then some lenders can consider an equitable charge, where consent is not required.

An example of how a cross-collateral bridge might work is shown below:

  • Primary property to be purchased at £500,000.
  • 75% funding would be £375,000; therefore deposit required of £125,000.
  • The applicant has no available cash as a deposit but has other security (property) that can be used as security.
  • Existing property to be used as additional security valued at £500,000, with an existing mortgage of £200000. (current LTV of 40%)
  • You can borrow up to 70% of this security, which would be £350,000, and after considering the existing borrowing of £200,000, an additional £150,000 can potentially be raised, but the applicant only requires £125,000.
  • The lender takes a 1st charge against the primary security and a 2nd charge against the additional security.
  • Total borrowing of £500,000** (£375,000 on the primary property and £125,000 on the additional security). Therefore 100% of the funds required can be borrowed, potentially more if needed.

**The above figures are illustrative of the process only, do not include deductions for interest and fees, and do not constitute an actual illustration. Actual net amounts will be less after the deduction of fees and interest.

Bridge To Let Loan

Bridge To Let Bridging Loan

Bridge-to-let finance is used where a property to be purchased is intended to be let, but may not be mortgageable until works are complete, and therefore a bridging loan is required to complete the initial purchase.

Using regular bridging, it would usually be the case that the bridging loan would be with one lender and the buy-to-let loan with another lender once the works are complete. As two lenders are involved, this would require two applications, possibly two sets of fees, including two arrangement fees, two valuation fees and two sets of legal fees.

With a bridge-to-let loan, the same lender funds both the initial bridging and the buy-to-let loan, saving on costs and time.

Whilst there can be cost savings in terms of the fees by opting for a bridge-to-let loan, it’s important to consider the rate the lender will charge on the buy-to-let mortgage, as it may be possible to obtain lower rates through another buy-to-let lender. 

How bridge to let financing works

  • The lender can lend up to 75% of the initial purchase (gross loan) on the bridging loan.
  • At the point of valuation, the valuer will ask what works are to be done.
  • The valuer provides two valuations, one based on the current condition and another based on when the works are complete.
  • One application and the lender will underwrite the bridging loan and buy to let at the same time and issue offers for both.
  • Bridging Funds are released, and work can start.
  • Once the works are complete, the lender re-inspects and provided the works are done as stated, the loan can be converted onto a buy-to-let mortgage.
  • If they wish, the borrower can borrow up to 75% of the new value, providing additional funds to move on to the next project.
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Got more questions?

Call us on 01604 212879 or take a look at our frequently asked questions below. 

Find out more about bad credit buy to let mortgages

Work out how much you can borrow with our buy-to-let mortgage calculators

Learn more about purchasing a HMO in a limited company

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Bridging Finance FAQs

Are there any risks with bridging finance?

Yes, the risks are the same as any secured loan in that the property could be repossessed If you don’t make the payments or repay the loan when required.

Confidence in the exit strategy is the most crucial aspect of any bridging loan. Before entering into any bridging loan, you should be confident that your exit strategy will be available when you need it to be and will cover the amount it needs to.

Will I need to prove my income?

This depends on how you choose to ‘service’ the interest on the loan. If the interest is to be rolled up or retained, then lenders will not be too concerned about your income in most instances. If, however, you choose to repay or ‘service’ the interest each month, then yes, the lenders will likely want to check your income for affordability purposes.

Am I able to clear the bridging loan early?

Yes, although some lenders may have a minimum period, you are required to have the loan, which could range from 1 to 6 months. You should check with your broker to confirm the costs of repaying early. Regulated bridging loans will not have any minimum tie-in period and can be repaid at any point.

How quickly can I get the funds from a bridging loan?

A typical bridging loan will look to complete within 3 to 4 weeks. If legal work has already started and is somewhat progressed, that a loan could complete sooner. 

Can I use bridging finance to refinance an existing bridging loan?

Yes, you can, but costs may make it prohibitive to do so—for example, new arrangement fees, valuation, legal fees etc. We always advise speaking to your current bridging lender about an extension, which may be cheaper. If you are considering replacing a bridging loan, please call us to discuss this further.

Are there any early repayment charges with bridging loans?

Typically bridging loans do not come with early repayment charges. Some lenders may require you to keep the loan for a minimum of 30 to 90 days, in which case there may be a fee if you redeem the loan earlier. 

Thanks for reading our bridging finance guide!