First, the million-dollar question – and there’s no shame in not knowing – what exactly is bridging finance? The answer is that at its core it is a loan which is taken out on a short term basis and gives a property developer an injection of cash so they have the chance to move smoothly from one part of a project to another, whether this is commercial or residential. Unlike other loans, a bridging one is only for a short term – it is quite literally ‘bridging the gap’ between property transactions when other sources of finance can be found. The term usually sits somewhere between 12-18 months. Even if you do need flexible, fast property finance in order to build, buy or renovate, there are some factors to consider before you decide that this is the road you want to go down.
- Is this type of loan definitely suitable for your situation? Rather than list facts that you need to slot into your individual plans, it’s easier just to give a couple of examples of where it is appropriate.
- If you’re in need of a short-term solution to generate income. For example, converting properties to residential use from commercial. It provides a finance option upfront if capital is needed to fund the project until a development loan can be arranged.
- You’re a property developer and you want to buy a house at auction. If you’re planning to refurbish for any reason then a bridging loan could be used until the property is ready to let, for example, at which point a more permanent development loan can be acquired.
- If a developer has used several sources of finance for the project and the situation is becoming untenable in terms of managing the cash. Much like any other credit options, a bridging loan can be used for – yes, you’ve guessed it – to consolidate the borrowing into one place until the property can be sold and the money paid back.
- What does an ‘open’ or ‘closed’ bridging loan mean? Put simply, a closed loan is where there is a definite exit strategy which will take place within confirmed timeframes. On the other hand, an open loan is where there is no certainty of timings and perhaps even the source of repayment isn’t clear. For obvious reasons lenders prefer closed loans because the financial risk is substantially lower for them, so if this describes your situation be prepared to invest more cash up front and accept that you might be dealing with substantially higher rates of interest as well. As long as you’re in control of your borrowing then there shouldn’t be too many hiccups.
- What regulations are bridging loans subject to? It depends entirely on the situation. Some are covered by the Financial Conduct Authority (FCA), but not all. Where the borrowers home is involved, or that of a close family member, the Mortgage Code of Business (MCOB) applies and protects the borrower against mis-selling circumstances and just plain old bad advice. However, if it’s for commercial property then usually these loans are not regulated by the developer. The reason for this is that different assessment criteria are in place; the rental potential of a property or the projected value of a development. The borrowers personal finance situation will not be considered. If you do decide to go ahead then you must consider the lender’s criteria and make sure it’s both suitable and applicable to you.
- What will a lender need to proceed? Mainly proof of a good credit history. This is typical of any type of financial credit agreement, and, combined with a solid experience in the property development market, could lead to the lowest rates of borrowing and a quick decision, meaning that you’ll be in a position to proceed more quickly. A lender will also require a first charge on the property that is destined to be either sold or re-financed. There are some lenders who will seek equity in the development in exchange for their investment, but this isn’t normal practice among the bigger lending companies.
- The cost of the loan? There isn’t one answer to this. It depends who your lenders are and their individual perceived risk in the venture and how much revenue is needed in order to turn a profit. The projected cost of your loan is something that should be taken into account before you agree to a lender’s criteria.
- Repayment? This is one thing that lenders are always clear on! There are definite guidelines for repayment, which takes place when one or more of the properties in the finance agreement are re-financed or sold. It’s worth checking the terms of this so that you have complete clarity about what is expected and when.
- How long will it take to get my loan? The good news is that it’s usually relatively quick. The terms in principle and credit are agreed first, then the process moves on to complete the security and valuations. This needs to happen before the money can be released by the lender. It won’t take days, but it won’t take months either. You can expect to have the funds released to you within weeks, subject to status.
Sometimes property developers are wary of using bridging finance because of the potentially high rates of interest and the need to move on and secure additional funding within a relatively short timeframe. However, whilst caution is good, a bridging loan is a well established option and it could easily be the glue that holds your development/property project together from one stage to the next. As a property investor, as long as you have a clear idea of where the next bit of finance will come from and how and when you can access it, then a bridging loan is actually a safe and reliable way to do things. Problems only arise if sufficient care isn’t taken to protect your investment – and that’s in your hands.
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