Bridging loans are a great way to secure a large injection of cash for individuals looking to finance a new property development, ideal for those waiting for the sale of a current development to be completed.
What is a bridging loan?
A bridging loan is a short-term loan, usually lasting anywhere from 12 to 24 months, and as the name suggests it is designed to provide a financial “bridge”.
In the context of property development, this is usually to provide financial support between the sale of one development and the initiation of a new one.
How much can you borrow with a bridging loan?
The exact amount you can borrow will depend on a variety of factors, one of the major considerations being the purpose of the loan.
For example, if you are borrowing against a residential property, it may be possible to borrow up to 80% of the property value. The lower the loan to value (LTV), the lower the interest rates, with some lenders offering interest rates at 50% LTV.
For non-residential properties, such as commercial properties and land, it may be possible to borrow up to 70% LTV.
This means that if the property is worth £100,000, the maximum you could borrow (including your existing mortgage) would be £70,000.
When is a bridging loan repaid?
Since the purpose of a bridging loan is to “bridge the gap”, the loan is repaid when the property is sold or refinanced.
Open bridging loans vs closed bridging loans
Bridging loans are defined in two main ways, typically as either open or closed.
A closed bridging loan is one where there is an established and detailed plan, including a timeline. For instance, if all transactions have taken place, but you are simply waiting for a final transaction to be completed. These “closed scenarios” are preferred by lenders and so you are likely to have more options available to you.
An open bridging loan is the opposite, it is a situation where timelines and payment details are less obvious. These are considered riskier to lenders and so you may have less favourable interest rates and loan amounts available to you.
How much do bridging loans cost?
Loan terms are largely dictated and offered by the amount of risk the lender determines, as well as the revenue they need to create to maintain profitability.
A bridging loan, particularly one that is “open” is considered relatively risky and since the loan is only provided for a relatively short period of time, the lender does not generate much income from the interest alone, as a result, it’s common to pay additional fees on top of the interest.
The fee is typically referred to as an arrangement fee and varies between lenders. On top of this fee, it is common to have other associated costs including legal fees and valuation fees. For this reason, it is important to carefully read any contract before you sign and agree to the terms, as the associated costs could impact the profitability of the project.
Since the majority of property development projects generate no revenue until the final sale, monthly repayments are often not practical and as a result, many bridging loan lenders offer what is referred to as “interest roll-up”. This enables you to pay for the interest in a lump sum at the end of the loan period instead of paying in monthly instalments.
Requirements of a bridging Loan
When assessing a bridging loan application, lenders will assess the creditworthiness of the borrower. This means they will be looking at your credit history, ensuring that it is in good order and that you do not have any defaults, county court judgments or previous bankruptcies.
Additionally, lenders will be looking at your history in the property development sector, to assess your track record. If both of these requirements are satisfied, you will likely receive bridging loan offers with more favourable terms.
How much the property is worth is also going to be considered. It is usual for lenders to offer a maximum loan to value ratio of around 60% for commercial properties and up to 80% on residential properties.
Can you take a bridging loan out in the name of a limited company?
Bridging loans can be taken out in either the name of an individual or a limited company.
It is also possible to take the bridging loans out for offshore companies, overseas companies, and foreign nationals.
Examples of common bridging loans scenarios
Here are some common examples of situations where bridging loans are commonly employed:
Bridging loans for debt consolidation
Property development can involve the accrual of several lines of credit, which by the end of the project can become expensive and difficult to manage. In such cases, a short-term bridging loan can be used to consolidate the debts into a single loan, which does not need to be repaid until the sale is completed.
Bridging loans to buy a new site
When starting a new property development project and acquiring a new site, a bridging loan is often used with the intention of gaining planning permission. Development financing often has a loan clause referred to as the ‘mobilisation period’. This is the time period given to arrange the build before works beginning.
Often, this period is under 4 weeks and would not provide you with enough time to execute the planning application and begin the work. If you neglect to achieve this, you will fail to meet the terms of the lender.
Moreover, there is no guarantee that a planning application will be approved. As a result, there is no assurance that the work will commence on a certain date and it is not possible to agree to the terms of a finance development loan.
In this scenario, a bridging loan can be employed to bridge the gap between the acquisition of a site and the development finance.
Bridging loans to raise capital
If you need to raise capital, then a bridging loan can often be one of the quickest and most convenient ways to do so. Bridging loans can be used to raise capital for property development in the following ways:
- Releasing capital from a completed property development with a pending sale.
- Releasing equity from other properties in order to clear debts or acquire a new site.
- Release funds to pay for upgrades or the redevelopment of a current property.
How do you apply for a bridging loan?
It is a wise idea to apply for a bridging loan as soon as it becomes clear that you require one. This provides you with plenty of time to plan and choose the best loan terms for your exact situation.
At Mortgageable, we have a dedicated team of advisors that will be able to offer you help, point you in the right direction and provide you with access to some of the best bridging loan deals currently on offer.
Give us a call on 01925 906 210 or get in touch for advice that is personal to you and takes your credit history into account. That way you will know where you stand in the bridging loan market and we can guide you on your route to securing a suitable loan.