Bridging finance is a way of raising short term finance quickly and is usually secured against a residential or commercial freehold property (on a first or second charge basis). As a bridging loan is secured in this way, personal credit history is not always as relevant as with applications for other types of finance, so non-status loans are available. For added security, the funder may also deduct interest payments from the loan on day 1, which means the applicant (or the funder) does not have to worry about proving loan serviceability (but also means a lesser amount is available).
A bridging loan is typically used to bridge the gap between a purchase and either a traditional re-finance or sale, and can also be used for auction purchases, land purchases, planning gain purchases, purchases of property in need of refurbishment/conversion/development or just for business cash-flow.
Exit strategy is all important and will often dictate the terms and price of the loan. A “closed” bridge is the term given to a bridge loan where the exit is clearly defined and in place. For example, an investor may have an existing facility with his current bankers which enables him/ her to refinance investment properties on to a buy to let facility. An “open” bridge has no or a lesser defined exit point, and is therefore more speculative and more costly. Selling a property on the open market would be categorised as an open bridge scenario.
Most bridge funders will lend a percentage of purchase price, subject to a maximum loan to value (generally up to 75%). In some circumstances, 100% of purchase price can be achieved, provided the bridge funder is confident that the property is being purchased for a true discount off current market value, or if additional security is offered by the applicant. Interest rates can range from 1% to 2% per month. In addition there are usually arrangement fees of 1% and exit fees of 1%. Bridge loans usually have a minimum term of 1 month and maximum term of 12 months, and start from £25,000.00.
On first glance bridging finance may seem expensive – this is because of the short-term nature of the loans. Any potential applicant should conduct their own cost-benefit analysis to establish exactly what they stand to gain from the transaction.