Formerly regarded as a niche financial product to keep residential house purchase chains on track, bridging finance has become increasingly recognised by property investors across the United Kingdom as a valuable and increasingly accessible tool.
Bridging finance is especially beneficial for those requiring short-term funds, such as property developers and landlords, who appreciate the advantages offered to enhance their property transactions and support their business ventures.
Bridging loans serve various purposes, but are predominantly employed to facilitate commercial and residential property transactions, auction purchases, and property renovation and development projects.
We have worked hard in recent years to expand the range of our products, such as adding development finance to our solutions and improve our service, bringing legal services in-house, all of which has helped drive our growth and success as a short-term property finance provider.
Thanks to lenders like Signature, bridging finance is now a more feasible option for individuals who might have previously considered it complicated and inaccessible.
What is a bridging loan?
A bridging loan is a short-term loan secured against property or assets, typically used by individuals and businesses for property-related purposes, until permanent funding or subsequent financing stages become available, or until a property is sold.
Reflecting the higher risk for the lender with bridging finance, the interest rate is typically higher than that of other loans, and usually the best choice for property professionals when they need a short-term financial solution for 12 months or less.
This type of loan is also a feasible solution for individuals caught in a property chain that has collapsed or is experiencing delays, but if the property is to be occupied by the borrower, the funding can only be sourced from a lender regulated and authorised under mortgage conduct of business [MCOB] by the Financial Conduct Authority [FCA]
A bridging loan is typically regarded as a solution to span the gap between the purchase date and the sale date, ensuring the buyer does not lose the desired property, with the loan repaid from the sale proceeds. However, bridging loans can also be used as a means of increasing yield on already owned assets, changing use, holding assets for the long term, restructuring leasehold terms etc.
There are two types of bridging loans:
- Closed Bridge – the borrower has a non-speculative exit plan with a date to achieve this (e.g. exit via refinance onto a BTL)
- Open Bridge – the borrower provides a proposed exit plan that is more speculative in nature (i.e. planning a sale to an as yet unidentified individual)
Applications of bridging loans
Bridging finance can be used to purchase both commercial and residential properties, making it a favoured tool among property developers, landlords and investors aiming to acquire, develop, or refurbish properties.
Businesses also leverage short-term bridging loans to resolve financial emergencies or capitalise on new opportunities. The flexibility and rapid access to funds make bridging finance increasingly attractive to both individuals and businesses, with loan applications completed and funds disbursed within weeks.
Typical uses for bridging loans
Whilst bridging loans have a number of uses for residential property owners, our clients are typically property developers and investors who want to:
- fix or restore properties where traditional term lending would not be approved
- renovate or develop a property or piece of land into one house or multiple houses
And for businesses that want to:
- take advantage of market conditions or discounted investment opportunities and need quick access to funds
- raise capital against land and property
- satisfy tax liabilities when the amount needed cannot be accessed within the required timeframe
- meet financial obligations and payments or overcome financial difficulties
Properties eligible for a bridging loan
Bridging loans can be secured against various property types, including residential, semi-commercial, commercial properties, and land.
Simple bridging loans can also be used to purchase un-mortgageable properties in need of refurbishment or upgrade, thereby increasing their value for sale or letting.
How bridging loans work
Whether opting for an open or closed bridging loan, lenders like us will typically follow a simple process when the acquisition of a property is concerned. The steps are:
- You provide us with a summary of the deal, details of the property that will secure the lending, your plans and provide a clear loan exit strategy.
- We will then issue indicative terms of the finance we can provide and what you need to provide in return, to obtain credit approval.
- Once detailed information has been provided, we will undertake relevant credit searches, identity and verification [ID&V] checks and seek credit approval.
- We then issue a credit backed offer letter, which you sign and return, along with the valuation fee and undertaking from your solicitor for legal costs.
- We then instruct valuation and solicitors to undertake due diligence and issue finance documentation.
- Once valuation is received, legal documents are signed and all conditions of lending satisfied, we then release the agreed loan amount to your solicitor.
We aim to complete the loan in four weeks, from completed application to funds being released to you, though it can be shorter or longer depending on the complexity of the deal. The timescale is typically affected by the property finance experience of the legal teams involved.