There are two types of bridging loans, called closed and open. With a closed loan, there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.

With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one year.

Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage. They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it, as well as proof of what you are doing to sell your current property if relevant. You should also have a back-up plan in place in case your repayment strategy fails.

Bridging loans are priced monthly, as people tend to take them out for a short period. Bridging loans can be expensive, facing fees of between 0.5% and 1.5% per month, making it much pricier than a normal residential mortgage. There are also set-up fees to consider, usually around 1% of the loan you want to take out, so it is advisable to only take a bridging loan out if you are confident that you won’t need it for a long period of time.

In cash terms, bridging loan providers might lend anything between £25,000 and over £25m. But you’ll usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property.

Expenses should be considered in terms of how much your client’s total cost will be. This can usually be divided into two categories:

1. Financial gain — supposing your customer pays £100,000 at auction for an unmortgageable house. They are able to finish renovations of a new bathroom and kitchen with the help of a bridging loan, and the property sells for £150,000. The perceived pricey nature of the bridging finance employed is eliminated if charges from the £50,000 return on the sale are taken into account. It is no longer an expensive kind of financing, but rather the sole option for achieving this goal.
2. Emotional advantage – A landlord client’s Buy-to-Let mortgage lender pulls out at the last minute, and they’re already in their notice-to-complete period after exchanging. A bridging loan’s flexibility allows a case to close in days, saving the landlord’s deposit and preventing the loss of the investment property. They can still finalise on the new acquisition and then have a year to arrange standard financing to replace the bridging loan.

The cost of bridging represents the lender’s risk in making a lending decision. They use little underwriting and frequently secure against unmortgageable, unmarketable property for which traditional financing could not be acquired. Bridging loans have no redemption penalties, thus once the first month’s payment is made, the client is free to redeem the loan with some lenders. This all contributes to the client being charged a greater interest rate than with traditional financing.

For bridging loans, we often observe three main departure paths.

1. Property sale – During the period of the bridging loan, the client will sell the property that the bridging loan is secured against in order to repay the bridging loan. This could also be the selling of a different asset than the security. In a chain break scenario, for example, the bridge is commonly secured against the property that the customer wants to buy, but the exit comes from the sale of their current home.
2. Refinance – The client will remortgage the security to repay the bridging loan with another form of financing. This allows the adviser to introduce the client to Leodis Financial for the bridging loan, and then source the traditional financing market to exit the loan within the term, essentially creating two pieces of business for the adviser in a year.
3. Cash redemption – The client must show that a specific cash sum will be made available over the loan’s term, sufficient to pay off the loan. This could be a lump sum payment from a pension, an investment, or the maturity of a stock portfolio. There are other exit options that can be explored in addition to these, as long as we can receive proof that they will occur during the term and are judged realistic by the lender.

Ideally, this should not occur because the exit strategy will be a big component of the case’s underwriting from the start. The ability to repay the loan is a key factor in granting the loan in the first place, but circumstances can change throughout the loan, and if they do, and the departure cannot be completed within the timeframes, there are two choices. If you want to do something else, you’ll need to give at least a month’s notice:

1. Requesting a term extension from your current lender. This will result in a new set of costs in line with the previous loan arrangement.
2. Rebridging to a different lender – this will usually be more expensive because the client was unable to depart the bridge within the 12-month period and is thus more risky. This could result in a higher interest rate and a penalty.

Bridging finance frequently incorporates interest into the loan. It allows customers to borrow the interest payments as part of their loan agreement. This means they won’t have to pay the loan provider monthly payments (which might be large) or show their affordability at the underwriting stage.

If your clients want to pay interest on the bridging loan, it’s crucial to understand how this will affect the borrower’s net loan amount. If the client wants to get the highest loan-to-value ratio possible, interest and fees can only be increased up to 75 percent. If the loan exceeds this amount after interest and fees have been added, they will be deducted instead. For example, suppose your client wishes to borrow £100,000 at a 75% LTV with a 1% monthly interest rate.

The net loan amount will be £86,000 after a 12-month period and 2 percent fees. Because the £12,000 monthly interest payments and costs will be deducted from the gross loan, the total borrowing will not exceed 75 percent loan to value. However, if the loan to value ratio does not cause this problem, the fees and interest will be applied to the loan.

If the loan required was at 50% LTV in the case above, the total borrowing would be £114,000, including fees and interest payments. It’s crucial to remember that the client only pays for what they use. They will receive a refund of unused interest if they want to keep interest on the loan but are able to return it before the end of the term.

Using the same situation as previously, if the client is able to return the bridging loan in month six and does not require the full 12 month term for which interest payments were calculated, they will receive a refund of six months unused interest payments, or £6,000 in this case.

If you’re securing funds against what is or will become your primary house, you’ll need a regulated bridge. If you’re securing funds against any property that isn’t your home and won’t be in the future, it’s unregulated. In terms of duration, regulated bridging loans can last up to 12 months and are typically repaid in 7-9 months (and as little as a few days in some cases). It’s also worth noting that certain bridging lenders are unlicensed and hence unable to provide FCA-regulated bridging loans.

Your most competitive rate for regulated bridging loans starts at 0.48 percent per month, while rates for unregulated bridging loans start at 0.44 percent per month (as of 16th March 2020). Bridging loans have a lot of flexibility.
The high flexibility of bridging loans is frequently linked to the high cost of bridging loans. Most lenders will allow borrowers to pay back the loan at any time without penalty, as well as to retain interest in the loan to manage cash outflows, and to secure on a variety of properties, including houses, flats, commercial units, land with planning, uninhabitable, and un-mortgageable properties.

Unlike a traditional high-street residential mortgage, bridging loans are underwritten with a greater emphasis on the strength, viability, and plausibility of the client’s exit strategy to pay off the loan, as well as the quality of the asset offered as security – rather than the client’s ability to pay. This is one of the reasons they may be completed so quickly. Although bridging loans can be obtained fast, most bridging lenders adhere to strict lending requirements and go through a thorough underwriting process. Of course, official identification checks will still be required to establish applicants’ identity to lenders.

Using an established specialist financing broker like Leodis Financial provides a number of advantages, including the ability to save borrowers and brokers time studying the various options and assisting them in finding the bridging loan that is best suited to their individual needs. If bridging finance is a new financial area for you, the process may seem daunting.

You’ll have access to a wide range of bridging finance lenders through Leodis Financial, ensuring that the client gets the best terms available. As part of the service we provide, we will conduct this research and product selection on your behalf. With nearly two decades of experience in specialist financing, we are close to lenders and are occasionally provided exclusive rates that other providers and middlemen are unable to obtain. Because of our long-term ties, we understand each lender’s underwriting criteria and will be able to get projects approved and offered swiftly, which is a key component of bridging finance.

You can also choose to have us manage your client’s application from the initial inquiry to the final approval. You can be as hands-on or as hands-off as you want with this approach.

Do you have any further bridging financing questions to ask? Please let us know by calling us on 01274 028 019