What is a Bridging Loan?
A bridging loan is a type of finance that allows borrowers to complete a property or land transaction quickly. Usually, this will be in advance of a longer term funding option, say a commercial mortgage, sale of another property or other expected cash windfall.
Bridging loans (or short term loans to give it its correct title) is usually offered to the borrower for a maximum term of 12 months. This should give borrowers enough time to arrange other finance at cheaper rates over the long term.
What can bridging finance be used for?
There are a number of uses such as buying land to develop on it, buying a property at auction, buying another property before you have sold your own. However the main reason people use bridging finance is for the speed of the deal…Quite often a property can be valued, purchased and all legal work completed in a matter of days, not the usual 3/4 months that you find on a traditional mortgage.
Adverse Credit Bridging Loans
If you were to apply for a residential mortgage or homeowner loan and you had poor credit, the chances are that you will be declined immediately. One thing most mortgage lenders don’t like is any form of bad credit as they see the borrowers as a huge credit risk.
The problem is that after the credit crunch of 2008, plenty of mainstream borrowers suffered terrible hardship which affected their credit profile and many of these borrowers will still struggle to pass a credit score when the lender undertakes a credit search on them.
CCJ’s, bankruptcy, defaults, IVA’s, debt management plans and even missing a just a couple of payments on a credit card will ensure that the borrower has virtually no chance of getting approved for a loan.
Not so with a bridging loan.
Lenders base their lending on the asset, not you
What we mean by that is instead of the lender looking at your credit history, they base their lending decision on the house or land. They will look at the asset (house/land) and decide that if they had to repossess the property for whatever reason, would they get their money back?
Because a bridging loan is usually offered at a lower percentage than a normal home loan, it means the odds on weighted in favour of the bridging lender if they had to repossess.
As an example:
Property is up for sale at £100,000. The borrower is looking to buy it for £65,000 (65% of the cost of the purchase). If the lender had to repossess the property and sell it quickly at auction, there is an excellent chance that they could sell the property for a knockdown price of say, £80,000. That means that they would get their original loan back, plus any interest and fees that they charged.
As you can see, because of the way a deal is structured, it would be very difficult for a lender not to get their money back.
Hence why they are willing to lend to adverse credit borrowers and your bad credit issues should not be a barrier to obtaining a loan.
Bridging Finance for Land
This is becoming more common and as the old saying goes, “they are not building anymore land”, so land acquisition has become a vitally important weapon in the property developers armoury.
One of our specialities here at The Finance Business is development finance. We work with property developers, entrepreneurs and other borrowers to enable them to buy land and develop on it, so we provide an initial bridging loan and then development finance to finish the project.
As stated earlier, because there is a lack of available land in the UK to buy and develop, the purchaser needs to be quick in making a bid and then arranging the finance and that’s where specialist knowledge comes to the fore. We can help with the initial planning application, cost all of the building works and work out a build schedule with your project manager and architect.
Buying land without planning permission
This is where a developer can make a real killing.
Whilst most lenders will insist you need full planning permission before they will fund your acquisition, there are a number of lenders who will allow you to borrow money without any planning being in place.
This will allow you to purchase the land via a bridge at a discounted price and spend some time applying top the local authority for planning permission. Of course, there is no guarantee that you will be granted permission but if you did your homework correctly prior to purchase, you should be pretty confident it will happen.
We have seen instances where a property developer has bought land for £60,000, spent £5,000 on plans and drawings and just 6 months after applying and obtaining planning permission, the land has valued at just over £1m.
Of course, like any property transaction, buying land without planning permission is fraught with risks and we would only advise you do this if you are experienced and have disposable funds.
Permitted Development Rights (PDR)
This is where a local council has introduced a scheme whereby the developer can submit a planning application that will not have to go through the normal planning process. Not every local council offers this (particularly some London boroughs) so you will need to check before proceeding.
Under PDR rules, the planning application should be approved within days.
Bridging Finance to purchase and refurbish a property
This is probably the area that most people are familiar with.
You see a property that is in need of some refurbishment, do your numbers and work out that you can spend x amount on it and that after work it is worth x times more.
At least in theory it is.
Before you go any further and decide to make a bid at a local property auction, make sure that you have all of your figures worked out. You need to:
- Get a valuation or survey. You may even need a Quantity Surveyor (QS)
- Get estimates from a builder
- Get comfortable that you can sell the property when finished and if not;
- See if you could refinance it at the end of the bridging loan and rent it out
- Work out the yield
- Work out a total cost to you over the period you have the loan including refurbishment costs, bridging finance payments and estate agent/letting agent fees
- Check out similar properties nearby – both unfinished and finished
Too many potential borrowers see an opportunity and then realise that it will take a lot more time, money and effort to get it to where it needs to be and we have seen plenty of small developments fail because of a lack of planning.
There are currently 137 bridging loan and development finance lenders in the UK. That we know of. There could be as many as 200.
Seemingly, anyone that has a pot of cash these days is looking to lend it…The old adage of money makes money has never been more true.
However, we are careful only to work with reputable lenders as we know it is important that your money is in safe hands. Just because you may be applying for a bad credit bridging loan does not mean that your money or investment should be any less safe.
We undertake a huge amount of due diligence to ensure that mortgage lenders meet our stringent criteria of:
- Quick process
- Simple application
- No jargon
- Competitive rates
- Transparent fee structure
- No upfront fees
Short term lending isn’t easy to understand but whether you are buying a residential property to refurbish or a commercial building to convert into apartments, we are here to help.