Bridging Loans

Bridging loans are a type of funding that allows you to “bridge the gap’ before additional, more longer term finance is available.

Yes it is like a traditional mortgage but the major difference is, it allows you to buy a property or land without having to worry too much about your credit history. 

You see a bridging loan is based on the asset, in most cases property but also land.

There are over 300 different bridging lenders in the UK (yes, 300!)…Some are major financial institutions like banks and some are specialist lenders you may have heard of like Aldermore or Shawbrook.

However, there are literally hundreds of smaller, alternative finance lenders who generally take more risks than the big banks and this allows them to lend against unusual or unmortgagable assets.

It could be buying a house at auction. It may be buying another property before you have sold your existing one or it may even be because you want to buy a piece of land that doesn’t currently have planning permission.

Whatever the reason, a bridging loan can be quick and relatively simple to apply for. As most lenders are looking at the value of the security (land or property) and not you, it enables them to lend money quickly and with little fuss.

If only!

Everyone asks this question but the simple answer is no, they don’t. Or rather, most banks don’t. The usual excuse is that offering a bridging loan is riskier than offering a residential mortgage for example and we get that. Natwest, Barclays, Lloyds, Santander…None of them offer bridging loans.

However, if you choose the borrower carefully, the quality of the asset or security is good and you do your usual lender due diligence, then there is absolutely no reason at all why banks and other high street lenders shouldn’t offer bridging loans.

Compared to a normal mortgage then yes, they are.

But you have to remember…These are risky products for lenders. Yes, if it goes well then both the borrower and the lender can earn a LOT OF MONEY.

However, if they get the deal wrong then both the lender and borrower could be in a lot of financial trouble.

There are however other costs involved that people forget to take into account. They are:

1. Legals costs. Both yours and the lenders legals fees are paid by the borrower and this is pretty standard right across the short term lending sector.
2. Valuation fees. You will have to pay for a full valuation for lending purposes.
3. QS and QS monitoring fees. If you are looking to purchase a property or land with a bridge and then build on that land or knock down the property and build on the land, then you will need development finance too. A Quantity Surveyor (QS) will have to complete an initial report that you the borrower will have to pay for. You will also have to pay for the QS every time they go out to site to check the progress and to release funds from the lender.

So in summary, you have to pay for:

• Your valuation
• Your legal fees
• The lenders legal fees
• The QS initial report
• The QS ongoing interim reports

And even after all of this, you may still have to pay stamp duty, VAT, professional fees for an architect, planning application fees and so on.

Yes you can but it varies from lender to lender.

Sometimes this type of lending is known as non status lending.

Traditionally, bridging loans were quick, short term loans for property developers, landlords and entrepreneurs.

So any lenders in this market knew they had to be fast and the fastest way to lend to someone is by basing that lending solely on the asset. i.e. The building or land.

Just because an individual has bad credit does not mean the deal is a bad one. Far from it.

Imagine this for a lender. Same property.

Borrower with GOOD CREDIT wants to borrow £75,000 against a property value (and purchase price) of £100,000.

Borrower with BAD CREDIT wants to borrow £50,000 against a property value (and purchase price) of £100,000.

The risk to the lender on scenario 2 (bad credit) is far less because there is such a gap between what they are lending and what the property is worth.

So if the property is valued 12 months after purchase and it has down valued to £85,000, because of bridging loan interest and fees that need to be added to the loan, it is unlikely that the lender will make any money on this property and in fact, will probably be owed more than the property is worth.

The bad credit scenario leaves the lender with a lot more headroom in case the property does get down valued.

In some cases, yes you can.

However, a number of lenders will charge extension interest so for example: You have a 12 month bridging loan and are paying 1% a month.

You ask for a 3 month extension and the lender says ‘yes’ but they will also charge you an additional 1% a month on top of the 1% a month you are already paying.

Here at Breeze Capital, we look at each case on its own merits, no one size fits all.

If you are struggling to sell your own house and want to buy your dream house (whilst still hanging on to yours until it sells) to avoid someone else buying it from under you, then again, a bridging loan could be ideal.

For the purposes of clarity – Here at Breeze Capital we will be unable to provide you with a bridging loan if you wish to purchase a residential property you are looking to live in or have previously lived in.

If you want to buy a piece of land and build your perfect home on the site then you would use a combination of bridging and a development finance loan.

Because this type of short term lending is usually only for a maximum of 12 months, it means that they are unsuitable for anyone who wants to use them to purchase a property that they will live in permanently (quite apart from the whole other issue of regulated lending)

Anything from £100,000 up to £1.5m is pretty standard.

Some lenders will go up to £20m and a few of the larger specialist lenders will go up to £50m for experienced borrowers.

In terms of property, we can arrange bridging finance for the purchase of residential property such as houses and flats.

Commercial property such as nursing homes, hotels, HMO’s, warehouses, industrial units and industrial estates, shops and car parks.

Yes you can.

Most lenders will require the land to have full planning permission however some lenders will allow the purchase of land without planning permission but will restrict how much they lend.

Land with planning is usually up to 50% LTV and land without planning is virtually impossible to fund from mainstream sources.

At Breeze Capital, we lend up to 50% LTV for land with full planning permission.

Pretty much.

A commercial mortgage (or business mortgage as it is sometimes known) is used to buy property over a long term, usually 10, 15 or 20 years.

A bridging loan can be used for exactly the same thing but can only be used for a short period of time, usually 12 months.

The other major difference is cost.

A commercial mortgage is a lot cheaper and rates can be as low as 3.5% pa compared to a normal bridging loan rate of 12% pa. When you apply these interest rates to loans of £1m+, the difference in cost can be staggering.

However, a bridging loan is much easier and much quicker to obtain than a commercial mortgage.

No.

The structure of a residential mortgage is completely different to the way investment type mortgages work.

Your residential lender will have taken certain checks on your ability to purchase the house. This may be through affordability and credit checks but either way, their decision to lend to you will have been based on your ability to put down a deposit on that property too.

They simply would not allow the borrower to obtain bridging finance to use as the deposit on a house.

The other reason why you can’t use a bridging loan for a deposit on a house is because this type of bridging would be regulated which means the lender in question would also have to undertake affordability checks and so on.

Based on this criteria, the bridging lender would not be able to make the deal work. Breeze Capital are not regulated by the FCA.

You can and this type of lending is known as development finance.

The way it works is this:

1. You obtain a bridging loan to buy the land unless you already own it. The land must have planning permission.
2. You then obtain development finance which is released to you in stages or drawdowns as they are known in the industry.
3. As each stage of your build is completed, you will contact your development finance lender and they will arrange for their Quantity Surveyor (QS) to come out.
4. Once the QS reports back to the lender and confirms that the work completed is satisfactory, the lender will release the money to the borrower so they can pay their builder or other contractors for the work done.

A development finance loan is usually taken over 18 months and is based on a 12 month build schedule and a 6 month sales period.

Important: Breeze Capital does not provide development finance or bridging loans to anyone looking to build a house that they or a family member will live in. Our loans are purely for investment purposes.

Yes they can and more often or not, a bridging loan is usually taken out by a limited company rather than an individual.

In most cases, the limited company has been set up with the sole purpose of buying a property. This type of borrowing structure is known as an SPV, short for Special Purpose Vehicle. This simply means that the company has been formed with the sole intention of buying a property and that after the transaction has been completed and the property sold, the company will usually cease to exist.