In this article, our Head of Property Finance, Paul Bagnall, talks about Bridging Loans as part two of his Property Series.

In parts one and three of this series, Paul will take you through Commercial Mortgages and Development Finance.

If you haven’t had the pleasure of meeting Paul yet, you can find out a little more about him here.

So, what is a bridging loan?

A bridging loan is a short-term loan facility typically used to ‘bridge’ a financial gap between two transactions or events, often when buying or selling property.

A bridging loan can also be used by a business to raise capital, by accessing equity in property (the difference between the property value and any existing debt) – such as premises, investment property or even directors’ own homes.

Bridging loans are typically used when speed is crucial, as they can be arranged quickly– allowing access to funds while waiting for another source, such as a mortgage or the sale of a property, to become available.

When used appropriately, bridging loans can be a good financial tool to provide a solution and enable progress.

However, I would always recommend that you speak with a specialist finance broker to ensure that a bridging loan is appropriate for your requirements – or to understand whether a more cost-effective and flexible alternative option could be available.

A key aspect of all bridging loans is the requirement for a clear exit strategy, a way to repay the loan. More on this later…

Ok, so what are bridging loans most commonly used for?

• ‍Quick access to funds

As already mentioned, SME businesses can access equity in property with bridging loans secured by way of first or second legal charges in days/weeks, rather than weeks/months as often the case with other long-term funding options.

• ‍Overcoming a broken property chain, or avoiding a chain entirely

A bridging loan can facilitate the completion of a property or business purchase, prior to a sale completing.

• ‍Property refurbishment

In addition to property purchase, bridging loans can also be structured to support the subsequent refurbishment/improvement/conversion of a property – thus funding the entire project, through to refinance or sale of the property.

• ‍Asset management

Purchase of property followed by readying for mortgage finance, for example; letting an investment property so it is income producing.

• ‍Auction purchase

For properties purchased at auction, completion is typically required within four or six weeks. A bridging loan can be used to ensure that this timescale is met.

How are bridging loans structured?

Bridging loans are secured against property assets – whether residential, commercial /semi-commercial property or land.

Short-term in nature, loans are typically arranged over 3-18 months. Most lenders will stipulate a minimum interest charging period, following which there is no early repayment penalty.

Generally, bridging loans are ‘interest only’ with repayment of the capital initially borrowed deferred to expiry/redemption of the loan.

A feature of bridging loans is that they can be arranged with ‘retained’ or‘ rolled up’ interest whereby interest is either deducted from the loan at the start or accumulated over the term of the loan – thus taking away the requirement for any monthly payments during the loan.

It should be noted that, due to the short-term and often higher risk nature of bridging loans, interest costs are typically more expensive than other types of property finance, such as a commercial mortgage. Interest rates for bridging loans are typically quoted on a monthly – rather than annual – basis.

All of these aspects need to be carefully considered to best suit your specific requirements – I can help with this.

You mentioned ‘clear exit strategy’…

For bridging finance, this is undoubtedly the most important aspect – yet, somehow, I regularly hear of scenarios where it has been overlooked.

Naturally, borrowers tend to be keen to learn how easily and flexibly funding can be accessed – i.e. the ‘day 1’ or ‘front end’ element. However, the ‘back end’ really needs as much careful consideration.

Simply put: how will the bridging loan be repaid? What will be required to achieve this? For example:

• ‍Sale of property or business - Has advice been taken re. realistic market conditions?
• ‍Refinance with a mortgage - What criteria must be met to achieve this?
• Business cash flow - Can this be documented?
• ‍Inheritance or similar - Has the probate process been sufficiently considered?

Some bridging lenders in today’s market claim ‘no need for a defined exit’ as a USP. The reality is that, although lenders’ core business strategy is ‘lend – get repaid – lend again’, there often exists the opportunity to renew or extend bridging facilities, more often at significant additional cost to the borrower.

Together, we can consider contingency options to mitigate your risk and avoid unnecessary cost.

So, all things considered, is a bridging loan the right option for me?

Sometimes, clients initially assume they need bridging finance – but I am firmly committed to ensuring that Bluestone clients don’t go through additional rounds of financing unnecessarily – and only proceed with bridging finance if:

• ‍It is the right fit for your circumstances.
• A less expensive and/or longer-term solution isn’t better suited.
• You have a clear and realistic exit strategy.

Together, we will always weigh all options.

We are here to help to support your business to achieve its goals, with the most suitable property funding options, through each & every step of the process.

Personally, I am proud to have been arranging bridging loans, alongside commercial mortgages, for over 22 years - and I look forward to us speaking in the near future, to understanding your business and aspirations for it, to determining your property finance requirements to achieve those aspirations and to working closely with you to deliver on them.

Bridging loans – the Bluestone way: Ethical, Efficient & Expert.

Speak soon, Paul.

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