A bridge loan is a useful and versatile short term funding option for professional property investors and developers who wish to purchase, refinance, refurbish, or reconfigure a property asset in the UK, including circumstances when the property may not be mortgageable or habitable i.e when buying a derelict property at an auction.
How does a bridge loan work?
When taking out a bridge loan in England & Wales, the loan will always be secured either as a first, second or third charge against some form of property asset. The type of asset that the loan can be secured against is varied, with different lenders having different appetites for a specific asset class, location, risk profile of the borrower and loan amount. For example, some lenders may only lend against residential assets in the South East of England to borrowers with a clean credit history, but some may lend against all types of property and to borrowers with mixed credit profiles, with the difference being the loan to value (LTV) and pricing they may offer for the bridge loan.
In most cases, a bridge loan will be for a term of between 6 months and 12 months, but they can be for as little as 1 month to as much as 24 months, depending on the specifics of the deal. Typically the lender will lend a gross loan based on the loan to value, usually around 70% for residential property, will calculate the fees and interest for the duration of the loan, then deduct this amount from the gross loan, leaving a net figure that will represent the loan advance on legal completion. See our bridging loan calculator to calculate your loan.
Please see below a typical example for a 70% LTV first charge bridge on a residential property in England with an open market value (OMV) of £500,000 taken over 6 months.
|House value (OMV)||£500,000|
|Maximum gross loan @ 70%||£350,000|
|Monthly interest @ 0.7%||£2,450|
|6 months interest||£14,700|
|Lenders arrangement fee @ 2%||£7,000|
|Net day 1 loan||£328,300|
|£350k – (£14,700 +£7,000)|
With some property investors, they may require as high a day one net loan as possible. In this case, some lenders will allow the investor to “service” the loan, i.e pay the interest on a monthly basis. Not all lenders will allow this, so be sure to check with your broker first.
If the lender does agree for the interest to be serviced, you will need to provide documentary evidence of your ability to do so, such as an AST contract for rental income, bank statements, tax returns or payslips. If you can prove to the lender your income is sufficient, the gross loan will only be reduced by the arrangement fee and any admin fees that are charged, instead of deducting the interest payment for the full term, which will increased your net figure by up to 10% for a 12 month facility.
As you can see, there are many variables when taking out a bridge loan, which it’s important to use an experience bridging loan broker such as Tiger Financial, to ensure you are getting the best funding for your project, and so you don’t waste time or money with a lender that’s not suitable.
What Happens if I Pay Back the Bridge Loan Early:
It is common for bridge lenders to calculate the total interest that will be charged for the full term of the loan, and deduct this figure from the gross loan, leaving you with a lower net figure on the day of completion. However, what happens if you repay the bridge loan 6 months into a 12 month facility?
Don’t worry. In circumstances such as this, the lender will calculate the actual amount of interest that has been accrued, then when they prepare you redemption statement, you will only have to pay for the interest that you have used. One caveat to this is that most lenders have a minimum term on their loan agreement; usually 3 months, but can be 1 month in some cases. This means that you can redeem the loan at anytime, at no extra cost, as long as you are outside of this minimum term.
What Can a Bridge Loan Be Used For:
A bridge loan in the UK can be used for a variety of different purposes, depending on whether it is a residential bridge loan, commercial bridge loan or a bridge loan secured against land. There are also differences if the property is located in Scotland and Northern Ireland, which have slightly different property laws to England and Wales, so less lenders operating in the space. At Tiger Financial, we can discuss which lenders are operating in your location, so as to give you the best chance of a successful loan application.
Residential Bridge Loans:
When using a bridge loan for a residential project, investors are attracted by the speed in which they can take out the facility, typically within 2-3 weeks. In some cases, such as when buying from an auction house or a distressed sale from an LPA receiver, being able to complete the acquisition as quickly as possible is a critical factor in winning the deal.
Aside from the speed; there are other useful features of bridge loans that experienced property investors deploy to help them make successful investments, such as:
- With some lenders, they amount they lend is purely dependent on the open market value (OMV) of the property, regardless of the purchase price. Therefore, if buying significantly below market value, such as in a distressed sale situation, it is possible to borrow up to 100% of the purchase price, if buying sufficiently under value.
- A bridge loan can be used to buy a property that would otherwise be unmortgageable i.e if derelict, or problems with Japanese knotweed or asbestos.
- A bridge loan can be used if you wish to reconfigure the property i.e buying a large house to convert into apartments on separate titles.
- A bridge loan can be used when applying for planning permission, such as when converting an old office to residential using “Permitted Development Rights”, or when changing the use i.e from an old care home into residential apartments.
- If you need to raise refurbishment finance. Some lenders will allow you to borrow up to 100% of the cost of the works, as long as the gross loan remains within a certain amount of the end value (GDV), typically 65-70%.
- A bridge loan can also be useful if you need to buy or refurbish a property but have a tight cashflow. With the interest deducted from the gross loan, known as “retained interest”, this means there are no monthly payments, which can make a project viable, that otherwise would not be.
Commercial Bridge Loans
Aside from the common uses that are also found with residential bridge loans, a commercial bridge loan can also be used for purchasing property that would not fit the residential criteria, such as a hotel, an office block or a care home.
However, when using it for this purpose, it is important to remember that the loan to value (LTV) of the bridge loan will purely be based on the underlying property asset value. This can often be a shock when purchasing a trading business with strong revenue and profitability, where the business valuation can be much more than the bricks and mortar or vacant possession (VP) value of the property its trading from.
For new businesses, a bridging loan that has been used to acquire the property, and perhaps to finance the refurbishment, such as with a new hotel, restaurant or care home; can be particularly useful if taken over a longer period of 12-24 months. This allows the new business to achieve 1 or 2 years of trading history and accounts, which is essential when applying for a commercial mortgage to repay the loan.
Bridge Loan to Purchase Land in the UK
A common use for a bridge loan is when property developers need to acquire land. Funding is available for land with outline planning and full planning, and occasionally, land with no planning, if there are strong supporting reasons that consent will be attained throughout the course of the bridge loan.
Due to the speed and efficiency of the bridge loan process, sometimes developers can use this to their advantage to urgently secure a plot of land at a great price, whilst waiting for their development finance application to progress, which can often take 8 weeks or more. Or, as is often the case, the developer may wish to acquire the site, then go back to planning to amend or uplift the planning consent, which can have an uplift on the land value, (sometimes triggering an overage payment), but with a corresponding uplift on the end value of the completed scheme.
Due to the complexity and fragmentation of the bridge loan market, its vital to use an experienced specialist broker such as Tiger Financial. We will use our granular knowledge to guide you through the bridge finance maze, to ensure your business gets the funding you need, as quickly and efficiently as possible.