Understanding UK Bridging Finance

Bridging Finance Basics

Bridging finance, sometimes referred to as high speed property finance, is a ‘financial tool’ used to raise funds against the value of a property. These funds can be used for any legal purpose, maybe to purchase an other property or to raise capital for some other reason. Bridging finance is primarily for short term purposes – typically one or two months but can be for up to two years. Literally any residential or commercial property which has provable value can be used to secure a bridging loan.
Some of the main purposes to which bridging loans can be put:

  • Purchase of a residential or commercial property before the sale (or re-mortgage) of an existing property.
  • Purchase of a property where speed is essential to clinch the deal
  • Funding can be arranged for property in need of substantial repair or refurbishment pending a long term mortgage.
  • To avoid bankruptcy of other financial crisis by releasing the equity in a property.

Bridging loans can either be based on the “restricted sale value” of a property or the Open Market Value (OMV). The difference is simply down to the preference of an individual lender, a specialist commercial broker will be well aware of the difference and should ensure that this is made clear to the client.

Because the loan can be based on the Open Market Value of the property it is not at all unusual to see loans being arranged in excess of 100% of the purchase price. This is a major attraction to most property investors who are able to negotiate purchases well below market value. In the event that additional funds are required additional security can be used to “top-up” the loan.

How does it work?

A professionally prepared valuation report is the back-bone of a bridging loan. Most bridging loan applications undergo relatively few background checks on the client’s ability to repay the loan, therefore the lender has to rely on the valuation for their security. Most bridging lenders will have a preferred list of surveyors so it is best to leave arranging the valuation to your broker.

Whilst waiting for the valuation report the lender will usually carry out their statutory checks on the applicant and be ready to issue the formal offer documents or facility letter when the valuation has been completed.

The exact process will vary from lender to lender, but in most cases once the offer has been issued and the valuation report checked the case is handed over to the solicitors who will then conclude the matter.
It is vital that you obtain independent legal advice when arranging bridging finance. Your choice of solicitor will have considerable influence on how quickly the process can be completed. It is worth checking you local phone book for firms of solicitors who have a commercial department, these solicitors are mostly likely to have carried out this type of high speed transaction before. Most solicitors expect to take eight weeks or more to conclude property transactions, bridging finance is usually completed within two or three days of a satisfactory valuation report being received. (Obviously the author is not aiming any criticism at solicitors!)

Types of Bridging Loan

Whilst researching bridging finance you will come across the terms “closed bridge” and “open bridge”. In principle a closed bridge is where the ‘exit route’ or ‘repayment source’ is already arranged typically where contracts have been exchanged but the funds are not going to become available in time. On the other hand, “an open bridging loan” means that there is not a confirmed repayment method. As with most things financial, there is a grey area between the two. The most important things is to make sure you are arranging the right finance for your circumstances. This is where a specialist bridging finance broker is best placed to assist.

Bridging Finance in the UK

There are now more bridging finance lenders in the UK than there have ever been, so rates are coming down and terms are becoming more flexible. When dealing with a bridging finance broker do not be afraid of asking for the terms of the loan to be explained in plain English. You will often be quoted a broker fee and a lenders arrangement fee. The interest rates and any repayment charges should be made clear at the outset.

Commercial Hard Money Lender

Commercial hard finance provider is a company or a private person loaning financial support. Often money-making hard cash loans are being issued with a higher interest rate than the traditional hard cash loans. Commercial hard money loans are usually being given for a short period of time and sometimes they are called bridge loans or bridge financing.

As traditional commercial hard money loan programs are very risky and have a higher than average loans likelihood of default, money-making hard finance providers offer a wide range of requirements on the type of real estate, special loan-to-value percentage and the certain minimum loan size for a money-making hard cash loan.

Bridge lender programs and commercial hard money loans:

Bridge lender programs and money-making hard cash loans are similar to the traditional hard money in the part of terms of the interest rates and loan to value requirements. A commercial hard cash lender or a bridge lender could usually be described as a strong financial institution with a large deposit reserves. Making a discretionary decision on a not conformed loan is totally in his power. Usually money-making finance providers (or borrowers) not conforming to the standard guidelines of a residential conforming credits.

And because of the fact it is a commercial property, commercial hard cash loans usually also do not conform to the guideline of the standard commercial loans. It is the usual and absolutely normal situation if the borrower is in a temporary financial distress or has just a building permit in place. The commercial property may not be in a good and marketable condition for a number of reasons; it may not be completed after the process of construction or reconstruction etc.

Some commercial hard cash lenders (bridge capital groups or private investment groups)could require some sale-lease back requirements or the joint venture to create an additional background for such a risky transaction that has a really high default rate. It is really usual situation when money-making hard finance providers temporarily offer hard or bridge money, allow the owner of the property to buy back his property within only a certain (as usual, not long) time period. If the property was not bought back by purchase or if it was sold within the period of time the money-making hard finance provider would get a right to keep the property at the agreed to price. In the case of default the property owner may lose the property to foreclosure.