Bridging finance, sometimes referred to as high-speed property finance, is a ‘financial tool’ used to raise funds against the value of a property. Correctly understanding bridging finance and the uses of short-term finance is essential.
Bridging funds can be used for any legal purpose, maybe to purchase a property or raise capital for another reason. Bridging finance is primarily for short-term purposes – typically one or two months but can be for up to two years. Any residential or commercial property with provable value can be used to secure a bridging loan.
Bridging Finance Basics
Some of the primary purposes for which people can use bridging loans:
- Purchase 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 a property needing substantial repair or refurbishment pending a long-term mortgage.
- Avoid bankruptcy or other financial crises by releasing the equity in a property.
Bridging loans can either be based on a property’s “restricted sale value” 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 property’s Open Market Value, it is not unusual to see loans being arranged for more than 100% of the purchase price. This is a major attraction to most property investors who can negotiate purchases well below market value. Additional security can be used to “top-up” the loan if additional funds are required.
Understanding bridging finance in practice
A professionally prepared valuation report is the backbone 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 background 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 conclude the matter.
You must obtain independent legal advice when arranging bridging finance. The choice of solicitor is entirely yours. However, the solicitor will have considerable influence on how quickly you manage to complete the process.
It is worth checking for firms of solicitors with a commercial department; these solicitors are likely to have carried out this type of high-speed transaction before. Remember that most solicitors expect to take eight weeks or more to conclude property transactions; bridging finance is usually conducted within days of receiving a satisfactory valuation report, so using an experienced solicitor is a vital part of the process.
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 in place, typically where contracts have been exchanged, but the funds will not become available in time.
On the other hand, “an open bridging loan” means no confirmed repayment method exists. As with most financial things, there is a grey area between the two. The most important thing is to ensure you are arranging the right finances 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 short-term property lenders in the UK than ever, so rates are coming down, and terms are becoming more flexible. When dealing with a bridging finance broker, do not be afraid to ask for the loan’s terms to be explained in plain English. You will often be quoted a broker fee and a lender’s arrangement fee. The interest rates and any repayment charges should be made clear at the outset.
As we said at the beginning, a bridging loan is a tool, and just like any tool, it is extremely useful when used correctly.