Are there different types of bridging loans?

Are there different types of bridging loans?

There are different types of bridging loans available when you need quick funds to bridge a financial gap. Especially in property transactions. Each type is designed to fit specific scenarios and financial needs. Understanding these differences is crucial in making an informed decision that aligns with your financial goals and circumstances.

What is a Bridging Loan?

A bridging loan is a short-term finance option used to ‘bridge’ a gap between a debt coming due and the main line of credit becoming available. Or it can provide a swift financial solution in a tight spot. Typically, it’s used in property transactions, helping buyers to complete the purchase of a new property before selling their existing one.

These loans are quick to arrange, which is ideal for when time is critical, such as at auctions or unexpected financial needs. They are usually secured loans, meaning the loan is backed by a property asset.

Types of Bridging Loans

Bridging loans can be broadly classified into two main types: open and closed bridging loans. Each serves different needs and comes with its own set of terms and conditions.

Standard Residential Bridging Loans

These are bridging loans aimed at standard residential houses and flats. Minimal work is required on the property. These type of bridging loans are normally used to purchase residential investment property. They are also used in a chain break scenario. For example buying a new home to move into before you have sold your previous home.

Loan to values on this type of bridging loan tend to be up to 70% or 75% LTV. At the time of writing, rates start at around 0.55% for lower LTV loans going up to around 1% per month depending on the circumstances.

Standard Commercial Bridging Loans

A standard commercial bridging loan could be secured against commercial property, semi commercial property or even land. The LTVs tend to be lower than residential bridging, normally between 60% and 70%. The interest rates are also normally higher at around 1% per month. The reason for this is that lenders consider the risk to be higher. Commercial properties not as easily saleable as residential. Sales and mortgages also take longer to complete.

Residential Light Refurbishment Bridging Loans

A typical scenario for a refurbishment bridging loan is a residential investment property somebody is buying with the view to refurbishing it and selling it. Alternatively they may remortgage it and retain it as a buy to let property.

Standard bridging loans can be used in this scenario. However, borrowers are often looking to raise the maximum amount possible. In this case, the lenders will take into consideration the value after the works of being completed and the cost of the works. To qualify as a light refurbishment, there must be no change in planning or structural works taking place. A new kitchen, bathroom, boiler, rewire and redecoration is perfect for this scenario.

There are various schemes of available but, typically, it should be possible to raise a gross loan of 85% (interest and fees will be deducted from this amount) of the value of the property. The borrower would then carry out the works to refurbish the property using their own money.

An alternative is a 70% to 75% net LTV loan (the interest can be added on top of this). Some of these loans also give borrowers a facility to draw down further funds as they progress through the works. This second option can often raise borrowers more cash if there is considerable work to be done on the property.

In each case, the lenders assessment will be based on what the property will be worth when it’s finished. Therefore there needs to be an expectation of a significant increase in value as a result of the works being carried out.

Heavy Refurbishment Bridging Loans

A heavy refurbishment bridging loan is the next step up from light refurbishment. It’s likely that there could be a change in use, structural works necessary, or the cost of the proposed refurbishment is more than 20% of the value of the property. Each lender has a different policy on this.

The rates may be slightly higher and the LTVs slightly lower. However, with significant works being carried out there is an opportunity to build into a drawdown facility to fund the works. In simple terms the lender will grant you a facility based on the gross development value of the property (GDV). Once you’ve done the first phase of work at your own cost, the lender can sign this off as being completed and reimburse you feel costs. This money is then used to carry out the next phase. The process repeats until completion

Property Conversion Bridging Loans

There is quite a heavy overlap between property conversion bridging and heavy refurbishment bridging. The main difference is that there is likely to be a change of use in the planning consent for the property. This planning consent needs to be in place before the lender will grant the facility. As with heavy refurbishment, their tends to be a day one loan amount to either purchase the property or start the works. This is then followed with a drawdown facility as above. 

If planning consent for the conversion is not in place at the point of purchasing the property, some lenders will consider offering a bridging facility to purchase and hold the property. Then offer a development facility once the planning has been granted. 

Development Bridging Loans

Development Finance is likely to apply where there are very significant works required of a structural nature. More often than not it will be a ground up build. The experience of the developer is very important in this scenario. However, a lack of experience can be mitigated by having a strong JCT contract in place. The contract should be with an experienced builder / contractor with a strong financial background. This means a strong balance sheet and positive assets. Thus evidencing the contracting firm is successful, established and had plenty to lose if the projects doesnt go well. This protects the lender and you by reducing the risk of the contractor having financial problems and walking away from the job.

Hybrid Bridging

Imagine you are looking to buy business premises. Unfortunately your latest accounts are not sufficiently profitable to support the mortgage you propose.

Alternatively, imagine you are buying an investment property which needs some work before you let it out. It won’t produce any income for 6 months. You could take a bridging loan and then refinance it onto a longer term facility six months later. However, you prefer to secure longer term borrowing at the outset.

There are lenders which offer both property investment term mortgages and bridging loans. They can offer facilities which have an element of bridging finance and rolled up interest for the first nine months. After this period, the loan changes to a serviced interest only loan. For some borrowers this gives them the comfort of a longer term facility and helps their cash flow for a number of months after they’ve purchased the property. It’s possible that the long-term element of this loan could be more expensive than other lenders in the sector. However, for some borrowers come at this is the only option. The pros and cons need to be weighed up with your broker depending on your circumstances.

Choosing the Right Type of Bridging Loan

Most lenders insist on a closed bridge with a definite end date. Therefore, open bridging loan is unlikely to be available to you unless you just want to borrow long-term money, secured against an asset, and service the interest monthly. What’s the bridging loan of this nature maybe quicker than a commercial loan, it is more expensive. Otherwise, the features are similar. Discuss this with your bridging broker. 

Therefore, once you know the type of project you are intending, one of the bridging options above should stand out.

There are overlaps between them and this is where the expertise of your broker will really make a difference to find which one will work for you best and most economically.

Remember, it’s not all about price. If you want your bridging loan to go through quickly and with the minimum amount of hassle, it may be worth paying a little more for a lender which is less picky.

Uses for Bridging Loans

Bridging loans can help in large tax liabilities, business investment opportunities, or covering unexpected expenses.

For instance, a business owner might use a bridging loan to secure a quick purchase of stock or a property developer might need it to finish a project pending the sale of another property.

Benefits and Risks of Bridging Loans

While bridging loans offer the benefit of quick funding and flexibility, they also come with risks such as higher interest rates and fees. Failing to repay a secured Bridging Loan could mean losing your property.

However, with careful planning and advice, bridging loans can provide the necessary funds at critical times without the long-term commitment of traditional financing options.

People Also Asked

How quickly can I get a bridging loan?

Typically, you can arrange a bridging loan within a few days to a few weeks, depending on the lender and your circumstances.

Are bridging loans more expensive than traditional loans?

Yes, bridging loans usually have higher interest rates than traditional long-term loans due to their short-term nature and quick access to funds.

What security do I need for a bridging loan?

The amount you can borrow depends on the value of the property used as security.

Can I repay a bridging loan early?

Some might have early repayment charges, so it’s important to check the terms with your lender. On standard bridging, normally there are no only repayment charges after three months. On heavy refurbishment, conversion or development bridging, some lenders may charge and exit fee. Typically around 1%.

Who typically uses bridging loans?

Property developers, investors, and individuals who need quick funds for property transactions are typical users of bridging loans.