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 a 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 bridging finance 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. Obviously the choice of solicitor is entirely yours, however the solicitor will have considerable influence on how quickly you manage to complete the process. As a rough guide it is worth checking the 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. Bear in mind that most solicitors expect to take eight weeks or more to conclude property transactions, bridging finance is usually conducted within 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 short term property lenders in the UK that 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.
As we said at the beginning, a bridging loan is a tool, and just like any tool it is extremely useful when used correctly.