June 6, 2019

Your guide to bridging finance for property development and investment

Bridging Finance could be the solution you need to secure and complete your next property investment project. Here’s how it works.

What is bridging finance?

Bridging finance is a short-term loan, typically lasting 12 to 18 months, and covers the timing difference between one property related transaction and another. Literally, it ‘bridges the gap’.

Different scenarios in which bridging finance might be required

A need for bridging finance arises when the purchase of one property needs to be completed before the sale of another one is finalised. In property development and investment, it is also common for bridging finance to be used as an interim facility to quickly secure a property, generate cash flow or fund light works while longer term finance is put in place.

Here are a few examples:

  • A property investor wants to take advantage of a purchase opportunity at auction. The intention is to refurbish the property for buy-to-let, at which point more permanent finance will be arranged. Bridging finance from LendInvest is used in the meantime to complete on the purchase and undertake the refurbishment
  • A property developer has taken their project to practical completion. During the development, they have accrued several different lines of finance, which have become unwieldy to manage and are proving more expensive than they need to be. A short-term bridging loan is used to consolidate the borrowing into one place until a sale is achieved
  • A part-time property investor needs to generate some short-term business cash flow while obtaining planning permission to convert a property from commercial to residential use.  A bridging loan is taken out to provide some pre-construction finance until a development loan can be agreed once planning has been granted.

Open or closed?

Bridging loans are sometimes referred to as being open or closed.

A closed bridging loan is one where there is a defined exit plan with known timings. For example, contracts have been exchanged, but completion on one of the transactions is delayed for some reason. Closed arrangements are generally preferred by lenders and borrowers alike because of the certainty that exists.

An open bridging loan is where the timings and possibly even the source of repayment is less clear.

How is a bridging loan repaid?

A bridging loan is repaid when one of the properties in the transaction is sold or refinanced.

What lenders provide bridging finance?

There are several different types of lender able to offer bridging finance.

Traditionally, bridging finance, like most other forms of lending, was the preserve of the banks, but since the financial crisis, they have reduced their appetite for new projects.

The banks’ place has been taken by specialist property lenders, like us here at LendInvest, that have in-house experts with the skills and resources to properly assess a property project and tailor the finance accordingly.  Our underwriters, business development managers and case managers work together to deliver quick decisions on loan applications.

The market is completed by an array of mainly small investment funds, private companies and high-net-worth individuals that focus on making above market returns by providing high-interest loans.

Are bridging loans regulated?

Some, but not all, bridging loans in the UK are regulated by the FCA. Any facility involving the borrower’s home or that of a close family member is regulated under the Mortgage Code of Business (MCOB) rules and protects the borrower against bad advice or miss-selling.

Bridging loans for property developers and buy-to-let landlords are typically not regulated. This is because commercial lending is subject to different assessment criteria. For example, the repayment will be based on the development value or rental potential of the project and won’t depend on the borrower’s household income. At LendInvest, we currently provide bridging loans on investment properties and development projects.

What does a bridging finance lender require?

When it comes to deciding whether to lend or not, any reputable lender will firstly want to satisfy itself about the creditworthiness of the borrower. A good credit history and previous experience in property development will help secure quick agreement and the lowest rates.

The security is also going to be a deciding factor. Lenders typically look for a maximum loan to value ratio of 65% on commercial properties and 80% on residential. Here at LendInvest we lend up to 75%.

Your lender will want a first charge on the property that is to be re-financed or sold.  We should mention here that some lenders, most likely the private lenders mentioned earlier, will seek equity in the development in exchange for their cash. This could happen if you need to borrow more than the maximum loan to value ratios on offer. This isn’t something that we ask for or offer here at LendInvest.

What is a bridging loan likely to cost?

Loans are priced according to the risk the lender perceives and the revenue it needs to generate to make a profit.

Bridging Finance, particularly in an open scenario, is generally considered to be more risky than other types of lending, but moreover, because the money is only lent for a relatively short period of time, the real income for the lender from interest alone is quite small, even if the headline rate looks quite high.  

For this reason, it is normal to see an interest rate plus an arrangement fee quoted. There could also be security fees, legal fees, valuation fees and early repayment fees. All of these are legitimate and it’s important you understand the full costs of any agreement that you enter into before signing. Get it wrong and it could impact the profitability, and even the viability, of your project.

We’ve created a handy bridging loan calculator to help you explore the full cost of any facility that you might be considering.

Of course, it’s not only the amount of any fees and interest that matters. When they have to be paid could have implications for your cash flow. Property investment often generates little or no income until the project is complete so you will need to budget for finance costs and have access to cash if they need paying in advance or in regular instalments. Interest roll-up, where interest is repaid at the end of the term rather than in regular instalments, is sometime possible for shorter-term arrangements.

How long does it take to agree a bridging loan?

The whole process for agreeing a bridging loan is likely to be measured in weeks not days, but because of its nature, it shouldn’t take months either.

The normal process is to agree the credit and the terms in principle first, which can happen within a few days, and then move to complete the valuations and security. The lender will need to confirm initial valuations and then complete the security arrangements before the money can be released.

Do I qualify for a bridging loan with LendInvest?

We hope so! We welcome applications from experienced property developers with good credit histories.

We can lend on freehold or leasehold properties (with 60+ years remaining on the lease) in England, Wales and Scotland.

Our loans range in size from £75k – £15m and we will lend from 12 to 18 months.

When and how should I apply?

We encourage you to apply as soon as the need becomes apparent. This gives us the best chance of tailoring the right facility for you and getting the formalities completed before you need the money.

If you’re intending to bid in an auction, we recommend obtaining an ‘agreement in principle’ before the big day. This will shorten the approval process when the specific details of the transaction are known.

We accept applications via brokers or directly through our website and have a dedicated team here to help.

Summary

So, in summary, bridging finance is a flexible, short-term facility that could be the vital cog in the machine to move your property investment or development project from one stage to the next. The added advantage is that the money can normally be arranged quite quickly.

Please talk to us today about your project, we’ll be pleased to advise on the best way forward.