Many of you will already be aware of the different types of finance products available. One of the products of particular interest to many investors is bridging finance. We have acted for both borrowers and lenders in bridging finance deals and therefore have “hands on” knowledge of the issues that crop up when arranging such finance..
What is bridging finance?
Bridging finance (or a bridging loan) is a type of short term secured loan designed to bridge a temporary cash shortfall when buying a property until you can find a more permanent type of finance such as a High Street mortgage. Bridging finance often fills a gap in the market if mainstream lenders are reluctant to lend based on the facts or figures presented to them. Bridging finance can be made available within a matter of days whereas it can take weeks for a High Street lender to approve a loan.
When is bridging finance usually used?
There may be many reasons for purchasers seeking bridging loans, such as:
- If they need to sell another property but the property sale hasn’t progressed and they still want to proceed to purchase their new property
- If a property has recently been purchased and conventional lenders expect the borrower to have owned the property for at least 6 months
- If they are buying a property that needs major work carrying out to make it habitable, or in order to fund the purchase as well as carrying out refurbishment works
- If they are buying at auction and need funds quickly. Often bridging finance can be made available within a matter of days but it can take weeks for a term lender to approve their loan, which could be to too late for an auction purchase required to complete within 28 days
- If there is a gap in the market and based on the current circumstances the mainstream lender will not agree to lend the finance.
- If a conventional lender does not accept the purchaser’s source of income as sufficient to support the purchase
Points to note
- Interest rates are often higher on bridging loans due to the short term nature of the loan and reflecting the lender’s risk. You will need to also pay for fees including exit fees and the lender’s solicitor’s fees – the lender is usually separately represented because the circumstances usually carry a greater risk to them.
- You must have a clear exit strategy to repay the bridging loan – and this sometimes has to be approved by the lender – otherwise you risk being stuck with a bridging loan for a long period which can be very risky and costly to you. The lender can also pursue their enforcement rights if you do not repay at the end of the term, putting your property at risk of repossession. The lender will consider both your plans for the loan and your exit strategy as part of their due diligence on assessing whether they are willing to lend you the required funds.
- The loan is mainly secured by a first or second legal charge against your property. If you are purchasing in a company name, the lender may require you as an individual to also sign a personal guarantee in order that their loan may be enforceable against assets in your own name, should they need to enforce the loan.
- As for financial advice you should discuss your needs with a financial advisor who will advise you as to the suitability of the loan based on your own circumstances. We can put you in touch with suitable advisors who are experienced in this field and thereafter we can provide advice on your legal obligations under the legal charge or personal guarantee.
This article is written by Sian Lloyd