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- Bridging loans explained in a comprehensive 32-page guide
- Gain a full understanding of this type of specialist finance
- For brokers & direct clients
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Bridging Loans Explained
The Only Guide You'll Ever Need
In this guide, we will break down everything you need to know about bridging loans and the specialist finance industry. Not only will we explain what a bridging loan is, we’ll also lay out how they work, when they’d be used, and the benefits they can bring.
To assist with this, we will highlight available tools which will help you assess the products against your own specific circumstances. We will also provide you with case studies, showing you how bridging loans can work in practice. What’s more, we’ll highlight all the data, industry stats, and outlooks you need to know to understand where you fit in the market.
There is a lot to cover, but hopefully this “Bridging Loans Explained”-Guide will make things much more digestible.
What is a Bridging Loan?
Bridging loans are short-term loans designed to “bridge the gap” between financial transactions. They are often used for property investment where funding is needed quickly.
A bridging loan can be used for example, when you want to buy a property immediately. You may want to jump on an opportunity but are awaiting money to materialise from the sale of another asset. A bridging loan could help you secure the new investment, while you wait for the other sale to finalise.
Bridging loans can also help you invest in assets you already own. The funding can be released from the property and be used to refurbish a property, in the hope the changes made will generate increased rents or sale prices.
Also, second charge bridging loans could allow you to raise capital against a property which may already have a mortgage secured against it.
Regulated vs Unregulated Bridging Loans
Bridging loans are split into regulated and unregulated finance. Who lives in the underlying investment will be the determining factor between the two.
If you, or an immediate family member, plans to live in the property you’re investing into, you will need a regulated loan. Regulated bridging loans share the same regulations as residential mortgages.
Unregulated bridging loans are used by those looking to use property as an investment. Those who will be renting properties out for income, selling them on for a profit, or otherwise utilising them for a potential return.
Unregulated loans tend to be more flexible than their regulated counterparts. This allows for bespoke solutions for investors, with services tailored to their circumstances.
Open vs. Closed Bridging Loans
There are also “open” and “closed” bridging loans. The differences between the two mainly lie in the exit strategies involved.
Open loans are issued without a defined exit strategy in place. There may be an overall deadline, but the borrower will not need to have an exact plan for how it’ll be met.
Closed loans are those where an exit strategy is established before funding is issued. This provides security for both borrowers and lenders.
Exit Strategies
Exit strategies broadly define the plans borrowers put in place to repay their bridging loans. Bridging finance offers a short-term solution, so a long-term plan will be needed.
For property investment, there are two common exit strategies available. You can refinance onto long-term financial solutions, such as mortgages, or sell an asset on to cover the bridging loan.
There may be many exit strategies available to you. But no matter what your method, it’s important to have a clear plan in place. Bridging lenders will focus on an exit strategy when assessing an application.
Who can use a Bridging Loan?
Bridging loans are available to individual borrowers as well as companies, the self-employed, trusts, and more.
Funding is also available for foreign nationals, and offshore entities. Bridging loans are commonly used by property investors, developers, and landlords who may have complicated backgrounds and need access to fast, flexible capital.
What can Bridging Loans be used for?
Bridging loans can be used for a range of property investments. This can include the purchasing of property, be it a residential asset, commercial space, or an auction bid, among others.
Bridging loans can also be used for property already owned. Funding can be issued for light refurbishment work or more substantial conversion plans. Also, homeowners can utilise bridging loans for refinancing or second charge strategies.
While bridging loans are typically used for property investment, the funds can be used for a range of financial or commercial interests. A borrower, utilising a property as a security, could use the capital to invest in their business.
Overseas investors can also use bridging loans to enter the UK property market more easily. It can be difficult for foreign buyers to raise funds with mainstream lenders. More red tape could be involved, which may hinder their ability to jump on an opportunity. Bridging loans tend to be more flexible than their high street counterparts, allowing for easier access to UK properties.
Generally explained, bridging loans can be used to address a range of short-term issues that may arise. A common example with residential investments is a chain-break. Property investment is often dependant on a group of connected buyers and sellers.
You may want to buy a house, but have to wait until the seller buys their next home, and you sell a previous one. Where this chain breaks, and your buyer pulls out, a bridging loan could allow you to secure the onward asset while alternative buyers are found.
Additionally, if you’re coming to the end of a major development project, you may find that you need a bit more time to secure tenants for the underlying units. Bridging finance could provide some breathing space for this, and help you avoid selling units at a loss just to make a deadline.
How do Bridging Loans work?
The bridging loan application process will vary from lender to lender. Simply explained, there will be only a few key stages to all claims. A lender will receive an initial enquiry, assess its merits, and determine if they can help. Eventually, so long as everything falls into place, lenders will issue funding to the claimant.
Here at MFS, we follow a simple five step process. We receive a loan enquiry, which can come to us over the phone, through email, or via our website. We will issue indicative terms, which are subject to credit approval and receipt of your information. A decision in principle will be issued, subject to valuations, due diligence, legal terms, and other assessments.
After this, valuers and solicitors will be instructed to act, and commitment fees will be paid. Beyond this, legal paperwork is issued. The loan itself will then be drawn down by you for your property investment and the commitment fees are refunded.
When you apply for a bridging loan, lenders will add a charge against an asset you are using as security. This will be needed to secure the loan. There are two types of charges available to you, which will be dependent on your investment.
First charge loans are, as their name suggests, the first form of borrowing secured against a property. Mortgages are the most widely used example. However, first charge bridging loans are also common. Second charge loans are less common and are issued where there is already a loan secured against the property – this can take the form of another mortgage or a bridging loan.
If a property with loans secured against became repossessed and was sold off to cover what’s owed, first charge lenders would receive repayments first. Second charge lenders would only receive repayments after the first charge had been satisfied. This makes second charge loans riskier for lenders and as such, they typically have higher interest rates.
What are Bridging Loans secured against?
Bridging loans are usually only secured against a property, or multiple properties. Some lenders may accept another form of asset to secure a loan against – known as asset finance. At MFS, we only secure our loans against properties.
In unregulated bridging, the properties being used as security must not be lived in by you, or a member of your immediate family. Your loan must be used for investment purposes. If you’re investing in a residential home, it must be then rented out, sold on for a profit, or otherwise used for a transactional purpose. At MFS, we only offer unregulated bridging loans.
Regulated bridging loans are available with some lenders. These can be secured against a property that you already own, intend to own, and plan to live in.
Some lenders may accept other forms of security for their bridging loans. This could include commercial equipment, luxury cars, jewellery, artwork and more.
As bridging loans are secured against existing assets, they are not directly linked to a borrower’s income. This may make them suitable for those with complicated financial records. Whereas mortgages are primarily centred around an applicant’s income, secured bridging loans are focussed on the property and exit strategy at hand.
It’s important to explain why it’s unlikely to find an “unsecured” bridging loan: It is possible to get unsecured loans generally, but these will not be bridging products. Common examples include student loans, personal loans, and credit card debts. With these there is no collateral, but interest and fees will still be applicable.
The Benefits of Bridging Loans
Bridging loans can present many benefits for property investors. Bridging products tend to be flexible and bespoke, providing optionality for buyers with complicated histories. They tend not to adhere to tick-box lending criteria and can be shaped around many different property types. Bridging loans can support those who may be held back by adverse credit histories, or complex company structures.
Bridging loans can also be issued at speed. In some instances, funding can be delivered within mere days. This can help property investors who need capital fast to cover unexpected issues or delays. Those at risk of being out-bid, gazumped, or seeing a property chain fall through can progress comfortably.
This specialism may also help property investors who are struggling to get far on the high street. While some mainstream lenders may offer bridging products, they’re unlikely to promote them. Generally, the banks that do offer specialist lending only do so at the higher commercial and private banking level. Their specialist products may be inaccessible at the retail investor level.
The Costs of Bridging Loans Explained
The costs of a bridging loan will vary between lenders. What you’ll pay will depend on your loan-to-value (LTV) ratio, the term of the loan, the asset you’re investing in, your financial background, and numerous other factors. The applicable interest rate will also be affected by the wider health of the economy, and the Bank of England base rate. If the base rate rises, interest rates in the market are likely to rise too.
The interest rate, term, and type of loan you’re applying for will have the biggest impact on the final costs. But, a number of fees may also be applicable. Bridging loan lenders are likely to levy product fees, broker fees, valuation and survey fees, drawdown fees, exit fees, and more. At MFS, as we underwrite from day one, you will not be hit by any unexpected costs.
We have no admin fees and commitment fees are refunded on drawdown. Across all our bridging products, there is an arrangement fee starting from 1% of the loan amount. There may also be an exit fee, with the price determined on application.
All our bridging loans have a minimum term of 3 months. The maximum term length will be either 21 or 24 months, depending on the loan product. Generally, the longer your term, the higher the cost. It should be remembered that bridging loans are designed to be short-term solutions. Meaning that while your costs may be relatively high initially, the goal is to exit the loan as soon as possible and move onto a long-term solution.
Bridging loans tend to be costlier than other mainstream mortgage products explained by this short-term nature.
What is the Process?
So how do you get a bridging loan? While there are many elements that go into our bridging underwriting procedures, everything follows a simple five step process that we visited earlier in this guide. Initially, we’ll receive your loan enquiry, which will break down your basic details, and preliminary information on the investment. We will then conduct an initial assessment involving basic background gathering.
As we move through the underwriting process, we will then issue a decision in principle (DIP). Once the terms are agreed, we will instruct the valuers and solicitors involved to complete their necessary tasks.
Finally, following an internal audit to determine everything is accounted for, we will issue the loan documents and finalise our due diligence. You, the borrower, will be transferred the funds for draw down.
Beyond this, we will be in regularly contact with you to keep up to speed on your investment, and support you where needed.
Different Types of Bridging Loans
We have several types of bridging loans available. Each of which, can be tailored to your circumstances. We have specific loans available for different property investment strategies, from expanding a property portfolio, through to refurbishing a home.
Buy-To-Let & Residential Bridge Loans
Our residential and buy-to-let bridging loans are designed for property investors who are looking to purchase a variety of residential assets. This often takes the form of a buy-to-let property which will have a single tenant or family living in it; A property which an investor will purchase, renovate and then sell on; or an HMO, where multiple tenants will inhabit a property on separate tenancy agreements.
These loans are generally used to “bridge the gap” between purchases. For residential investments, this often involves securing an asset where a chain breaks, or jumping on an opportunity while long-term finance is organised in the background.
The investments themselves can also take on many forms. Including regular homes, new-build apartments, student housing, or holiday lets. These loans, and indeed all our products, can be utilised for properties across England and Wales.
Large Bridging Loans
Large bridging loans are used for substantial investments, which can stretch across residential, commercial, semi-commercial, and newly developed properties. Typical examples of what these large loans can be used for include prime London properties, or multiple units in a single building, such as a block of flats.
Those with big projects on the horizon can also utilise our large bridging loans. They can be used commercially for those who plan to expand a business, or by property investors who want to convert an office block into luxury flats. They can also allow large portfolio owners to refinance and consolidate their assets.
The only material difference between our large loans and other products is the loan amount. Our large loans follow the same processes and timelines as our other products. An application will not face delay simply because of its size.
Commercial & Semi-Commercial Bridging Loans
Commercial bridging loans are used for commercial properties – those that are utilised for business purposes. The property will house a company and/or its employees. This will include obvious examples such as offices or shops, but can also stretch to larger or more niche sectors. Our commercial loans can also be used for warehouses, logistic hubs, restaurants and more.
Semi-commercial bridging loans are used for “mixed-use” property. This means both residential and commercial elements exist in the same space. A flat situated above a pub will likely need a semi-commercial loan.
Commercial loan applications are assessed in the same way as our residential options. As every case we deal with is unique, the paperwork needed will vary between applicants. But, for commercial and semi-commercial loans, we may place more due diligence on asset and liability statements, your commercial background, and the prospects of the underlying business.
Permitted & Light Development Bridging Loans
Our refurbishment loans can be used to invest in properties in need of sprucing up. This can range between basic cosmetic changes, such as redecorating, or more labour-intensive endeavours, such as renovations or conversions. Our loans can be used wherever refurbishment work is needed, regardless of whether you’re doing it for financial, legislative, or restorative purposes.
These loans can be used for a broad spectrum of assets and purposes. You can use them to upgrade a residential asset, which may then generate higher rents. Or, you can use the funds to upgrade your manufacturing centre and take your business to the next level.
The funding can also be used to address certain legislative requirements. You may discover that your property does not meet new EPC requirements for example. Our loans can support you through these issues.
Development Exit Loans
Our development exit finance can help you secure more time and breathing space to finalise your development plans. We do not supply development loans for ground up development projects, but development exit loans can help you cover the original development finance you took out elsewhere.
This funding can help you finish last minute works, figure out long-term financial solutions, or find the right buyers for your development. The loan can be used for residential development projects of varying sizes, ranging between 4 and 100 units.
Ground up development projects often take a great deal of time, leaving a lot of space for unexpected problems. A refurbishment can face delays, the economy may shift, and/or contractors could go out of business. Despite these issues, an overall project will still likely be up against a tight deadline. Our loans can help where investors are at risk of missing out, or need more time to secure the right buyers paying the right price.
Auction Bridging Finance
Auction bridging loans can help you lock-in a property bought at auction, which will be subject to a looming deadline. Typically, once a property is bought via a winning bid, buyers have less than a month to complete the transaction. Auction houses usually require funding within 28 days.
This leaves bidders with little time to act. Fortunately, our auction loans can be issued in as little as 3 days. Allowing property bidders to secure the asset, and get the ball rolling on a long-term financial solution. Our auction loans can be used for residential and commercial assets, so long as they’re based in England or Wales.
All our loans are assessed on their individual merits but for auction finance, it may prove useful knowing where you are in the process. Understanding how your auction house operates, their timeframes, and other details will help us with your requirements.
Foreign Nationals/Overseas Bridging Finance
We provide overseas bridging finance for property investors based abroad who want to invest in English or Welsh property. Our overseas funding spreads across all our bridging products, covering residential and commercial assets.
We consider applications from any country, other than sanctioned states. Also, we can issue funding to individual foreign nationals, as well as offshore companies or entities.
Our specialist products can help foreign nationals who may struggle with mainstream lenders. Overseas buyers are likely to face enhanced due diligence and red tape with high street banks. This could slow things down, preventing an investment from moving forward.
Our flexibility can help overcome these potential problems. We can process a claim from an overseas investor just as quickly as a domestic case.
Complex Bridging Loans Explained
Our complex bridging loans are designed to help those with particularly complicated backgrounds. They could support borrowers who are investing through a complex corporate setup, or who have large debts, for example.
The property being invested into may also be the complication. If it’s a large building, with lots of units and moving parts, a more niche loan may be required. You may also be in need of a complex bridging loan where multiple types of assets are coming together at once. For instance, you may need this funding if you’re investing in a restaurant, with a tenanted residential flat above it, along with a garage.
As is the case with all our products, complex loan claimants will be assigned a dedicated underwriter. They’ll work with you from day one to get to grips with your background, and find solutions that’ll fit in with your complexities.
Second Charge Bridging Loans
Our second charge bridging loans will allow you to raise capital against a property which already has a first charge loan secured against it. Often, this first charge will be a long-term mortgage. Our second charge finance will allow you to utilise a property without needing to re-mortgage, or move onto different terms.
This funding can support a range of property investment plans, from refurbishments through to expanding a commercial project. However, to attain second charge funding, you will need to have permission from your first charge lender.
You can use this funding where speed is of the essence. High street banks can take a long time to release funds from an existing asset. Whereas we can deliver funding in mere days. And while you will need permission from your first charge lender to move forward, it’ll be up to solicitors involved to organise this.
Refinance Bridging Loan
Refinancing bridging loans allow you to replace existing finance secured against an asset. Investors may seek out this options where certain plans have fallen through and more time is required. For instance, your current finance may have run out before you had a chance to complete your project, or your original exit strategy is no longer viable.
You may also seek out refinance if it results in cheaper rates or more favourable terms. What’s more, you may be able to refinance more than once should you need to raise additional funds for expanded business or property plans.
What’s important for refinance bridging loans and indeed, for all our products, is having an exit strategy in place. We will not issue funding without a confirmed exit strategy, which will allow you, and us, to move forward with confidence.
Useful Tool:
Bridging Loan Calculator
Our bridging loan calculator is a free-to-use, interactive tool that allows you to calculate how much you may be able to borrow, what will need to be repaid, and whether we’ll be able to provide you with the funding you require.
The calculator requires a few basic details on your investment and the costs will be updated in real time. You must remember however, that the results will be calculates estimations. To get exact quotes, you will need to work with one of our underwriters.
Our calculator is split into two sections. There are orange boxes, which require input from you, and blue boxes, which show the results of the calculation. This includes an applicable LTV, gross and net loan amounts, and monthly repayments.
You’ll need to provide some basic details on the property being used as the security. We’ll need a property value and a figure for any outstanding mortgage. As a minimum, we require a property value of approximately £140,000, along with a maximum LTV of 75%.
We’ll then need details on the type of loan you require. We’ll need to know the size of the loan you’ll need, and your expected term. Across our products, we offer funding of between £100,000 and £50,000,000, with terms ranging between 3 and 24 months.
Finally, you’ll be able to select your preferred interest payment plan. You’ll be able to chose from 3 options: rolled up, part serviced, or pay interest monthly. Also, you can vary interest rates and arrangement fees in the calculator to see how they’ll affect the loan. Our available rates will vary, while arrangement fees start from 1%.
At the bottom of the calculator is a “contact us” button, which will allow you to reach out to our teams, and get the ball rolling.
Bridging Industry: In Focus
“In 2010, the value of bridging loans in the UK was £400 million, and less than a decade later, in 2019 the value deployed had reached £4 billion.” (Property Reporter)
“Bridging completions went over the £1 billion mark over four consecutive quarters for the first time in 2022.” (Mortgage Solutions)
“Bridging loan books reached a record high of over £6 billion in 2022.” (Mortgage Solutions)
“Market Financial Solutions (MFS) has now secured charges against more than £1.5 billion worth of UK property assets, with a loan book nearing £1 billion.” (MFS)
Case Study 1
Bridging finance can support investors of all shapes and sizes. Property investors can utilise bridging loans to expand their portfolios in the residential and commercial markets. But aside from the obvious uses, specialist finance can be tailored to a range of unique circumstances.
For instance, we recently supported an investor who needed funding to move their business forward – and not to invest in a property. The client required a second charge loan, secured against their main residence, urgently. High-street lenders were unlikely to provide what was needed in time, so we quickly assessed the case to meet the looming deadlines.
To progress the application, we examined the client’s wider assets to make sure the loan sat on solid foundations. We also determined the secured asset was valued accurately, and the client’s long-term business plans were sound. With these assurances in place, coupled with a strong refinance exit strategy, we were able to deliver funding.
Case Study 2
We can also support those improving what they already own, as opposed to investing in something new. A foreign national turned to us for their refurbishment plans, where they planned to spruce up their property in a bid to boost its rental potential. Our underwriter came up against a number of issues in the borrower’s background. But, by working closely with valuers and gathering a clear schedule for the works, we were able to move forward comfortably.
Case Study 3
Foreign nationals regularly approach us for support, knowing we can issue funding even to those living abroad. Such was the case with a borrower who was facing pressure to complete on a commercial deal.
With few UK assets to assess the case against, our underwriter teamed up with the surveyors involved to determine if the underlying property held enough potential to justify the loan. What’s more, as we saw that there were multiple exit strategies available, we were able to guide this investor into their first UK venture.
Conclusion
Bridging finance has come to the forefront of the lending industry in recent years and there’s a reason for this. As the wider market became more competitive, and mainstream providers tightened their criteria, more bespoke solutions became essential.
Where the wider economy takes its toll, bridging finance will be there to keep property investors afloat. Our loans are available for those who may have less-than-perfect financial records, blips on their credit histories, or other issues preventing them from getting ahead on the high street.
The world is becoming increasingly complicated. One size fits all approaches simply won’t cut it anymore. Property investors in need of financial products tailored to their circumstances will likely find what they need in the bridging industry. So long as your security asset holds potential, and your exit strategy is clearly defined, we want to hear from you.
Disclaimer
MFS are a bridging loan and buy-to-let mortgage provider, not financial advisors. Therefore, Investors are encouraged to seek professional advice.
The information in this content is correct at time of writing.