What you need to know about bridging lenders

Bridging loans are a popular choice for individuals and businesses who need quick and/or short-term financing for a property.

A short-term bridging loan 'bridges' the gap between buying a property and getting long-term funding, or selling the property. These loans are often used for property auctions or renovation projects.

Working with a bridging lender can help you get a loan fast in a shorter timeframe than a mortgage, if you need funds quickly.

This guide will teach you everything you need to know about bridging loan lenders. We discuss how they work, their benefits, and how to choose the best one for you.

What is a bridging lender?

A bridging lender is a financial provider that offers bridging loans to borrowers. Bridging lenders provide easy access to short-term finance.

Lenders will offer loans that are either regulated by the Financial Conduct Authority (FCA) and suitable for a property you will live in; or unregulated and suitable for flipping property or refinancing to let out – whether that is with a buy to let mortgage, or if it is a business premises, a commercial mortgage.

Why work with a bridging loan lender?

Working with a lender can be very helpful, there are a number of uses for their loans:

• You need to get money fast to secure a property e.g. buying below-market-value property or buying at auction.
• The property you are investing in is uninhabitable so a mortgage lender will not lend you the money to buy it.
• You want to improve the value of a property by renovating it so you need a temporary loan which you will pay back with long-term finance.
• Your business needs a short-term cash injection to bridge a gap in cash-flow, say your company has a number of larges invoices outstanding with a debtor which would not be paid for some time, but you want to move forward with investment plans, a bridging lender could step in to help.

How bridging lenders work

We explore the application process, loan terms, and interest rates and fees:

Application process

Applying for a bridging loan is faster and easier than applying for a mortgage. Borrowers usually need to give the following information:

Personal and financial details

Borrowers need to provide personal and financial information in the loan application. Lenders use this information to see if the borrower can pay back the loan and to establish how risky the loan would be.

Information on the security property

You will need to use a property as security for the loan. Lenders will need to know the property's location, type, and condition. This information helps the lender to figure out the right loan terms.

Details of the exit strategy

An exit strategy is your plan for how you will pay back the loan. Borrowers need to provide a clear exit strategy to show lenders they can pay back the loan on time. This plan may include selling the property or refinancing with a long-term mortgage.

A valuation of the property

A professional valuation is needed, from which the loan to value (LTV) is checked. The LTV ratio affects how much of the property value you can borrow. A valuation helps the lender make sure the loan terms match the property's value.

Lenders will then review the application and make a final lending decision. If approved, the necessary legal work is completed, and then you will receive the funds a few days later.

Interest rates and fees

Interest rates for bridging loans are usually higher than those for mortgages. This is because they are short-term and carry more risk for lenders. The more you put down as a deposit, typically the lower the rate you can get, because your level of investment mitigates a degree of risk to the lender.

Borrowers should also consider any fees that come with the loan. These fees can include arrangement fees, valuation fees, legal fees, and exit fees. These can add up and make the total cost of the loan higher.

You can use our bridging loan calculator to figure out how much you would need to pay back at your LTV. Our calculator uses current rates, but the rate you get with your lender might be different.

If the terms of the deal you see on a calculator doesn’t align with your circumstances, you won’t be able to get that deal. That is why a calculator can only give you a feel for available rates, whereas talking to an advisor will give you an accurate idea of the loan you can get.

Loan terms and repayment options

Bridging loan terms usually last between 3 months and 18 months. Some lenders may offer longer or shorter terms, depending on their criteria (the rules they apply to the lending they offer).

Bridging lenders typically offer two ways of paying the interest charged on a bridging loan:

Monthly interest payments: Borrowers pay the interest every month; this is called a ‘serviced payment’.

Retained interest: Lenders calculate the interest payments on the loan upfront and add them to the loan amount. At the end of the term, the borrower repays both the main loan amount and the retained interest.

Pros and cons of bridging lenders

Pros

Bridging lenders can help borrowers in many ways:

• Speed: One of the main advantages of bridging loans is that they can be approved within days. This allows borrowers to act on opportunities fast, such as securing a property deal or paying a property auctioneer.
• Flexibility: Different lenders offer different repayment options and loan terms to fit the borrower's needs. This flexibility allows borrowers to find the most suitable loan structure.
• Access to funds: Lenders provide access to funds when regular financing options might not work, or be too slow. This is helpful in circumstances where quick access to funds is essential.

Cons

There are challenges when trying to work with bridging loan lenders:

• Access to the lender: Not all bridging loan lenders will accept applications direct from a consumer, they need you to apply through an intermediary, like a specialist mortgage broker.
• Choice of deal: A lender can only talk to you about the products they offer. Unless you research all of the lenders in the marketplace, you will not know when speaking to just one or a few, if what they are proposing is the best deal you can get. Working with a broker can overcome this.
• Solicitors: Most bridging lenders are very specific in the solicitors they use for the legal work on bridging finance, so you need to make sure you work with one that is on their ‘panel’. By using a specialist mortgage broker like Commercial Trust, we can recommend solicitors who work with our bridging lenders.

Choosing the right bridging lender

Finding the right lender will make the process smoother and more successful. Here are some things to consider when choosing a lender:

• Reputation and experience: Look for a lender with a good reputation and experience in the industry. You can ask professionals, such as bridging loan brokers, for recommendations. This will ensure you choose a lender with proven success in handling short-term loans.
• Interest rates and fees: Compare different lenders and look at the interest rates and fees each one offers. This way, you can find the most cost-effective option that best fits your financial needs.
• Loan to value (LTV) ratio: Check the LTV ratios offered by different lenders, as this will impact how much you can borrow.
• Speed of service: Ask the lender how long it takes them to approve loans and give out funds. Choose a lender that can provide timely service so you can secure your property deal. A broker will be aware of current service levels offered by lenders so can help with this.
• Customer service: Choose a lender that is good at communicating and helping during the loan process. A lender with responsive customer service will ensure a successful transaction.

Work with professional bridging lenders through Commercial Trust

At Commercial Trust, we know how important it is to find the right lender to meet your unique needs. Our expert team will help you select the best lender for your specific situation. We work with a wide range of lenders, ensuring that you have access to a diverse array of bridging loan options.

Contact us today to discover how we can help you find the right lender for your property project.

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