Bridging loans have really come into their own as of late, acknowledged and accepted by mainstream borrowers as a useful alternative to more conventional products. In the right hands and for the right purpose, bridging finance has the potential to be uniquely flexible, versatile, and affordable.

Even so, there will always be instances where a bridging loan is not necessarily the best option available. Either due to the nature of your requirements or issues with eligibility, your broker may advise you to consider the alternative options available.

The below options could prove more appropriate and cost-effective.

Here are just a few alternatives to consider when bridging is not the best option:

A mortgage extension

If you are in good standing with your current mortgage provider, you have a good chance of qualifying for a mortgage extension. This is simply where you increase the size of your mortgage to cover your requirements, in return for extending the term of your mortgage or increasing your monthly repayment.

Secured loans

There’s an extensive range of secured loan options available on the mainstream and specialist markets, both for business purposes and for private borrowers. Lenders implement their own policies with regard to the types of assets they are willing to accept as security, which could be anything from the home you live into jewellery, watches, cars, business equipment, and so on. Secured loans tend to be longer-term in nature and repaid over the course of several years.

Unsecured loan

If you require a fairly modest capital injection, an unsecured loan can be a good option. Some secured loan applications can be processed within 24 hours, typically with maximum loan sizes of around £15,000 to £20,000 available. Repayment terms are flexible (usually a few years), and interest rates can be highly competitive.

Property development finance

In the commercial arena, specialist property development finance can be a fantastic facility for established developers and construction companies. With development finance, there are no upper limits placed on how much can be borrowed, based on the value of the project being undertaken and the security provided by the applicant.

Refurbishment loans

Open to both mainstream applicants and commercial borrowers, a refurbishment loan provides the funding needed to perform minor or major property renovations before selling or letting it out. It is effectively a specialist type of bridging loan, but it is issued exclusively for property refurbishment and renovation purposes.

Commercial mortgages

Where time is less of a pressing factor, a commercial mortgage could be used in place of a bridging loan. Commercial mortgages work similarly to conventional mortgages, though they are issued exclusively for the purchase of business properties and have much higher minimum deposit requirements (often as much as 30% to 40%). As it can take several weeks (or even months) to arrange a commercial mortgage, it is not a viable option in time-critical scenarios.

At UK Property Finance, our experienced brokers can provide you with the objective advice you need to decide which product is right for you. From bridging loans to development finance to all types of specialist business loans, we’ll scour the market to help you secure an unbeatable deal from a top-rated lender.

Call anytime for a free consultation or email us, and we’ll get back to you as promptly as possible.

What are bridging loans?

As the name suggests, a bridging loan is a temporary solution for a short-term financial gap. Typically, issued over the course of no more than a few months, bridging finance effectively ‘bridges’ the gap between a purchase or investment and the procurement of funds by other means.

What can bridging loans be used for?

One of the most appealing aspects of bridging finance is the way in which it can be used for almost any legal purpose whatsoever. Even so, some of the most popular applications for bridging finance in the UK are as follows:

• Opting out of property chains or reversing chain break scenarios
• Purchasing properties at auction for less than their true value
• Beating competing bidders to the punch by purchasing properties for cash
• Buying ‘unable to mortgage’ properties to renovate and sell on
• Covering unexpected business costs and general outgoings
• Buying homes to be renovated and let out to tenants
• Just as long as you can provide your lender with proof of a viable exit strategy (how you plan to repay the loan), there are no limitations placed on how you can use the funds.

Bridging loans are not restricted solely to property use, but, as we’re writing a property blog, that’s what we’ll stick to here today.

How is interest calculated on a bridging loan?

Interest and overall borrowing costs on bridging finance vary from one facility to the next. Instead of a conventional APR, bridging loan interest rates are usually published as a monthly rate of interest (which can be as low as 0.5%).

This interest can be repaid monthly or rolled up into the final loan balance. Likewise, all associated borrowing costs (arrangement fees, transaction fees, completion fees, etc.) can be added to the final balance payable.

In the meantime, no monthly repayments are necessary, enabling the borrower to maintain total cash flow efficiency. The full balance is then repaid in a single lump-sum payment on an agreed-upon date.

What is the difference between open and closed bridging loans?

Open-bridging loans are those that are issued with no fixed repayment date. The borrower enjoys a greater degree of flexibility with regard to when the loan is repaid, but open bridging loans are riskier for the lender and therefore have higher overall borrowing costs.

With a closed bridging loan, the borrower agrees to repay the loan on or before a specific date. Such loans are considered lower-risk for the lender and are therefore usually more competitive in nature.

What’s the difference between first charge and second charge loans?

A first-charge loan is primarily taken out against an asset of value, such as a home or business property. For example, when you buy a home with a conventional mortgage, this is a first-charge loan: the first and only debt secured against your home.

If you then take out a bridging loan against the equity you have built up in your home (but while you are still repaying your mortgage), it will be issued as a second-charge loan. This is because there is already a primary debt (first charge loan) secured against your home, which, in the event your home is repossessed to repay your debts, will take priority.

Second-charge loans can be more difficult to secure than first-charge loans, and due to their higher risk, they can also be more costly than first-charge loans.

Who can qualify for bridging finance?

Bridging finance eligibility centres on the availability of assets of value to secure the loan and evidence of a viable exit strategy. Where both of these requirements are met, the applicant will most likely qualify, irrespective of their credit history and employment status.

Even so, the key to qualifying for a competitive bridging loan lies in comparing the market with the input and support of a specialist broker. This is particularly true where ‘ subprime’ bridging loan applications are concerned, but it also applies to mainstream bridging finance applications in general.

Downsizing to a smaller home should be a simpler task than moving into a larger home or buying your first property. Your current home may have a much higher market value than that of your target home, putting you in a great position to relocate and have plenty of extra money left over.

Or at least, this is how the whole thing should work on paper. In practice, it rarely works out quite so straightforwardly.

Having built up plenty of equity in a home is all well and good, but converting this equity to cash to buy a new home is not always easy. Prior to purchasing your next home, you first need to find a buyer for your current home. A process that means not only finding an eligible buyer but waiting for their mortgage application to be processed (assuming it is successful at all).

In the meantime, the risk remains of being beaten by a competing bidder. If another interested party is able to buy your target home faster than you, chances are that is exactly what they will do. Likewise, if you have lined up a buyer for your current home who backs out at the last minute, you are back to square one.

Breaking the chain

This risk of a broken property chain does not apply exclusively to more standard moves or when upgrading to a larger home. Even if you plan to move to a home that is significantly smaller and lower in value, you still face the prospect of being beaten to the finish line.

In fact, the growing demand for smaller homes that are affordable to run has resulted in a situation where competition for these types of homes is growing at a much faster rate than competition for larger homes. The more people there are bidding for the select properties available, the higher the chance of a broken property chain.

But there is a way to almost entirely eliminate the risk of a property chain crashing down at the worst possible time. Increasingly, homeowners are setting their sights on short-term bridging finance to ensure they are at the front of the queue. With bridging finance, it is possible to tap into most (up to 80%) of the equity you have in your home in a matter of days.

A flexible and affordable solution

Bridging finance is issued in the form of a short-term loan (usually over a term of no more than 12 months), secured against the home of the applicant. With all the essential paperwork in place, the funds can often be accessed within a few working days.

This money can then be used to purchase a smaller home for cash while their previous home remains on the market. When their former home sells for its full market price, the loan is repaid in full, and the remaining proceeds are retained. Charged at around 0.5% per month or less, overall borrowing costs on a bridging loan can be extremely low.

As cash buyers are often afforded significant discounts on property prices for fast transaction completions, the savings made could augment the costs of the facility in its entirety.

Best of all, bridging finance eligibility requirements are far more relaxed than most comparable products. You simply need sufficient equity in your current home to cover the costs of the loan and evidence that you will be able to repay the loan by the agreed-upon date (exit strategy).

Once a financial product used nearly exclusively by property developers and investors, competition in the housing market has propelled bridging finance into the mainstream lending sector.

Having found your perfect home at a price you can afford, you suddenly find yourself in a major race against time. Given the attractiveness of the property and its price, it’s highly unlikely you are the only interested buyer.

This is where the limitations and imperfections of conventional mortgage loans become painfully apparent. You can comfortably afford the repayments on the mortgage you need, and your deposit is good to go, but you are still at the mercy of your bank’s standard underwriting and processing times.

All of this means you could be waiting as long as 12 weeks to get your hands on the money you need, during which there is a high likelihood of being beaten to the punch.

A Faster and Simpler Alternative

Ferocious competition on the housing market has spurred a major spike in bridging finance enquiries and applications over the past two years. Bridging finance differs from a conventional mortgage in that it is a strictly short-term facility.

With a bridging loan, you are able to raise money against the equity you have in your current home and use it to buy your next home outright. Importantly, a typical bridging loan can take as little as a few working days to arrange, giving you every chance of being at the very front of the queue.

You purchase your next home for cash, and you repay your bridging loan in full when your previous home sells. In the meantime, interest is added at a rate as low as 0.5% per month, making bridging finance usually cost-effective when repaid promptly.

If you are completely confident your home will sell in the near future without any issues, a bridging loan could prove so much more affordable than a conventional mortgage.

What is the Difference Between an Open and Closed Bridging Loan?

If you decide to apply for a bridging loan to purchase a property fast, you will come across two different loan options, open and closed bridging loans:

Open Bridging Loans. This is a bridging loan that is issued without a fixed repayment date. Your lender will expect to be repaid within a certain period of time, but no specific repayment date is agreed upon during the application process. As a higher-risk loan on the part of the lender, open bridging tends to be slightly more expensive.
Closed Bridging Loans. With a closed bridging loan, you commit yourself to an exact repayment date, by which the full balance of the loan will be repaid. There may also be the option of repaying earlier to save money, with no additional fees or charges incurred.
Which of the two is suitable for you will be determined by how quickly you believe your home will sell after taking out your bridging loan. If demand is high and your home will sell within no more than a few months, a closed bridging loan could be ideal. If you cannot say for sure when your home will sell, an open bridging loan may be more appropriate.

Will I Qualify for a Bridging Loan?

Eligibility for bridging finance is determined on the basis of two main factors which are security and your repayment plan (exit strategy).

Bridging loans are secured against assets of value, which in this case means the equity you have tied up in your current home. Loans are issued with a maximum LTV of 80%, which means that if you have £400,000 of equity in your current home, you could borrow £320,000.

When buying and selling homes the exit strategy for your bridging loan will be the sale of your current home, if your lender is confident that demand is high enough to guarantee the sale of your home in the near future (and for a good price), they will almost certainly approve your application.

Even with poor credit and/or no formal proof of income, it is still possible to qualify for affordable bridging finance.

New data from Bridging Trends suggests that in spite of the year’s first quarterly interest rate increase, total bridging activity has once again reached a new record high. The impressive figures from Q3 indicate total bridging loan transactions of £214.7 million for the quarter, up a huge 20% on Q2 (£178.4 million).

This is the best quarterly performance for the UK’s bridging sector since Bridging Trends began monitoring the sector and reporting on combined market activity in 2015. The figures are even more impressive when taking into account the year’s first (albeit minor) increase in average bridging loan interest rates.

Having stood at 0.69% in Q2, the average interest rate on a bridging loan issued in Q3 came out at 0.73%.

Chain break prevention: The new top use for bridging finance

There was also a significant shift in borrower spending patterns in Q3, bucking the trend of several consecutive prior months. Chain break prevention topped the table as the most popular application for bridging finance, accounting for a huge 22% of all transactions (up from 21% in Q2).

Purchasing investment properties, which had been the most popular application for bridging finance for five previous quarters in a row, accounted for just 16% of all transactions in Q3 (a major fall from 24% in Q2). This is the lowest share of the bridging market ever recorded for purchasing properties for investment purposes and is likely the result of investors delaying important decisions due to the turbulent economic climate.

“I anticipate investment purchases to increase in the next few months,” commented Sam O’Neill, Head of Bridging at Clifton Private Finance.

“The total gross lending will be an interesting benchmark for the next quarter given the current uncertainty of the market. With uncertainty comes opportunity, and we are already seeing investors looking to capitalise on under market value transactions caused by panic selling vendors.”

“I would be interested to see the re-bridging figure in the next quarter’s statistics. Current bridging loans nearing their term’s end are subject to more stringent criteria on mortgages and an uncertain buying and selling market. Will more lenders who don’t currently consider re-bridging see this as an opportunity? Or a necessity to keep pace with other lenders and the demands of the market?”

A boost in business bridging

Elsewhere, the use of bridging loans for business applications increased by almost 100%, hitting a new height of 11% in Q3 (up from 6% in Q2). Likewise, there was a major increase in the number of borrowers taking out bridging loans to finance auction purchasers, up from 5% in Q2 to 8% in Q3.

All of this occurred at the same time that average monthly interest rates on bridging loans increased for the first time in 2022. Having hit a record low of 0.69% in Q2, average bridging loan interest rates increased slightly to 0.73% in Q3.

Rates remain low in comparison with historic averages, but there are those who believe further increases over the coming months are inevitable.

“As predicted in Q2, interest rates have started to slowly rise to 0.73%, but it is worth noting they are virtually on par with Q3 in 2021 (0.72%). What comes next remains to be seen, but I would not be surprised if interest rates continue to rise and investors remain cautious,” said Gareth Lewis, Commercial Director at MT Finance.”

“Considering the volumes we have seen in Q3, bridging finance clearly continues to be a useful tool for homeowners and investors alike. What has been interesting is the drop-off in bridging being utilised for investment purchases, which is likely due to buyers taking stock of the current market. While it’s too early for us to really feel the impact of September’s mini-budget, I expect this will be more visible in Q4.”

 

A recent spike in bridging finance activity has seen loan volumes once again come close to pre-pandemic peaks. Even in times of economic uncertainty, bridging finance continues to serve as an affordable and attractive alternative to conventional high-street loans.

Equally, the growing availability of bridging loans is broadening the appeal of responsible short-term borrowing to a more diverse audience than ever before. There are more independent specialists offering bridging loans in the UK than ever before, spurring the kind of competition that has brought average monthly interest rates to all-time lows.

But what are the specific applications that bridging loans are currently being used for? What are the most popular uses for bridging finance in the UK as of Q4 2022?

Investment property purchases

For some time now, the most common application for bridging finance has been purchasing investment properties. Ferocious competition in the UK housing market is prompting more investors than ever before to seek fast-access funding for time-critical property purchase opportunities. Bridging finance provides new and established investors alike with the opportunity to beat competing bidders to the punch and to purchase properties that would not be considered eligible for a conventional mortgage.

Chain break

The latest figures from Bridging Trends suggest that the second most common application for bridging finance as of right now is funding chain breaks. This is where homeowners looking to relocate effectively use bridging finance to become cash buyers. They borrow against the equity they have tied up in their current home; the funds needed to purchase their next property are released within a few days, and the transaction is wrapped up as promptly as possible. Property chains have become increasingly complex and fragile as of late as competing bidders go to extremes to beat their rivals to the punch.

Light and heavy refurbishments

Another popular use for bridging finance is funding light and heavy property refurbishments. Homeowners, for example, often take out a bridging loan to cover significant improvements to their properties before listing them on the market for their maximum value. Elsewhere, investors looking to flip homes for profit routinely use bridging finance to fund their projects before selling their properties for the biggest possible profit. As bridging finance is designed to be repaid within a few months, it is ideal for short-term undertakings like these.

Auction purchases

Purchasing properties at auction can pave the way for significant savings. It is not uncommon for homes and business properties to sell at auction for less than £50,000, making them ideal as ‘fixer-upper’ projects. But as the full balance on auction property purchases needs to be paid within 28 days, no conventional mortgage or property loan is viable. Bridging finance, which can be organised and accessed within a few working days, has become the go-to for many thousands of people looking to pick up bargain properties at auction.

Business purposes

Business owners looking to cover time-critical gaps in their finances have been turning to bridge finance specialists in record numbers. Bridging finance is uniquely flexible and accessible, with no specific limitations on how the funds can be allocated. From purchasing stock to upgrading business equipment to covering staff wages and tax bills, bridging finance has a broad range of applications for business owners and SMEs. It can also be secured against a wide variety of assets of value, making it more accessible than many comparable types of secured business loans.

Tracking down and buying your dream home is never easy. In times of unprecedented housing shortages, competition for desirable homes in most parts of the country is at an all-time high. Unexpected price increases by sellers or the possibility of being outbid by a rival bidder are only two reasons why transactions can and do fail.

In fact, some estimates suggest that as many as 25% of planned property purchases result in disappointment.

With conventional mortgage completion times averaging around 12 weeks, there is ample time for things to go wrong along the way. Traditionally, cash buyers have been afforded the kinds of privileges that have given them a major advantage over mainstream homebuyers.

Today, it is a set of privileges that can be accessed by anyone who owns their current home. If you are planning to relocate and looking to escape the trappings of traditional property chains entirely, a low-cost bridging loan could be just the thing.

How a bridging loan can speed up a transaction

A bridging loan is effectively a fast-access, short-term loan that can be used for any legal purpose. In this context, the funds needed to purchase your dream home are secured against your current property. The more equity you have tied up in your current home, the more you can borrow in the form of a bridging loan.

With all the essential paperwork in place, bridging finance can be organised within a few working days. This means being able to ‘jump the queue’ and beat competing bidders to the punch, with all the flexibility and convenience enjoyed by a cash buyer.

You buy your new home for cash (which may pave the way for a generous discount), you leave your previous home on the market for as long as it takes to sell for its full value, and you repay the bridging loan when your previous home sells. In the meantime, the bridging loan accrues interest at a rate as low as 0.5% per month, making it a much more affordable transaction than any conventional mortgage.

As the name suggests, the facility can be used to ‘bridge’ the gap between buying your dream property and selling your current home. Whereas the process would usually work the other way around (sell first, buy later), bridging finance allows you to buy first and sell later. And in doing so, reduce the risk of having to watch your dream property slip through your fingertips.

Bridging loans: common-sense care and caution

As a bridging loan is issued in the form of a secured loan, you face the risk of your property being repossessed if you do not fulfil your repayment obligations. This is something that must be taken into account and carefully considered before applying for any type of secured loan.

Bridging finance is designed to be repaid in the form of a single lump sum payment, typically 1 to 12 months after being issued. You therefore need to be confident that your previous home will sell successfully during this time in order to provide you with the funds needed to repay it.

A bridging loan is a strictly short-term facility and should not be taken up with long-term repayment in mind. The more promptly a bridging loan is repaid, the lower the interest and borrowing costs that apply.

Before applying for a bridging loan with the purchase of a property in mind, consult with an independent broker to discuss the options available and your suitability for bridging finance.

For some time, investment property purchases have been the most common use for bridging finance in the UK. More aspiring and established investors than ever before are looking to leverage the explosive competition in the UK housing market, using fast-access bridging loans to fund time-critical property purchases.

Meanwhile, a growing contingency of homeowners is turning to bridge finance for an entirely different reason. Second only to investment property purchases, breaking free of property chains is now the second most common reason for taking out a bridging loan.

During the first six months of the year, at least one in every five bridging loans was issued for this purpose.

The risk of broken property chains

Never has competition for quality homes in desirable parts of the UK been greater. Even so, there are no guarantees at any point during the property purchase process that the transaction will go through.

Incredibly, research suggests that up to 25% of all residential property sales fall through due to broken property chains. The longer and more complex the property chain, the higher the likelihood of one or more links being compromised.

A property chain is defined as “a line of buyers and sellers linked together because each is selling and buying a property from one of the others.” When buying or selling a home, you are at the mercy of every other buyer and seller within the same property chain.

Should any property sale or purchase fall through before your own transaction is complete, it may be rendered unviable.

Why do property chains collapse?

Nobody lists a property for sale with the intention of the transaction falling through. Even so, there are many reasons why a property chain can and does collapse with such regularity.

Typical examples of this include the following:

• A change of circumstances for the buyer or seller, rendering them unable to continue with the transaction.
• The buyer or seller of a property simply changes their mind at some point during the deal and withdraws from the chain.
• A competing bidder submits a higher bid that is accepted by the sellers, despite them having already agreed to sell the property to someone else.
• Mortgage applications may encounter disruptions and delays, or a decision in principle may be reversed for any number of reasons.
• A survey conducted on a property may uncover unexpected problems and structural issues, rendering the agreement null and void.

In each of the above instances, the property chain comes crashing down and brings all sales and purchases therein to a grinding halt.

Fixing property chains with bridging finance

This is where bridging finance can offer an invaluable lifeline to those looking to escape the trappings of the conventional property chain. With a bridging loan, you borrow money against the value of your current home, which is used to purchase your next property for cash.

Along with speeding up the purchase process, these types of transactions are in no way reliant on any other buyers or sellers. In addition, cash buyers are often afforded additional incentives by sellers looking to complete transactions on their homes as quickly as possible (often up to 2% off the home’s standard purchase price).

For faster and more convenient than a conventional mortgage, a bridging loan can be organised and accessed within a few working days. The full balance is then repaid when the borrower’s previous property sells for its full market price, a few weeks or months down the line.

“I’m not surprised that chain-break finance is one of the top reasons to use bridging loans. Property transactions are booming, and we’re seeing a large number of solicitors trying to exchange and complete on the same day,” said Dale Jannels, Managing Director of Impact Specialist.

“This inevitably will result in people pulling out of purchases late on, and therefore clients need a short-term loan to fill the gap their buyer left behind.”