What are the criteria for a bridging loan and am I eligible?
Bridging loans are a flexible, fast source of short-term financing that can be used in the UK for almost any reason, be it purchasing a house before you sell, financing a refurbishment, or paying a tax bill. However, many first-time borrowers don’t understand the criteria for eligibility. This article provides insights into a UK alternative lender’s typical requirement, what terms are available, how much a borrower can raise and tips on ensuring your bridging loan application is accepted.
Are you looking to get a bridging loan?
Bridging loans are typically offered based on an individual or company’s unique situation; and whilst many lenders do have set parameters that they’re willing to lend within, known as the criteria, it’s the unique circumstances that will shape the type, size, terms, and conditions of the bridging loan available.
The raison d’etre of a bridging loan is to provide short-term finance to those who may have the following constraints:
- An urgent need for finance and cannot wait for a traditional lender to approve a loan
- Unable to obtain a loan from a traditional lender due to their or their project’s risk profile
There are online tools that can be used to check indicative eligibility for bridging loans, a bridging loan calculator can be useful in determining whether the criteria are met and how much you could borrow, but it’s generally accepted that to obtain an agreement in principle you’ll need to speak with a broker or lender directly.
Whilst bridging loans range in value from £25,001 and can in theory go up to £1 billion or more, they typically are sub £10 million. The amount borrowed depends on the nature of the individual circumstances of the borrower. For example, if the loan is for a property purchase, the loan size will be based on a percentage of the value of the property being purchased, plus fees and interest.
What’s an alternative lender?
Alternative lenders are typically privately held companies who are more willing to lend to customers with risk profiles than traditional high-street banks would. Alternative lenders have created a range of bespoke, niche products since 2008 to fit the short-term, commercially-focused secured lending market.
Alternative lenders are also referred to as specialist lenders and many have just one or two products that are specifically tailored to a specific borrower type. Some will lend to agriculture, others just experienced property developers. With over 200 alternative lenders in the UK, it can be difficult for an individual borrower to know exactly which lender likes which deal. This has created a further market of bridging loan brokers who make it their business to understand which lenders are in the market to accept which types of deals. BridgingLoan.org.uk is a directory that lists all major UK alternative brokers and lenders.
What is the lending criteria for a bridging loan?
Lenders require the borrower to provide security for the debt and must have a viable method of repaying the debt within the term agreed. Most debt-based security comes in the form of a charge upon a residential, commercial or agricultural property; a group of properties; or land.
The type of property being used as security will affect the maximum loan amount available to the borrower. The reason for this is that the lender will find that some properties are easier to sell on, should the borrower default, than others. Additionally, some property types have more resilience in a market downturn than others. Typically, residential properties in a good location are the most favoured assets for a lender.
For example, if your intended security is in the form of a 1st charge on a residential property, and there is enough equity in that property to satisfy the loan-to-value (LTV) requirements of the lender, typically up to an 85% LTV, the loan will likely be approved and the process is relatively straightforward and quick to complete.
You’ll also have to provide the following information in addition to the security and exit plan: your credit history, proof of identity and address, and a statement of assets and liabilities. If you’re representing a limited company then you may be asked to provide documentation such as your company’s accounts, cash flow statements, and shareholder’s agreements.
What types of loans are offered?
The most appropriate financing option will depend on the individual circumstances of the borrower. Bridging loans are most frequently used for the following situations:
Auction finance is used to finance the purchase of a property at auction and enables the borrower to take advantage of any opportunities as they arise. The purpose of auction finance is to provide a quick turnaround for those looking to purchase a property at an auction where the finances are not readily available. Typically, when utilising this method of financial borrowing the loan value is based on a percentage of the property value used as security, with the maximum loan amount generally being 80%. The security that is used for this type of loan can generally be commercial, residential, and semi-commercial property.
This type of loan is used to finance the development of a property. This type of finance can be used to fund both experienced and first-time developers for asset acquisition, ground-up development, mixed-use schemes, and lighter refurbishment projects. The loan amount is typically based on a percentage of the development costs, with the maximum loan amount generally being 65%. The LTV value can also depend on the amount of security that is provided.
This type of loan is used to finance the refurbishment of a property. This allows renovations and refurbishments to take place and the loan can be repaid once the property has been sold or another form of long-term finance has been obtained. The loan amount is typically based on a percentage of the refurbishment costs, with the maximum loan amount generally being 70%. The LTV value will typically depend on the amount of security provided by the borrower.
A commercial loan is a type of bridging finance that is used to finance the purchase of a commercial property. The purpose of this type of loan is to provide quick and easy access to funds for those looking to purchase the property. The loan amount is typically based on a percentage of the property value used as security, with the maximum loan amount generally being 70%. The security that is used for this type of loan can be either commercial or residential property. In this type of loan, the borrower can use the funds for a variety of reasons including but not limited to purchasing a residential investment property, refurbishment of property/properties, stock/machinery, and tax.
Bridging refinance, also known as a re-bridge is a type of bridging finance that is used to refinance an existing bridging loan. The purpose of this type of loan is to provide additional funds for those who need it, whilst still being able to take advantage of the low-interest rates. The loan amount is typically based on a percentage of the property value used. Bridging refinance is typically used when the project’s overrun, the assets not selling, or the project can’t be completed within the original budget our re-bridging loans enable you to finish your project, sell your asset, raise more funds or give you the time to arrange funding via traditional longer-term financing.
What loan terms are offered?
The loan term is the period of time over which the loan must be repaid. The typical loan term for a bridging loan is between 3 – 12 months, however, this can vary depending on the type of loan and the circumstances of the borrower. For example, if the loan is for a property purchase, the loan term may be shorter as the property will generally be sold within a year.
What types of assets are accepted?
The majority of bridging loan lenders typically require real estate as security. This could refer to one or more properties. By taking a charge of the property or properties, they will secure their loan. A first charge, second charge, or even third charge is used to register this at the land registry.
When the property is free and clear, that is, there are no loans or mortgages secured against it, or when the existing lender is being paid off with some or all of the finance raised from the bridging loan, a first charge is employed. When a charge is already present but not being paid off, second and third charges are employed. It’s important to note that subordinated debt such as a second charge will usually have a lower LTV limit than a first charge.
What are the potential exit strategies?
Typically lenders will be more likely to lend to a potential borrower that has a reliable exit strategy in place. A few potential exit strategies include:
- Selling the property: This is the most common exit strategy and typically the one that is preferred by a lender. The loan is repaid when the property is sold and the proceeds are used to repay the loan.
- Refinancing to a traditional mortgage: This exit strategy involves taking out a traditional mortgage to repay the bridging loan. This can be achieved once the repairs or renovations have been completed on a dilapidated property in order to satisfy the mortgage lender’s criteria.
- By selling any additional property: This exit strategy can be used when the borrower has other investment properties that can be sold in order to repay the loan.
- Disposition of other investments: This exit strategy can be used when the borrower has other investments that can be sold in order to repay the loan.
- Shares are sold: This exit strategy can be used when the borrower has shares that can be sold in order to repay the loan.
Overall there are some general criteria needed to be successful when applying for a bridging loan, however, this varies depending on the lender and the type of loan. The security for the loan is typically property or properties, and the loan term is generally no more than 12 months. It’s critical to have a solid exit strategy in place before contacting a lender as this will result in a higher likelihood of the loan being approved. Exit strategies typically involve selling the property or another asset, or refinancing to a traditional mortgage.
If you are thinking a bridging loan might be the solution to your short-term financing needs then it’s important to speak to a broker who can help navigate the process and find the best loans that suit your specific circumstance.