The rise and rise of the bridging loan

Bridging loan finance continues to grow amidst low interest rates, Brexit uncertainty and mortgage lender caution, Commercial Trust Limited research has found.

The firm looked at the rise of the bridging loan and its uses in the sector, revealing that bridging lending totalled £3.98 billion in the 12 months to September 30 2018 – equivalent to a 21% increase, according to data from The Association of Short Term Lending (ASTL).

Why choose a bridging loan?

As bridging loans are a short-term form of lending, they are usually arranged much quicker than a buy-to-let mortgage, with turnaround times typically around 28 days.

Bridging loans can be used for a variety of reasons, including to:

-          Finance property purchase at auction

-          Finance renovation work

-          Purchase land for future development

-          Purchase uninhabitable property

-          Purchase stock

-          Purchase machinery or IT equipment

According to Commercial Trust, clients can borrow up to 75% loan-to-value on a bridging loan and rates start from 0.49%.

Bridging loan rates vary, however, depending on the purpose of the loan and projected future rental income of the property (established by a valuer).

What’s more, if the loan is to cover renovation work, then the lender might see heavier work (such as knocking down walls or building a conversion) to be a greater risk than a kitchen renovation. This would make the rate higher.

Have an exit strategy

Commercial Trust also stressed the importance of clients having an exit strategy for a bridging loan.

This could be through the sale of an existing, alternative, property, by buying, renovating and selling at a higher price than the debt, or transitioning to a buy-to-let or commercial mortgage (depending on the property type).

If the bridging loan is taken out by a business, a third form of redemption is to pay it off at a later date through operating cash flows, the firm said.

If a business has a short-term cash liquidity issue, then a bridging loan could be used to pay bills or staff wages. Once the outstanding invoice has been settled, the company can pay off the bridging loan.

First and second charge bridging loans

When you are borrowing against the value of a property, it is possible to have more than one type of borrowing, as long as you are within loan-to-value limits and criteria fits your circumstances.

Additionally, if you have a favourable existing buy-to-let mortgage rate on your property and wish to raise funds, you may not want to remortgage, because other products are not as competitive and would put you at a disadvantage.

In this situation, your mortgage lender holds the ‘first charge’ on your property (if you had to pay back the debt, they would be first in the queue to be paid). You could take out another line of borrowing to raise the cash you need. This would enable you to keep your existing mortgage.

If you were renovating your property or need access to funds quickly, a second bridging loan could be the right option.

It’s key to remember that if the cost of the first charge is more expensive than the second charge you will take, it’s unlikely that a second charge would be the most effective option; you would just remortgage to raise the funds.

However, if the first charge is cheaper than the second charge you will take, you may benefit from a second charge solution.

Commercial Trust confirmed that as bridging loans are a short-term product, it is possible to redeem within a matter of months, so if you are renovating to get your property up to a competitive remortgage valuation, you can pay it off as soon as the works are done.