The bridging finance sector has changed quite a bit during the past 2 decades. Bridging has gone mainstream and is “constantly growing,” according to an update from Assetz Capital.
UK-based Assetz Capital, a marketplace lending platform originating secured loans, notes that in the current economy, after the 2008 Financial Crisis and uncertainty post-Brexit (fueled further by the COVID-19 outbreak), banking institutions are being told to re-capitalize instead of engaging in lending, leaving many small businesses and property developers “faced with finding alternative finance solutions.”
This is where bridging finance comes in – “by offering flexible, fast, short-term lending solutions to borrowers,” the Assetz Capital team explained.
Despite the dramatic growth of the bridging sector, the concept of bridging can create confusion for first-time or inexperienced borrowers as this type of transaction is “extremely fast-paced,” Assetz Capital’s blog noted.
As mentioned in the blog post, bridging is basically a “short-term funding option.”
As noted by the company, a bridging loan is a short-term, “interest-only” loan, which is typically secured against property and may be used by individuals and businesses “for purchases, refinance or releasing equity until permanent, long-term funding or their next stage of financing becomes available, or they sell a property.”
They are usually available “up to 75% of the property’s value and the loans can be taken for a term of up to 24 months,” the Assetz Capital noted while adding that finance is available on “all types of residential properties such as HMO (house in multiple occupancy), Holiday Lets, as well as semi-commercial and commercial property types, for development projects and land purchases.”
The Assetz Capital team added that bridging loans are usually quite fast, flexible, and secured, which offers borrowers “a quick cash injection that they may have been unable to secure elsewhere within a small timeframe.”
They also noted that bridging loans might come with fixed or variable interest rates. These rates are “stated on a monthly, rather than an annual basis, but do not always have to be charged on a monthly basis. Borrowers can repay the interest in different ways depending on their needs,” the company added.
Here are the main ways it may be charged. As noted by Assetz Capital, these are:
- Monthly –borrowers “pay the interest monthly.” At Assetz Capital, borrowers will “need to provide evidence of income and we will carry out an affordability assessment to repay interest monthly.”
- Deferred or rolled up – borrowers “pay all the interest at the end of the bridge loan. There are no monthly interest payments.”
- Retained – where the interest payments are “included within the lending facility, and then the borrower will pay it all back at the end of the bridge loan.”
The flexibility of how the interest is charged may offer key advantages to the borrower, the Assetz Capital explained. For instance, a borrower may decide to have their interest “rolled up” because the property they’ve acquired isn’t creating income immediately as there could be repairs or renovations to be carried out (so they’re not able to make monthly interest payments).
As noted by Assetz, bridging loans usually carry “different fees in addition to the interest, which can impact the overall cost to borrowers - so, it’s important that borrowers are aware of any attached fees to the loan and it’s important that brokers make these fees clear to their customers. ” For instance, at Assetz Capital there are “no early repayment charges or minimum charging period,” the company clarified.
While commenting on why people might use bridging, the Assetz Capital team noted that bridging finance is “on the rise with an increasing number of businesses and individuals using bridging loans to take advantage of opportunities that arise,” including :
- To buy at auction – a time-sensitive transaction, “with normally anything between 21-28 days to complete from the date of the auction”
- To refurbish and convert a property – where a property may “need some works to enable it to be mortgage-worthy or where alterations will maximize value and rental income”
- To finish a development
- To purchase a property that would “not secure a mortgage in its existing condition with a mainstream lender”
- Planning permission or change of use for security is “required which enables investors to purchase and exit the loan without penalties for early settlement”
- To bridge a shortfall of funding between buying and selling property “when a sale is delayed or the chain has broken down – bridging allows borrowers to progress with new purchase (so not to miss out) whilst existing security is on the market to be sold, or if the original sale has collapsed”
- Urgent finance required – to “support cashflow, or resolve an emergency situation
Please note that Assetz Capital does not offer regulated mortgage contracts.””
Bridging finance gives borrowers some ”breathing space” until they access other funds, sell a property or ”find alternative, long-term finance,” the Assetz Capital team explained while adding that one of the advantages to using bridging finance is “the quick fix that it provides to businesses in need of short-term funding.”
As noted by Assetz, here are the 2 types of bridging loans:
- Closed bridge: The borrower has “a predetermined time frame that has already been agreed on by both parties which will be a set date when the loan will be repaid. And because there is a set date, “closed bridge loans are more likely to be accepted by lenders as it gives more certainty about the loan repayment.” For example, the borrower has “already exchanged to sell a property and the completion date has been fixed, so the sale of that property will repay the bridging loan, resulting in a high degree of certainty that the loan will be repaid.”
- Open bridge: The borrower “sets out a plausible plan to the project, which proposes a realistic exit strategy to repay their loan, typically by sale or refinance, but there is no set date for settling the loan at the outset.” There will be a “clear cut-off point that the loan must be repaid by and to ensure the security of their funds, most bridging companies deduct the loan interest from the loan advance.” Due to the uncertainty on loan repayment, “lenders may charge a higher interest rate for these types of bridging loans.”
Closed bridging loans are usually suitable or ideal for buyers whose property chain may have “broken down – perhaps their buyers have pulled out while they are in the process of buying a new property, they can use a bridging loan to ‘bridge the gap’ between the purchase and the sale,” the blog post from Assetz Capital noted.
They also mentioned that open bridging loans are usually preferred by borrowers who might not be sure about when their expected finance “will be available.” These borrowers are usually landlords or property developers who can’t “guarantee timings (although they will still need to provide a schedule of works) and who need the loan for a longer period.”
While explaining who may use a bridging loan, Assetz Capital’s blog post noted:
“Bridging finance can be used in both commercial and residential property transactions. Borrowers can be homeowners or homebuyers, landlords, property developers or investors – whether they are buying a property, building a property, or raising funds for a refurbishment project, something they all have in common is a need for fast, short-term finance secured against a property.”
Going on comment on how they work, the blog added:
“At Assetz Capital, bridging loans are always secured loans. This means borrowers have to have a high-value asset to get one, such as property or land.”
“A borrower requires funds to purchase and refurbish a new investment property. The property is in need of some light repair work so that they can maximize the value of the property, whilst meeting all legal requirements for the property to be tenanted.”
The Assetz Capital team further noted that the intended works are “non-structural and do not require planning permission (which typically equates to less than 15% of the current market value).”
After these renovations are made to the property to enhance it, the borrower then aims to sell the property. A bridging loan, which may be facilitated with a few business days, would enable the borrower to buy the property, finance the refurbish work and “exit with no penalty fees and indeed provide any additional flexibility that the project would need should it finish early, resulting in them exiting earlier than they intended too.”
As mentioned in the update:
“Bridging loans are quick to arrange – at Assetz, you could get a decision in principle within 24 hours of applying; Borrowers can take advantage of time-sensitive opportunities.”
There are also flexible lending criteria. It is short-term – “bridging loans are designed to temporarily bridge the gap when there is a shortfall in funding,” the company added. They also noted that borrowers may gain access to “large sums secured against property.” You can also have “a lot of flexibility if needed,” the Assetz team noted.
To learn more about choosing the appropriate lender for you and other details from Assetz Capital, check here.