7 Small But Important Criteria for Obtaining Bridging Loans

Securing bridging finance from reputed bridging loan companies relies heavily on applications that meet all necessary criteria. Hence, after researching several lenders of the UK market, we narrowed down these few but important criteria that are requested when applying for a bridging loan.

Loan Size
Every lender has a limit set for the loan they offer. Usually, in commercial bridging, it is between £500,000 and up, though many lenders start at £ 750,000.

Term
The term is the span of period up to which you have borrowed the amount. Typically, in most firms, it is between 1 to 18 months, but certain reputed firms also allow you to extend it to 36 months. However, it differs for the regulated non-commercial sector where FCA thrusts a mandatory 1-year limit.

Bridging Loan Security   

One of the most important factors that lenders consider while giving bridging loans is the security they deem acceptable. The assets eligible for security include:

• Land - Car parks, development land, barn, car parks, etc.
• Property - Flats, houses, mixed-use, care homes, offices, hotels, shops, restaurants, etc
• Assets such as jewellery antiques, trade assets, vehicles, etc.

Acceptable Borrowers
In most cases, loans specify who are acceptable borrowers for them. For example, adults who are at least 18 years old. Additionally, borrowers can also include private individuals, limited companies, partnerships, pension funds, and offshore companies.

Creditors History
Credit history is relatively less important while applying for bridging finance in personal or commercial property. Mostly, lenders are more concerned about the security. As long as they feel the security is acceptable, they will be happy to lend money even to a company with poor credit history.

Income Proof
Often known as income verification, this is a standard practice for all commercial loans. It may come in the form of bank statements, tax returns, or audited accounts.

Exit Strategy
Your plan to pay your loan off is referred to as your exit strategy. When applying for a bridging loan, lenders would want to know how you will pay them back and exit the loan. It allows them to assess the risk level. Here are the most common exit strategies:

• Selling an existing property
• Business Merger
• Cashing in Investments
• Selling a business or shares in it
• Proceeds of a debt repayment

How Are Bridging Loan and Redevelopment Finance Different and what’s Asset Refinancing?

Bridging loans for property development and redevelopment finance have a number of similarities. These options are only ideal for short-term funding and both can be invested in finance building new properties or refurbishing run-down dilapidated ones.

On completion of the project, the bridging loan or development finance amount is to be returned. To achieve this, most people refinance the property with a long-term finance option like a commercial mortgage or sell the property.

You can take development finance for periods up to 36 months, while usually bridging loans are up to 12 months. To buy a new property or refurbish, property development finance is a great option because it might be cheaper and have better rates. Plus, the proceeds of the loan are released whenever required as the work progresses, allowing further savings on the interest charges.

The development finance provider relies heavily on previous development experience, so if this isn’t available then a bridging loan from commercial real estate bridge loan lenders is the best and only option for you.

As far as asset refinancing is concerned, it’s a form of finance used by businesses to let go of some equities in an asset like a vehicle, a piece of machinery, or some other equipment. Asset refinancing usually takes place for assets owned outright, though refinancing can also happen when there is already one finance facility secured on the asset, provided the existing facility is repaid by the money from a new facility.

What Kind of Securities Can We Use? What Is The Importance of Valuation and Planning Permission?

These are some securities that are considered acceptable by most lenders. It’s worth noticing that while bridging finance for commercial property from a UK lender, the property should be based within the UK.

Here’s the list:
Houses, bungalows, apartments, maisonettes, HMOs, plots of land, retail stores, shopping centres, warehouses, factories, restaurants, cafes, hotels, pubs,  hospitals, nursing homes, sports facilities, medical centres.

Though the list above covers a few options to use as security, it’s not complete and many other property types can be added to it, which can be used as security.

Coming to valuations, they are a vital part of the procedure. Lenders use them to assess the value of the property offered as security. Some brokers do arrange a valuation, but mostly it is to be provided by the lender.

Valuation reports may differ depending upon circumstances. These sometimes include automated valuation reports, full validation reports and drive-by valuations. They also provide the lender with all necessary information to calculate the loan to value ratio.

Planning Permission
Planning permission is often needed when you want to make a major structural alteration to a property, building on land, demolish a construction, or change the purpose of a property. It is important to ensure that planning permission is addressed before you apply for finance or second charge mortgage loans. As a part of the process, the local planning authority might also check with your neighbours about any objections. A necessary step for any prospective developer to investigate.

What are the Different Types of Online Bridging Loans?

 There are two main types of bridging property development loans in the UK: Closed and Open. In both kinds, you’ll need an exit route, so you can pay off the loan.

Closed Bridging Loans - This kind of loan has to be paid off before the fixed end date. So mostly borrowers know when the needed funds will be available. Typically, these loans take a few weeks or months tops.

Open Bridging Loan - This kind of loan doesn’t have any fixed end date. But mostly they still don’t last for more than a year. For the flexibility they offer, these loans are relatively more expensive than the closed ones.

First Charge and Second Charge Loans

This is again something you should know about. ‘Charges’ are added on the property you use as security.

When you don’t have other loans secured against the property, you can get the ‘first charge’ bridging loan.

But if you already have a mortgage on the property, you can take a second charge bridging loan on it. If you are unable to pay it off, these charges are considered to determine the priority of debts.

There’s a higher chance for you to get more loan to value (LTV) rate on a first charge bridging loan for property development because the property has no other claim. In a second charge loan, the lender calculates the Loan to Value based on the amount of equity you have on the secured property after other mortgages are deducted. It’s worth noticing that you might need permission from the first charge lender before adding a second charge lender.                                                                                                                                                                                                                           

Are Bridging Loans Expensive? - For How Long Can We Borrow It?

 Bridging loans tend to have more interest than small business loans, so they can be slightly more expensive than other forms of finance solutions. This happens as they are quicker than other property development loans. Regardless of how you repay, if you have a sound exit strategy, you will be fine. There are so many ways in which people can repay their bridging loans.

• Refinance
• A policy reaching maturity
• Inheritance
• Property or sales assets
• Receipt of money owed

Wondering for how long you can borrow a bridging loan? In the UK, bridging loans, typically, are to be repaid in less than a year, sometimes in just a few weeks. You can avail longer terms too, but it is highly unlikely to find anything over three years. It’s also important to realize that the longer the term, the more interest you’ll have to pay.

Another confusion that people have in their minds is about an unregulated bridging loan.

An unregulated bridging loan sure does sound a bit dodgy, however, it’s just a way of classifying whether the loan is for commercial or residential use. 

Where a regulated bridging loan is used solely for personal residential properties in which you plan to live, an unregulated bridging loan is also used for other business purposes or property investments. They are unregulated due to their complex nature, as they allow greater flexibility and can be customized to meet the needs of borrowers. One important difference worth noticing is that bridging loans offer an additional layer of protection as they are overseen by the Financial Conduct Authority (FCA). So if you are mis-sold a bridging loan or have received bad advice, FCA can intervene.

Questions to Ask When Planning a Bridging Loan

 When applying for finance, be sure to choose the right products for your aspirations and consider your current financial situation. Though external funding is an invaluable resource that helps your business progress, acquiring all the funds in a short notice is a burdensome task. This is where a bridging loan can be extremely crucial. But to make sure that the commercial bridging loan lender is right for you in every respect, you need to ask yourself a few important questions:

In What All Ways Can I Use A Bridging Loan?
Bridging loans can be used to cater to a variety of purposes. Though their main use is for purchasing and selling a property and land, you can also use it for buying apartments, houses, and other commercial units.

How to Secure Bridging Loans
In the UK, residential bridging loans can be easily secured. Typically, you are required to present collateral in the form of profitable land or property that doesn’t have any debt against it. The good thing is there aren’t any restrictions on the property you choose to present. However, you should own it outright, even if it’s residentially or commercially used. You also have the freedom to present more than one unit as collateral. Keep in mind though, if you are not able to return the loan or keep up with the payment process, lenders can seize your property.

How Much Can I Borrow?
Typically, bridging loan firms offer 80 or more % of the total cost of the property you are about to invest in. There’s no dictating limit on how much you can receive because bridging loans use a percentage. Lenders can impose restrictions though, depending upon how much they can afford or are willing to invest. 

How Long Do I Get To Repay
Bridging Loans are short-term finance solutions mostly lasting up to 12 months. Often this type of loan carries high interest. So it’s better and more cost-effective if you return it sooner than later. However, some lenders also extend the term further up to 18 months and some even offer a 3-year solution. But doing so may mean your business incurring more interest. You can also repay the loan earlier than expected but check with the lender about ERC (Early fee charges).

How Are Bridging Loan Repaid?
Typically you have 3 repayment options available:

Pay Monthly - Make interest payments at the end of each month until you return the principal or return the borrowed money entirely.

Rolled-Up Interest - In this mode, all the interest that you have incurred throughout the tenure is added up. It is then combined with the principal, and made payable at once in final payment. Do consider that this option often increases the size of the end payment.

Retained Interest - Allows you to borrow the interest incurred for an agreed number of months, aside from the funds you are requesting. The retained interest stays with the lender to assist you in making monthly interest payments. Once the agreement ends with you paying the full principal, some lenders reimburse the remaining retained interest that you weren’t able to utilize.