Bridging the gap

James Moorhouse examines the role and purpose of bridging loans in the UK property market

Bridging loans can be a helpful way to provide clients with funds if they want to buy a property while waiting to sell another. Bridging can be arranged for almost any borrower wanting to raise funds against a UK-based security. This includes the ability to raise funding for foreign national clients purchasing or refinancing property in the UK.

Bridging loans are secured against assets either being purchased or owned by the borrower, such as houses, flats, commercial buildings or buy-to-let properties. These can be individual assets or a portfolio of properties. For example, a property developer could secure a bridging loan on one or more properties, depending on the amount they wanted to borrow from the lender. Clients can even borrow against a plot of land – whether it has planning permission or not.

As an interest-only short-term loan, bridging loans can range from just one week to a term of up to 18 months. This means they can be very flexible to suit the requirements of the borrower.  

The benefits

The ability to briefly bridge a financial gap for borrowers means there are many short-term benefits of taking out this type of loan. As it is only a short loan, there is a speedy application process that is quicker than a mortgage or second-charge application. This is because bridging lenders look at the case scenario rather than individual affordability, leading to more ‘pragmatic’ underwriting. If the property and exit strategy are solid, then a lender can agree to the deal.

With repayments, there are two main ways that lenders charge interest:

• Retained interest.
• Rolled-out interest.

Whichever option clients choose, they must still have a solid plan in place to pay off the loan. This is known as an ‘exit route’. A viable exit route is a must on all bridging loan applications. This is as important as the client’s status, property valuation and loan-to-value (LTV) ratio. Ways to do this include the use of any of the following:

• Refinancing.
• Sale of property.
• Equity release.
• Inheritance (with evidence).
• Investments.
• Pension.

It is possible to have more than one exit strategy, and the more exit strategies a borrower has in place the better. For example, if a client cannot sell the property, they could release equity from another property to repay the loan.

If a client reaches the end of their loan term and has not been able to repay the bridging loan, they could be charged. For unregulated loans, interest rates will increase in line with the terms of the loan agreement where the loan remains unpaid after the agreed term date. This will likely add to their costs or could see them losing some or all of the profit they would have made from the deal.

This late or non-payment can occur if they are relying on the sale of a property to repay the loan. While it may be difficult to gauge the property market 12 months from the start of a bridge, the borrower needs to be certain that they will achieve their intended value at the term end in order to ensure that their property sells, should this be their exit strategy to repay the bridging loan. Speaking to an estate agent about the current housing market is advised.  

Regulation

To ensure fair practice, some types of bridging loan are regulated. The Financial Conduct Authority regulates loans on someone’s home, because of the risk of losing it if they are unable to keep up with payments. A bridging loan is regulated in the same way as a residential mortgage. A bridging loan will be regulated if the loan is secured against a property that is (or will be) the main residence of the borrower or a member of their immediate family. All other deals would be unregulated.

Of these, there are two types of regulated bridging loans – first charge and second charge. A first-charge bridging loan is the first loan that has been secured against the property and would generally be restricted to a maximum LTV of 75%. If there is any equity after the first secured bridging loan, the client can then take out a second-charge loan, restricted to 70% LTV. This can be with a completely new lender and will sit behind the first-charge loan.

With this flexible loan, as long as the borrower has a good exit strategy and can keep up with the repayments, a bridging loan can provide a helpful short-term solution to plugging a temporary financial gap.

James Moorhouse is content manager at the PFS

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