Over recent years bridging loans have become an essential tool for investors, developers, and homebuyers. Currently there is an estimated 150 institutions offering bridging finance.
These short-term financial solutions provide fast and convenient access to capital.
The UK bridging loan market’s value of £7.5 billion in 2023 highlights its growing importance in the property sector.
Consider this scenario: You’ve found an ideal property investment, but need to act quickly to secure the deal. Or perhaps you’re a developer with an opportunity to purchase prime land, but require funds rapidly.
These situations showcase where bridging loans excel. To successfully secure this type of finance, it’s important to understand the criteria lenders use to assess applications.
Key Eligibility Requirements for Bridging Loans
Bridging finance prioritises flexibility and speed, but lenders still have specific criteria that borrowers must meet:
Age and Residency
Preferably, applicants must be at least 18 years old and UK residents. We have access to lenders who consider applications from UK nationals abroad or international investors, though options may be more limited.
Loan Amounts
At Bridging Finance London, we arrange loans from £150,000 to £100 million and beyond. The exact range varies between lenders, with some specialists considering larger amounts for suitable projects.
Loan Terms
Bridging loans are inherently short-term. Terms usually span 3 to 36 months, with 12-18 months being most common. Regulated loans have a maximum duration of 12 months.
It can be possible to arrange a very short-term loan for just one month, but many lenders have a minimum interest charge of three months.
Eligible Borrowers
We offer bridging finance to a wide range of clients, including individuals, partnerships, limited companies, SPV, trusts and in some cases, offshore entities.
Security and Collateral
The foundation of any bridging loan is the offered security, typically in the form of property, though other high-value assets may sometimes be considered. You can secure a loan against the property you’re buying or an existing property.
Property as Primary Security
Whether residential, commercial, or land, property is the most common form of security. The condition, location, and marketability of the property all influence the lender’s decision.
Traditionally the lender would send a surveyor to the property for a condition inspection and valuation. Now, we have access to lenders that use Automated Valuation Models (AVMs) that provide an immediate valuation for loans under 70%.
Read more: Do you need a valuation for a bridging loan?
Loan-to-Value (LTV) Ratios
LTV ratios for bridging loans typically range from 65% to 80%. For example, a well-maintained commercial property in North London might secure an LTV of up to 75%. However, higher-risk properties or those requiring significant work might only achieve 60-65% LTV.
The LTV is the loan amount divided by the property value.
You will get the best rates at 55% LTV or below.
Charge Types
Bridging loans can be secured as first, second, or even third charges on a property. First charge loans, where the bridging lender has primary claim on the asset, will secure the best rates and highest LTVs.
If you already owned a mortgaged property and required bridging finance you would need a second charge bridging loan. This allows you to borrow up to 70% LTV on a short term basis and leaves your existing mortgage untouched.
If you want to borrow 90%-100% of a property, this is possible. You will need other assets to bring to the table and access to a lender that offers cross-charge bridging loans.
Related reading: Do You Need a Solicitor for a Bridging Loan?
The Exit Strategy
The exit strategy is perhaps the most important aspect of any bridging loan application.
This is your plan for repaying the loan, and it’s an element lenders scrutinise closely.
Common exit strategies include:
- Property sale
- Refinancing to a long-term mortgage
- Completion of a development project and subsequent sale
For example, a developer planning to sell newly renovated flats would need to provide market analysis and sales projections to support their exit strategy. Lenders assess the viability of your plan, considering factors such as market conditions, your track record (if applicable), and any potential obstacles.
It’s prudent to have a backup plan. If your primary exit strategy is to sell the property, consider how you might refinance if the sale takes longer than expected. This foresight can strengthen your application and give lenders confidence in your ability to repay the loan.
Financial Considerations
While bridging loans are primarily asset-based lending, your financial situation still plays a role in the application process.
Credit History
Bridging lenders are well known for taking a more flexible approach to credit history.
While some lenders may accept applications with adverse credit, interest rates typically start from 0.44% per month for borrowers with clean credit histories. Your credit score can impact the terms offered, so it’s worth checking your credit report before applying.
Read more: Do You Need a Good Credit Score for a Bridging Loan?
Income and Affordability
For many bridging loans, especially those for property investment or development, lenders focus more on the project’s viability and exit strategy than personal income or status. Remember that a bridge loan doesn’t normally require regular payments, so monthly affordability is less relevant.
However, for regulated loans or those where the exit strategy involves refinancing to a traditional mortgage, affordability assessments may be more rigorous.
Read more: Non-Status Bridging Loans Explained
Deposit or Equity Requirements
The amount of capital you contribute can significantly influence a lender’s decision. A larger deposit or more equity in the security property can lead to better rates and terms. As you put in more cash, the lender’s risk position reduces, and they can provide improved terms.
To strengthen your financial position before applying, consider these steps:
- Having a deposit of at least 25% gives you more options
- Review and improve your credit score where possible
- Gather evidence of any additional income or assets
- Prepare a detailed business plan if the loan is for a commercial project
Interest Rates and Fees
Understanding the cost of bridging finance is important.
Unlike traditional mortgages, bridging loans use monthly interest rates rather than annual percentage rates (APR).
On a £500,000 loan with a 1% monthly interest rate, you could expect to pay £5,000 per month in interest. However, bridging loans don’t normally require monthly payments, instead rolling up the interest to be paid at the end of the term.
Additional costs to consider include:
- Arrangement fees: Typically 2% of the loan amount
- Exit fees: Some lenders charge a fee when you repay the loan
- Valuation and legal fees: These vary based on the property and complexity of the deal
While these costs may seem high compared to traditional mortgages, the speed and flexibility of bridging finance often justify the expense for many borrowers.
The Application Process
Securing a bridging loan should be faster than obtaining a traditional mortgage, but it still involves several key steps:
- Initial enquiry: You provide basic details about your borrowing needs and the security property.
- Agreement in Principle (AIP): We can provide a lending decision within 24 hours of receiving an initial application.
- Full application: You supply detailed documentation, including proof of ID, property details, and your exit strategy.
- Valuation: The lender arranges for the security property to be valued.
- Legal work: Solicitors handle the legal aspects of securing the loan against the property.
- Funds release: Once all checks are complete and legal work is done, the funds are released.
Throughout this process, you’ll need to comply with UK anti-money laundering regulations, which will include providing proof of funds for your deposit.
Working with Bridging Finance London can significantly smooth this process. Our team brings market knowledge, lender relationships, and experience in structuring deals. We have access to niche lenders and exclusive deals, not available by going direct.
Special Considerations for Different Borrower Types
The criteria for bridging loans can vary depending on the borrower and the loan’s purpose.
Property developers with a track record of successful projects will secure more favourable terms, such as higher LTVs or lower interest rates. Lenders will closely examine your past projects, focusing on completion times, budget management, and sales performance.
For business bridging loans, lenders will assess both the security property and the business itself. They’ll want to see business plans, financial projections, and possibly personal guarantees from company directors.
International investors face additional scrutiny due to UK anti-money laundering (AML) regulations. However, many lenders welcome foreign investment, particularly in major cities like London. These borrowers should be prepared to provide extensive documentation proving the source of their funds.
Can anyone get a bridging loan? Nearly anyone can get a bridging loan. With strong property security and a plausible exit strategy, most people will be able to obtain a bridging loan.
Do you need good credit for a bridging loan? Have a good or perfect credit profile is not needed for bridge finance. However, if you have experienced a serious credit issue within the last 6-12 months then all lenders will need to understand the situation behind it.
Common Pitfalls and How to Avoid Them
Even experienced borrowers can encounter challenges with bridging loans.
Here are some common issues and how to sidestep them:
Overly Optimistic Exit Strategies
Be conservative in your projections. If you’re relying on selling a property, research the local market thoroughly and allow extra time for the sale process.
Underestimating Costs
Factor in all possible expenses, including interest, fees, and potential overruns on development projects. Build in a contingency fund of at least 10% of your total budget.
Planning Permission Problems
If your project requires planning permission, consider seeking it before applying for the loan, or look for a lender offering a ‘planning bridge‘ product.
Remember, transparency with your lender is key. If you encounter difficulties during the loan term, communicate early and often. Many lenders are willing to work with borrowers to find solutions, such as extending the loan term, if they’re kept informed.
Securing Your Bridging Loan Success
Bridging finance can be immensely useful in the right circumstances, offering speed and flexibility that traditional lending can’t match. By understanding the criteria lenders use and preparing thoroughly, you’ll be well-positioned to secure the right bridging loan for your needs.
Remember these key points:
- Have a solid exit strategy
- Offer strong security with a realistic valuation
- Be prepared with all necessary documentation
- Understand all costs involved
- Work with experienced debt advisory brokers
Every bridging loan is unique, tailored to the specific needs of the borrower and the nature of the project. While this article provides a comprehensive overview, it’s always wise to seek professional advice tailored to your individual circumstances.
Need some help?
If you need a short-term bridging loan then a specialist debt advisory broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To speak with a specialist broker, please call us on 020 3556 9137
