Bridging loans have become an increasingly popular option for those needing swift access to funds.
But what exactly are these loans secured against?
This guide will walk you through everything you need to know about bridging loan security, helping you make a well-informed choice for your financial needs.
Understanding Bridging Loans
Picture this: you’re at a property auction, and you’ve just spotted the perfect investment opportunity.
The catch?
You need to complete the purchase and pay for it within 28 days, but your current property hasn’t sold yet. This is where bridging loans come into play.
Bridging loans are short-term financing solutions designed to fill the gap between a financial need and a future source of funds.
They’re particularly common in the UK property market, where speed can make or break a deal. These loans typically last from a few weeks to 18 months and can be used for various purposes, from property purchases to business cash flow needs.
Here’s the crucial bit: bridging loans don’t come cheap.
To offset the risk of lending large sums over short periods, lenders require security. This security is the foundation of bridging finance, and understanding it is key to getting the best deal.
The Basics of Bridging Loan Security
Consider loan security as a safety net for the lender.
It’s an asset that the lender can claim if you can’t repay the loan. For bridging loans, this security is typically property or land, but other assets can sometimes be used too.
Why is security so important?
It’s all about risk management. By securing the loan against an asset, lenders can offer larger sums and often better rates than they would for unsecured loans.
The security you offer can significantly influence your loan terms. Higher quality security often leads to more favourable interest rates and higher loan-to-value (LTV) ratios. It’s a balancing act between what you can offer and what you need.
Primary Security: Property
Residential Property
Most bridging loans in the UK are secured against residential property.
This could be the property you’re buying, selling, or even your current home. Lenders typically prefer properties in good condition in sought-after areas, as these are easier to sell if they need to recoup their money.
For residential properties, lenders might offer LTV ratios up to 75% or even 80% in some cases.
However, this can vary depending on the property type and location. For example, a flat in central London might attract a higher LTV than a rural cottage in Cornwall.
Consider Sarah, a homeowner in Manchester. She found her dream home but hadn’t sold her current property yet. By using her existing home as security for a bridging loan, she was able to secure her new property quickly, giving her time to sell her old home without losing out on the purchase.
Bridging Loans for residentialCommercial Property
Commercial properties can also serve as security for bridging loans.
This includes offices, retail spaces, warehouses, and more. However, commercial property loans often come with slightly lower LTV ratios, typically around 65-70%, due to the perceived higher risk and potential difficulty in selling these properties quickly.
Semi-commercial properties can also be funded. These properties typically feature a commercial component on the ground floor, such as retail shops, offices, or restaurants, with residential units on the upper floors.
Take the case of a small business owner in Birmingham. He used his office building as security for a bridging loan to finance a major equipment upgrade. The loan gave him the cash flow he needed to expand his business without disrupting his day-to-day operations.
Bridging Loans for semi-commercialLand
Land can be a valuable form of security, especially for property developers.
However, the LTV ratios for land are usually lower than for developed properties, often around 50-60%. The presence of planning permission will significantly increase the land’s value as security.
For instance, a developer in Essex used a plot of land as security for a bridging loan to cover the costs of obtaining planning permission. Once permission was granted, the land’s value increased, allowing him to refinance on better terms for the actual development.
Bridging Loans for Land with Planning PermissionUninhabitable property
If a house lacks a kitchen, or a bathroom, or a roof, the main stream mortgage lenders will not grant a mortgage against it. It’s unmortgageable.
They need all of their mortgages to be secured on properties that are habitable on completion.
Bridging lenders are not so fussy!
They are well known for lending against almost anything.
No roof, no problem.
Subsidence, no problem.
For them it all comes down to risk, and that is managed by the LTV they offer you, and the interest rate.
Secondary Security Options
While property is the most common form of security, it’s not the only option.
Some lenders may accept other assets as additional security, which can be particularly useful if you need to borrow more than the value of your primary security allows.
Other assets that might be considered include:
- High-value vehicles or machinery (Asset finance)
- Stocks and shares (Lombard loan)
- Personal guarantees from company directors (for business loans)
Remember, though, that these are typically used as additional rather than primary security. They’re often considered on a case-by-case basis, so it’s worth discussing your options with a specialist broker.
Let’s talk bridging loans!
How Lenders Assess Security
When you offer an asset as security, lenders don’t just take your word for its value.
They’ll conduct an assessment to ensure the asset provides adequate coverage for the loan.
For property, this usually involves a professional valuation. The valuer will consider factors like the property’s condition, location, and recent sales of similar properties in the area. For commercial properties, they’ll also look at things like rental income and lease terms.
It’s not just about the asset’s current value, though.
Lenders also consider how easy it would be to sell the asset if needed. This is why properties in desirable areas or with unique features might be viewed more favourably.
Your personal financial situation also plays a role. While bridging loans are primarily secured against assets, many lenders will still conduct credit checks and ask for proof of income or your exit strategy.
Borrowing Against Multiple Properties
If you own multiple properties then, with the right lender, these could be used to boost your borrowing power.
While all lenders have maximum LTV percentages that they will work to, this is based on one property being used as security. If you offer up another, then they should be able to lend you more money. This presumes that the additional property is suitable and has sufficient equity. This is known as a cross-charge, or cross collateralisation.
This is a very common scenario for specialist lenders and second charge bridging loans are also available where properties already have a main mortgage in place.
Read more: Leveraging Multiple Properties: A Guide to Cross Charge Bridging Loans
Impact of Security on Loan Terms
The security you offer can significantly influence your loan terms. Generally, the higher the quality of the security, the better the terms you can expect.
Interest rates for bridging loans in the UK typically range from 0.5% to 1.5% per month. Where you fall in this range depends partly on your security. A low-risk residential property in a prime London location might attract rates at the lower end of this scale, while a piece of land without planning permission might be at the higher end.
The amount you can borrow is directly tied to your security’s value. For a residential property, you might be able to borrow up to 75-80% of its value. For land, this might be closer to 50-60%.
Loan duration can also be affected. If your security is a highly liquid asset (easy to sell quickly), lenders might be more comfortable with longer loan terms.
Related reading: A Guide to Cross Charge Bridging Loans
Risks and Considerations
While bridging loans can be a useful financial option, they’re not without risks. The primary risk is losing your security if you can’t repay the loan. This is why having a clear, viable exit strategy is essential.
If you’re using your home as security, think carefully.
While it might allow you to borrow more or get better rates, the stakes are high. UK law does offer some protections for borrowers using their primary residence as security, but it’s still a significant risk.
Another consideration is the costs involved. Bridging loans come with various fees, including arrangement fees, valuation fees, and legal fees. These can add up, so make sure you factor them into your calculations.
Choosing the right security for your bridging loan is a significant decision. It’s about balancing what you have available, what you need to borrow, and the level of risk you’re comfortable with.
Remember, every situation is unique.
What works for one borrower might not be the best choice for another. That’s why it’s important to seek professional advice. A specialist bridging loan broker can help you explore your options and find the best solution for your needs.
At Bridging Finance London, we have access to over 250 lenders, including private banks and individual lenders. We can help you explore all your options and find the right bridging loan solution for your unique situation.
Need some help?
If you need a short-term bridging loan then a specialist broker like us 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.
