What is a bridging loan?

“Bridging loans” or “bridging” or gap loans are designed as a short term finance solution, secured against residential or commercial property.

Typically they are used where speed is essential, the property is being sold under-value or for whatever reason the deal falls outside of standard term lenders criteria e.g. not classed as inhabitable, due to the lack of a kitchen.

Unlike term lenders that are going to work off purchase price, most Bridging Finance providers work off the open market value (OMV).

Bridging finance lenders are really concerned with three elements:

1. Open Market Value, as verified by a R.I.C.S. surveyor. If you have had a recent valuation carried out by an R.I.C.S member, some bridging finance providers will accept a re-type of the valuation
2. Treatment of interest - are you going to service the interest during the bridge or “roll it up” into the facility
3. Exit strategy- A realistic exit strategy is required from outset, be it sale or re-finance to a long term lender.

There are minimal or no status requirements, depending on whether you intend to service interest or not.

Bridging occupies a unique place in the market, and over the next couple of years the demand for it will no doubt increase, due to some of its more adventurous applications.

Below market value property purchase

Not so long ago there were herds of almost “zombie” like property investors, buying new build properties on the inside track style scenario believing that a property could be sourced at 15% - 20% “ BMV”.

Come on get real! Do these vendors also stand on the street giving away fivers?

So is there a future for below market value properties? The answer is a resounding, yes.

In these credit crunch times, there are lots of “distressed “sales coming onto the market, some due to the panic caused by the media. For instance, would it be better to sell up now 10% under value, lock in you’re your gains now, and, if you believe what you are told, wait a year or so and buy at rock bottom? I don’t know, but you get the idea.

Problems come with financing these. The lenders that have caught a cold won’t mention any names here, specialising in financing, so called “under value” new build flats, are either closed to new business or won’t look at any under value element as a deposit contribution.

Solution: Bridging finance.

A bridging loan can provide 100% of the purchase price, providing that this is not more than 85% of the open market value (OMV), if there is a simultaneous, same day residential re-mortgage in place. This gets around the residential lenders rules and fears surrounding under value purchase.

An example would be the purchase of a repossession property say 15% under value. The high street route, would work on the purchase price, and not the value and this would be classed as 100% lending. At present, these loans are not available.

Using one of the above examples, you would complete at 100% on the purchase price and simultaneously complete a re-mortgage at 85% of the open market value.

Bridging finance isn’t cheap; but the gain, in certain circumstances far out weigh the cost.

Why Would You Need bridging Finance? Six Ways It Could Help Your Business

Bridging finance seems to be used more often in the business than in the residential market.  Why should this be so?  Possibly because residential customers are a bit wary of bridging finance, seeing it as very expensive.  For people in the property or other types of business, on the other hand, bridging finance is very much part of life.

So why would you need bridging finance in the business arena?

• If you are in any business, of any kind, and need to purchase new equipment, you will be very likely to find that your finance deal is not yet in place by the time you need to take delivery of the equipment.  In this situation you will probably look for bridging finance as an interim measure.
• Likewise, if your company needs to complete on a new office building before having sold the old one, you can use bridging finance to tide you over.
• If you are in the property business, your most common reason for using bridging finance will be if you are buying property at below market value.  This can enable you to make a quick purchase and then have time to re-mortgage at the actual market value.  You can then pay off the bridging loan and have cash to do up the property.  Or of course you may manage to sell it immediately at the full market value, in which case you will have the cash for your next purchase!
• When you are buying property at auction, bridging finance is the most likely way you will pay for your purchase.  If you bid successfully on a property, you must pay within 28 days, which may not give you time to arrange your regular mortgage.
• If you have a large property portfolio, there will often be times when you need to get cash out quickly for further purchases.  Bridging finance is a great way to do this as it can be secured on existing property.
• You may be in the position where obtaining bridging finance is part of your normal business process.  If so, you can usually obtain pre-approval for your loan up to a certain amount.  This enables you to get hold of your funds very quickly and take advantage of the best deals.

You may be just taking your first steps in business and wondering if bridging finance might help you.  Your best idea would be to look for a qualified mortgage broker who will be able to show you how to start using this great facility!