A GUIDE TO
Bridging Loan Criteria
Bridging loans can be useful in all sorts of situations but are most often associated with property finance. Customers may want finance for all sorts of reasons, but will generally have a clear way to pay the loan. For example, they may want to buy a new home, but haven’t yet sold their own. Their lender will therefore have the security of knowing that the money can be paid back.
For example, this might happen if you buy a home at auction but have yet to sell your own home. In this case, a bridging loan is a great solution to get the money you need.
Loans are usually secured against a property or other asset which means lenders don’t need to worry so much about the credit history of the buyer. They may not need a monthly income as the loan will be balance will be paid off at the end of the term. This provides them with the flexibility to offer a variety of loan sizes and finance options to meet the customer’s needs.
That’s the easy bit. However, with so many bridging lenders out there, bridging loan lending criteria can vary dramatically from one lender to another.
Bridge loan providers may differ in their interest rates, repayment terms and what security they are willing to accept.
Let’s explore these criteria in more detail.
BRIDGING LOAN CRITERIA
- Monthly interest rates from 0.44%
- 100% of purchase price (up to 75% LTV)
- Up to 75% LTV for residential properties
- Up to 70% LTV for commercial properties
- Up to 68% net loan for refurbishment
- Land with planning up to 70% LTV
- Overseas residents welcome
- First or second charge loans
- No monthly loan repayments
- No proof of income
- Interest deducted from the loan
- Loans from £100k – no upper loan size.
- Discharged bankrupts welcome
- Overseas residents welcome
- Bridging loans from 1-24 months
- Loan amount based on full open market value
- All types of credit history welcome, including with defaults/CCJs
- England, Scotland, Wales & Ireland (ROI + NI)
- Other European locations also available.
- Loans to individuals, Ltd Co’s, LLP’s, SIPP
WHAT TYPES OF PROPERTY / LAND CAN BE FINANCED WITH A BRIDGING LOAN?
A bridging loan can be used to secure all types of properties from bungalows to offices, holiday homes or even parking spaces. They might also be used to purchase land with or without planning permission.
Your chances of getting a good deal depend to a certain extent on how many providers are working in such a space. For example, the most popular types of bridging loan is for residential properties so this is where most of the competition can be found. As such, it also offers some of the best finance options available.
- Residential assets, including HMO’s and Buy to Let.
- Refurbishment loans, both for acquisition and to fund renovation work.
- Retail premises
- Land – usually with some form of planning consent.
- Hotels & B&B’s
- Houses of multiple occupations (HMO)
- Student accommodation
- PRS sector
- Permitted Development (PD)
- Mixed use properties
- Nursing/Care homes
- Petrol Stations
- Golf courses
Many bridging loan providers will specify where they can provide finance. As a rule most will be able to cater to anyone in the United Kingdom.
They may also have facilities for other international destinations. You can check directly with them to make sure your destination is covered.
HOW DOES A BRIDGING LOAN WORK?
A bridging loan can normally be used for just about all legal purposes and property types. It could be because you are buying a new property before the old one has been sold, buying a property in poor condition, providing finance for a business cash injection, buying a business, paying urgent debts, clearing bankruptcies, funding renovation or anything else.
The key is to understand how much you are borrowing, the terms and how you will pay it back. However, most bridging loans are associated with properties.
Bridging Loans at a Glance
- Secure short term finance over 1-12 months
- Loan to value up to 70%
- Auction finance funding for commercial property acquisition or land purchase
- Auction finance funding for residential investment
- Monthly interest rates from 0.70%
- Funding for non standard property construction
WHAT TERMS DO LENDERS OFFER?
Bridging loans are short term deals. The standard range will be between one and 12 months. However, most providers will offer terms up to 18 months with some rising as high as 36. However, regulated loans – those covered by the Financial Conduct Authority – are restricted to 12 months.
OTHER COMMONLY ASKED QUESTIONS
BRIDGING LOANS SIZE: HOW MUCH CAN YOU BORROW?
Your lender will offer the money for the property up front. This can range from anywhere between £100,000 and £1bn with no upper limit.Loan amounts will be based on the full open market value of the property. Most lenders will have a maximum loan to value (LTV) of around 70%. This is the amount of loan you can get against the value of the property.
How much you can borrow will depend on the lender, your financial circumstances, your property value (for a charge) and the value of the property/land for finance.
The maximum loan size will depend on a number of factors, particularly the value and strength of the asset being used as security.
The normal loan to value (LTV) is 70% of the open market value, however, some lenders can offer up to 80% for residential properties.
Hypothetically speaking, for the right project with the right assets backing it, no loan size is too big.
SECURITY REQUIRED FOR BRIDGING LOANS
Bridging lenders vary in terms of what security and credit histories they accept. Most will require a loan to be secured against a property. It could be one property or a collection of properties. They secure that loan by taking a charge over the property which is registered at land registry as a first charge, second charge or even third charge loan.
A first charge comes when the property is unencumbered, meaning no existing loans or mortgages against it or if the existing lender is being cleared using the proceeds of the bridging loan.
Second and third charges are used when there is also an existing charge which has not been cleared.
Some lenders may accept other types of security such as jewellery vehicles, watches or anything else of value. You should contact your vendor directly to see what they are willing to accept.
BRIDGING FINANCE & CREDIT HISTORY
Lenders generally carry out credit checks. However, because bridging loans are secured against a property, lenders have a guarantee they will get their money back. As such, they are usually relaxed about the people they lend to. Most providers will accept applications from all sorts of people including those who have poor credit histories, defaults on their record or county court judgements.
However, credit histories may affect the rates on offer. Providers will normally advertise clearly what kind of histories they cater to, but it’s always worth double checking to see if it may affect the cost of the loan.
The strength of the asset or assets that you are using as security is another very important bridging loan lending criteria.
Most lenders prefer property and land as security assets. The strength of each asset is determined by what type of asset it is (residential, commercial, land, etc.), the quality of the building or land, its commercial success and revenue, whether it’s liquid and can be sold relatively easily and quickly, its location, and its future prospects and opportunities, among other things.
PROOF OF INCOME
Many providers are also quite happy to lend without a proof of income. This is because repayments are not taken monthly. The interest is cleared when the balance of the loan is cleared.
This will normally happen, for example, when you receive the money from the sale of your old property.
MINIMUM AGE OF APPLICANT
Bridging finance is available for applicants over the age of eighteen. However, some providers, as with mortgages have an upper age limit beyond which they will not go. Every applicant must be responsible enough to know what they are doing unless they have a power of attorney in place.
BRIDGING LOAN USES
There are a vast number of reasons for which a bridging loan can be used, including but not limited to the following:
- Buying under value from an LPA Receiver
- Purchasing before planning permission
- Purchase with the intent to change the planning permission
- Buying at auction
- Borrowing against value not purchase price
- Development and refurbishment
- Buying with a deferred consideration
- Developing an uninhabitable property
Additionally, bridging loans are the preferred route for borrowers in the following situations:
- When conventional credit is refused
- When you don’t want monthly payments
- When you need finance quickly
- When you want a non-status loan
BRIDGING LOAN EXIT STRATEGY
There are many ways out of the loan. It could come when another property is sold, you complete refining, gain money from another source, inheritance, or a policy reaching maturity. Whatever form of exit you take it is important to understand where the money will be coming from to clear the balance.
You will generally pay the balance with the interest at the end of the loan term. However, you can choose to make monthly repayments. In this case, they will generally want proof of income to make sure you can keep up repayments on the loan.
Lenders want to know what your exit strategy is before approving your bridging loan. In simple terms, they want to know how you plan on paying back the loan.
Lenders evaluate the strength of your exit strategy in order to assess the level of risk associated with giving you the loan.
Some of the most common exit strategies for bridging loans include selling the property, selling a business or business shares, refinancing, money from inheritances, or cashing in on business investments.
CHOOSING BRIDGING FINANCE
Generally speaking, a bridging loan is an effective and flexible way to secure money for a short term purpose. Lenders are generally happy to lend to people with poor credit histories and will not charge monthly repayments. In theory, this should be a product you go into with a clear exit strategy in mind.
For example, a common exit will come with the sale of your existing property which will be used to repay the balance of your loan.
You should also look at how they are regulated. The Financial Conduct Authority regulates loans with a term of up to 12 months. This gives you a sense of security and all the protections you would expect. However, lenders also provide a whole range of other term lengths which might not be covered under the FCA.
Whichever option you choose it is important to be certain that the money will be coming and you will be able to afford the repayment. If not the property you have secured against could be at risk.
BRIDGING LOANS – HOW LONG CAN I BORROW THE MONEY FOR?
A bridging loan is, by definition, a short-term loan. Bridging loans are most often taken out for between 3 and 12 months. However, it is not uncommon for bridging loans to be extended to 24 months in some circumstances.
It should also be noted that regulated bridging loans are limited to a 12 month loan period due to (Financial Conduct Authority) FCA regulations. A bridging loan is said to be unregulated if the borrower or a borrower’s family member will not be residing in the subject property.
It’s also important to note that unregulated lenders are unable to offer regulated bridging loans.
Individuals who are 18 years of age or older can apply for a bridging loan. There are lenders who are willing to work with overseas residents and Chinese nationals as well.
Other acceptable types of borrowers include private companies, limited liability partnerships (LLP), UK limited companies, overseas and overshore companies, and other ownership structures such as pension funds may be considered.
Compared to other types of finance, credit history is not that important when applying for a bridging loan. The most important bridging loan lending criteria is the security and strength of your assets.
As long as lenders find the security to be acceptable, they will be able offer bridging loans to individuals and companies that might not have exemplary credit histories.
For the cheapest rates, some lenders might not even ask for a credit report.
Even if you have a county court judgment (CCJ), you will still be able to receive a bridging loan if the strength of the asset being used as security is satisfactory.
You don’t need a clean credit file to obtain a bridge loan either.
MONTHLY INTEREST PAYMENTS
As previously mentioned, there are usually no monthly payments associated with bridging loans. Lenders will typically add the interest into the loan in order to avoid the need for monthly payments.
Most borrowers who seek out bridging loans do so because they would rather have the interest for the full term rolled up so that they can pay the loan back all at once. This is why lenders do not ask borrowers for proof of income when giving out bridging loans.
ASSOCIATED FEES AND COSTS
There are usually no up-front fees associated with bridging loans. However, borrowers will usually need to pay a property valuation fee. This can cost a few hundred pounds to a few thousand depending on the size and value of the property that is being evaluated.
Borrowers will also have to pay their own legal fees involved with obtaining a bridging loan.
Most lenders will charge a 2% arrangement fee, while we at Tiger Financial charge 1%.
Additional fees that you could possibly encounter during the process of obtaining a bridging loan include asset manager fees, quantity surveyor fees, and specialist report fees for things such as contamination concerns or asbestos removal.