What Is Bridging Finance?

Bridging finance is a short-term loan secured against property. It is designed to provide capital quickly for a defined period, usually between three and twenty-four months, until a longer-term solution is in place or the property is sold.

The name comes from what the loan does: it bridges a gap. That gap might be between buying one property and selling another, between purchasing a property that needs work and refinancing it once the work is done, or between an auction hammer falling and a mortgage lender being able to complete.

When bridging finance is used

• Auction purchases, where completion is usually required within 28 days.
• Chain-break situations, where a purchase must complete before a related sale.
• Property that is uninhabitable or otherwise unmortgageable, such as a house with no kitchen or bathroom.
• Light or heavy refurbishment, with the loan repaid on sale or refinance once works complete.
• Capital raising against property that is unencumbered or has low existing borrowing.
• Development exit, where a completed scheme is refinanced onto a cheaper facility while units are sold.

How bridging loans are assessed

Lenders focus on three things: the security, the exit and the borrower. The security is the property being charged and its value, typically confirmed by a RICS Red Book valuation. The exit is how the loan will be repaid, and it must be evidenced rather than simply asserted. The borrower assessment covers identity and anti-money-laundering checks, credit history and, for larger or more complex projects, relevant experience.

Loan to value

The loan is expressed as a percentage of the property's value: the loan to value, or LTV. Maximum LTVs vary by lender and by the type of security. Standard residential property typically supports higher leverage than commercial property or land, and land without planning permission sits at the lowest end of the range. Where interest is rolled up, lenders also check that the total facility including interest stays within their limit.

How interest works

Bridging interest is quoted monthly and can be handled in three ways:

• Serviced: paid monthly from income, like a conventional mortgage.
• Retained: the interest for the whole term is deducted from the loan at the outset, so the borrower receives the net amount and makes no monthly payments.
• Rolled up: interest accrues and is added to the balance, repaid in full at redemption.

Retained and rolled-up interest are common because many bridging borrowers do not have income from the property during the term. The trade-off is that the net amount available is lower, or the redemption figure higher.

Fees and costs

Alongside interest, expect an arrangement fee (usually a percentage of the loan), a valuation fee, legal fees for both sides, and sometimes an exit fee. A good broker will set out every cost before an offer is issued so there are no surprises at completion.

The exit strategy

The exit is the most important part of any bridging application. A sale exit is supported by comparable evidence, an agent's appraisal or a marketing plan. A refinance exit is supported by a decision in principle from a term lender, or clear evidence that the refinance product is affordable. Lenders will not proceed without a credible exit, and a term beyond eighteen months usually attracts closer scrutiny of it.