Getting started: Bridging finance

The start of a new year is traditionally a time to review the outlook for your business and consider how you could better serve your clients whilst growing your revenue.

Bridging lending is one sector that is bucking the trend in a relatively flat market and the Association of Short Term Lenders has reported that bridging experienced a record period of strong growth in the third quarter of 2023. Compared to the same period the previous year, application volumes rose by more than 8%, completions grew by nearly 11% and loan books swelled by well over 18%.

So, what do you need to know about bridging finance?

To begin with, a bridging loan is a form of short-term finance secured on a property that can help to bridge a financial gap or allow investors to complete a full refurbishment before marketing or renting a property.

Bridging loans are usually taken on terms between 12 months and two years, and can often be agreed on relatively short notice to meet a tight deadline, secured as either a first charge or second charge. On the majority of bridging loans, interest is not serviced, but instead paid on redemption of the loan.

Some bridging finance is regulated by the Financial Conduct Authority (FCA) and a loan is considered regulated when it is secured against a property that is currently occupied, or will be occupied in the future, by the borrower or any member of their immediate family.

Whether a loan is regulated or non-regulated, one important consideration is the exit strategy. This is how the borrower intends to repay the loan, including any interest and fees that are due, at the end of the term. The most popular exit strategies are the sale of the property on which the loan is being secured or refinancing the loan to a longer-term mortgage lender. Alternative exit strategies could include the sale of another property or other investments such as shares, to repay the loan.

The most important thing to consider is that any exit strategy should be reasonable and robust. It may also be a good idea to consider multiple exit strategies, just in case the primary strategy is unworkable at the time of redeeming the loan.

Typical uses of bridging finance

Chainbreaks

One of the most well-established uses for a bridging loan is to help finance a purchase where there has been a break in a property chain. If one buyer pulls out of a transaction it could jeopardise the successful completion of every transaction in that chain. Bridging finance can be used to save a chain break, by providing the finance required for a buyer to continue with the purchase of a property even while they wait to sell their existing property.

A bridging loan can also be used in a similar way to put buyers, who have a property to sell, in the position of a cash buyer, providing the capital they need to make an onward purchase while they market their existing property. This is a popular approach used by buyers who are downsizing and moving from a higher value property to a lower value property.

Auction purchases

Under typical auction conditions, if a client’s bid on a property is successful, they are often required to pay a non-refundable 10% deposit on the day and would usually have a further 28 days to complete the purchase.

Another benefit of bridging finance in this situation is that it is not uncommon for properties sold at auction to require an element of renovation and refurbishment. In these circumstances, bridging can also help to fund the renovations as well as the purchase.

Property refurbishment and conversions

A growing number of property investors are realising that they can generate better returns by buying a rundown property and renovating it to achieve a higher resale price or retaining the property and benefitting from increased rental income.

Property refurbishment falls into three main categories – light, medium and heavy refurbishment.

Light refurbishment is where no planning permission or building regulations are required to renovate the property. This could include fitting a kitchen or bathroom, the absence of which would leave the property unmortgageable.

Heavy refurbishments are more complex, involving structural changes to the property that require planning permission or building regulations. Common examples of heavy refurbishment include converting a property from commercial to residential use, such as barn conversions, creating multiple units from a single building or merging multiple units to a single building.

Many investors may also choose to convert existing buildings from commercial use to residential using permitted development rights (PDR). These are automatic grants of planning permission that allow certain building works and changes of use to be carried out on a property without having to make a full planning application.

Bridging finance can be used to fund property renovations or conversions, enabling an investor to purchase a property in need of renovation and carry out the work to increase its value before deciding whether to retain and refinance onto a longer-term solution or sell the property.

Conversion to HMOs and MUFBs

A House of Multiple Occupation (HMO) is a building comprised of multiple occupants who share one or more basic amenities, such as toilet, bathroom and kitchen. A typical HMO, for example, might be a student house that is let to a number of different students.

Multi-unit freehold blocks (MUFBs) are properties where there is more than one self-contained unit on a single title. Unlike an HMO, a multi-unit freehold block contains separate, independent residential units, each with their own AST agreement.

These type of properties can provide strong returns for investors and bridging finance can fund both the purchase and any conversion work that is required.

Development exit

Many developers are in a position where they are asset rich and cash poor, particularly when they near the end of completing a development. Their options at this stage depend on their intentions for the scheme.

If they are retaining the development to let out developers will usually refinance onto a longer-term solution. For those who are selling the properties they have developed, a development exit loan enables them the option to buy extra time and avoid defaulting on their development finance, at the same time as providing the potential to release equity which could be used towards future developments, or switch to a cheaper monthly interest rate whilst tenants are sourced or the property is marketed for sale.

Business ventures and cash flow

A bridging loan secured against a property, either residential or commercial, can provide business owners with the chance to start a new venture, expand their current enterprise, invest in equipment or stock, or even purchase additional premises.

It can also be the solution to short-term cashflow issues, an issue that is impacting many businesses during the current cost-of-living crisis.