Property Lawyers Who Understand Bridging Finance
Bridging finance is becoming increasingly popular. According to data from Bridging Trends, this kind of lending rose to an all-time high in the 3rd quarter of 2022, which saw £214.7m lent. Bridging loan solicitors have extensive experience in dealing with bridging finance and the process involved in obtaining a bridging loan. They will act swiftly and efficiently to ensure the bridging finance you need is obtained quickly and with minimum stress to you.
Looking for experienced Bridging Loan Solicitors? Whether you are buying a new home or investing in property, and regardless of whether it’s in a personal or company name, we can help.
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What is bridging finance?
Bridging finance is a type of borrowing used to ‘bridge a gap’ in funding when monies are required quickly or where you cannot secure a conventional mortgage. Bridging loans are intended to be a short-term solution, and the term of a bridging loan can be anything from one day up to around 12 or 18 months. The exact term will depend on the lender and your circumstances, and some lenders may consider longer terms.
Bridging loans are usually a type of secured loan – that means you will need to use an existing asset (usually a property) as security for the loan.
So, whilst they are a helpful ‘quick fix’ to cover a shortfall in funds, you have to be careful – you risk losing the secured asset if you fail to repay the loan. Since bridging loans are often needed at short notice, they are usually offered at a higher interest rate than other forms of borrowing, such as a mortgage.
Haven’t got your bridging loan arranged yet? Looking for mortgage broker specialising in this area? Give us a call – we can introduce you to one of the brokers we know who really understand bridging finance.
How much can I borrow with a bridging loan?
The amount you can borrow depends on various factors. Some lenders will lend many millions of pounds, but the loan amount will be limited to the amount a lender is convinced you will be able to repay.
The most crucial factor a lender will look at when considering a bridging loan application is your ‘exit strategy’. You will need to present the lender with a clear plan detailing how you intend to repay the money by the time agreed.
In the case of property, a common exit strategy is to repay the loan either from the proceeds of sale or a remortgage. You need to be certain (and convince a lender) that you will be able to sell the property or that your prospects of securing a mortgage are strong. If your exit strategy turns out to be flawed, you risk losing the assets secured against the loan and paying considerable interest.
When can a bridging loan be useful?
People choose to use bridging finance a residential or commercial property purchase for several reasons.
They may want to buy a new home before their current one has been sold, buy a property over which they can’t secure a conventional mortgage – because it is currently uninhabitable, for example – or purchase a property at auction. And they are also they are also regularly used by property investors who need to move quickly.
- Avoiding the breakdown of your conveyancing chain
This appears to be the most common use of bridging finance. According to statistics from Bridging Trends, preventing a break in the conveyancing chain became the most popular usage of a bridging loan in 2022, Q3 with 22% of total transactions. If you’re looking to buy a property but don’t want to risk breaking the conveyancing chain, a bridging loan could be the answer. Bridging is often used to purchase property before funds become available – perhaps before monies from the sale of existing property are released. And once that happens, the money from the sale can be used to pay back the bridge loan.where you have found your dream home but have yet to sell your current house.In this situation, you may be able to use a bridging loan to buy the new property while you try to sell your old one.Your exit strategy in this scenario would ordinarily be to repay the bridging loan with the proceeds of the sale of your current home; - Buying dilapidated, uninhabitable or unusual property
Many property investors, developers and individuals often seek out unusual, dilapidated or run-down buildings that they can convert or upgrade. This is particularly useful for those buy to let property investors who purchase a below-market-value property that requires work using what is known as the “BRRR” (buy, refurbish, refinance, rent) strategy.A bridging loan in these circumstances allows them to add value to the property and then refinance using a more conventional mortgage before selling or renting the property out to tenants. As they have added value to the property, when it comes to refinancing the property, the investor can often refinance at the higher value with a traditional mortgage, allowing them to recycle much if not all of their initial capital and move on to the next project – or sell it for a profit.These types of properties are often considered uninhabitable, and many high street lenders will not provide a mortgage for them due to the lack of security they provide. But, don’t forget that you will still need to offer alternative security for the loan. - Buying property at auction
For those looking to acquire property at auction, speed is a necessity It is usually necessary to pay the full purchase price within 28 days. That is routinely what you commit yourself to when the hammer goes down and your bid is successful.This can be really difficult for prospective buyers who are not cash buyers – because the process of securing a mortgage is often painfully slow, and usually takes more than just 28 days.So these kind of loans are very useful when buying at auction to bridge this gap and to ensure buyers are able to snap up bargains when they arise
Click here to read more about buying property at auction - Planning permission
Bridging finance is one of the most popular ways used by property investors to buy land or property with development opportunities requiring planning permission, where other sorts of funding may not be available. And if permission is granted, then development finance is commonly used to fund construction costs.It’s also regularly used by investors to provide short-term cash flow while a project obtains planning permission.In this scenario, bridging finance can also help to provide pre-construction finance before switching to a more long-term development loan once planning has been granted.Here at Bonallack & Bishop not only is Senior Partner, Tim Bishop, an active property investor himself, but our bridging loan solicitors are part of a specialist property investment team acting for investors and developers nationwide.
Click here to read more about our specialist Property Investment team
What are the pros and cons of bridging loans?
Bridging finance has numerous advantages and disadvantages which you need to consider before deciding to take out a bridging loan.
Some pros of bridging loans include the following –
· Can usually arrange bridging loans far more quickly than most other types of loans or finance. In most cases, we are talking weeks rather than months
· You may be able to borrow money in circumstances which make other types of finance unlikely; for example where a property is unhabitable and so cannot be mortgaged, or where you are buying a leasehold property with a short lease with a plan to extend that lease for example.
Click here to read more about lease extension
· The most important factor for a lender is that you have a realistic exit strategy. This means that you may be able to secure a bridging loan even if you are ineligible for other types of finance due to issues – such as a bad credit history.
But there are disadvantages and risks that go along with taking out bridging loans – and these include the following:
· Bridging loans are often offered at a higher rate of interest than other types of loans. And that could be more a problem if we are really past the era of rock bottom interest rates
· You face significant problems if you are unable to repay the loan. Higher interest rates mean that failing to repay the loan on time can result in you having to repay a far higher sum. Since the loan is secured, you also risk losing the asset used as security.
· In addition to the usual costs involved in property transactions, such as legal and valuation fees, most lenders charge additional fees on a bridging loan, including –
o ‘Arrangement fees’ for organising the loan. The arrangement fee amount varies between lenders but is often around 2% of the loan value;
o ‘Assessment fees’. Also known as a drawdown fee, this is a charge for accessing the money; and
o ‘Exit fees’, which fall due when you repay the loan.
Your bridging loan – the importance of having a well thought out exit plan
To secure a bridging loan, your lender will insist that have a watertight ‘exit plan’.
This plan should detail how you intend to repay the loan within the relevant time frame. Lenders will carefully examine your exit plan when considering your application and deciding how much to lend you. If they’re not satisfied your exit plan is good enough, they simply won’t lend.
A good conveyancing exit plan may enable you to raise funds in circumstances which might otherwise prevent you from borrowing – if, for example, you have a bad credit score or cannot meet affordability criteria.
In the context of property purchases, a standard exit plan is to repay the loan with the proceeds of sale of your current home or the renovated property. In this example, however, you would need to be sure that the market conditions are favourable to a quick sale and that the sale price will cover the outstanding amount of your bridging loan at the time of repayment. A sluggish property market or one where property values are dipping can prove a disaster if you’ve used bridging.
Open and closed bridging loans – what’s the difference?
Closed bridging finance is used where you have a clear exit plan with known timings. An example of this would be in a delayed completion scenario – where contracts have been exchanged and both parties therefore legally committed to the transaction, but completion itself is delayed.
Click here to read more about Delayed Completion as a Property Strategy
Both borrowers and lenders usually prefer these kind of closed arrangements simply because they are more certain.
In contrast, an open bridging loan refers to finance where the timescale and possibly even the source of repayment the loan is less obvious.
How our bridging finance solicitors help you?
Bridging loan providers often require that you take independent legal advice from bridging finance solicitors.
They want to be sure that you are clear about the terms on which you are borrowing the money, particularly your repayment obligations and the interest rate.
Since bridging finance is often required at short notice, getting support from bridging loan solicitors with experience in the process will also ensure your application is dealt with swiftly and has the best chance of success.
Your bridging finance conveyancing – the importance of having a specialist lawyer on board
Purchasing a property with the help of a bridging loan can complicate the conveyancing process. The issues raised by purchasing a property with a bridging loan can differ from those which commonly arise in other conveyancing transactions. Much of the documentation involved is also unique to bridging loan transactions.
For example, the bridging loan lender will take a charge over any property you use as security for the loan. If you already have a mortgage over that property, your existing lender will usually need to consent to the registration of this additional charge. Lawyers specialising in bridging finance conveyancing will help you deal with this second charge requirement and all other aspects of the process involved in buying a property with a bridging loan.
If you purchase a property using bridging finance before selling your existing home, you will own two properties for a while. This can have tax implications since tax reliefs that apply to your main residence may not similarly apply to your other property. You might also need to pay a higher rate of stamp duty. Whilst this can be refunded in certain circumstances, its impact on your finances should be considered before you proceed. Bridging finance conveyancing lawyers will review any tax, or other, consequences of your purchase and advise accordingly.
So make sure your lawyer has plenty of experience of bridging loans.
Most conveyancing lawyers rarely handle bridging finance conveyancing (only some of our own conveyancing team do) – and some can really struggle to provide the level of service you need as a result. And that’s why when appointing a solicitor you need to make sure you have got someone on your side who really understands bridging finance conveyancing and has plenty of experience in this area. That’s the best, most cost-effective way to understand the implications of bridging finance and ensure a smooth, swift property transaction.
