Beginner's guide to bridging finance
In this piece, Roma Finance's Steve Smith explores the basics of bridging finance and when it might be suitable for your clients.
The learning objectives for this article are to:
- Understand what bridging finance is and how it works
- Have confidence in your knowledge of the benefits and drawbacks of bridging finance
- Know which of your customers would suit a bridging loan
What is a bridging loan?
A bridging loan is a short-term, interest-only loan secured against property.
They are usually available up to 75% of the property’s value.
The loans can be taken for a term of up to 24 months and are available on residential, development and commercial properties (and sometimes on land).
Bridging loans come with fixed or variable interest rates. These rates are stated on a monthly rather than an annual basis and the borrower can repay the interest in different ways. They could choose to pay monthly, on a set date or at the end of their term when they repay the sum borrowed as well as the interest incurred.
Bridging loans usually carry different fees in addition to the interest, which can significantly increase the overall cost to borrowers. It’s important that brokers make these fees clear to their customers.
Open and closed bridging loans
Bridging loans can be defined as open or closed. An open bridge has no agreed repayment date (although it does have a maximum term), while a closed bridge has a fixed repayment date.
Closed bridging loans are likely to be suitable for buyers whose property chain has broken down. Perhaps their buyers have pulled out while they are in the process of buying their new home. They can use the loan to bridge the gap between the purchase and the sale of their existing property.
Open bridging loans tend to be used by landlords or developers who can’t guarantee timings (although they’ll still need to provide a schedule of works) and who need the loan for a longer period.
Regulated and non-regulated bridging loans
Some bridging loans fall under statutory regulation and others don’t. If the borrower is buying a property to live in (or for a family member to live in) this would usually be a regulated bridging loan.
If the borrower is purchasing or refinancing a property as an investment, not as their home, the loan is usually unregulated.
Bridging loans are available on a first or second charge basis, although regulated bridging loans are always a first charge loan.
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