When a property purchase needs to happen quickly, traditional mortgage finance isn’t always able to keep pace. This is where bridging finance could help.
Perhaps you’re waiting for your existing property to sell. Maybe you’ve found an investment opportunity that needs to complete quickly. Or you want to purchase a property that isn’t currently suitable for a standard mortgage because it requires refurbishment.
In situations like these, bridging finance could provide a short-term funding solution.
But bridging loans aren’t suitable for every situation. They are specialist forms of finance, and understanding how they work, what they cost and, crucially, how the borrowing will be repaid is essential before proceeding.
In this guide, Mallard Commercial Finance explains what bridging finance is, when it can make sense, how lenders assess applications and what you need to consider before taking out a bridging loan.
What is bridging finance?
Bridging finance is a form of short-term borrowing designed to provide funding for a specific period, usually until a longer-term source of finance becomes available or an asset is sold.
The name comes from its purpose: a bridging loan can effectively “bridge” the gap between one financial event and another.
For example, you might use bridging finance to:
- Purchase a property before selling another
- Complete a time-sensitive property purchase
- Buy a property that isn’t currently suitable for a standard mortgage
- Fund refurbishment before arranging longer-term finance
- Purchase a property at auction
- Provide short-term funding while arranging a commercial mortgage
- Support a property investment opportunity
The important point is that bridging finance is generally intended to be short-term finance, rather than a replacement for a conventional long-term mortgage.
At Mallard Commercial Finance, bridging finance can be used in a range of property-related situations, including purchasing a property while the sale of another property is progressing and funding properties that require refurbishment before longer-term finance can be arranged.
How does a bridging loan work?
A bridging loan is typically secured against property or another suitable asset.
The lender considers the value of the security, the amount being borrowed and, importantly, how the loan will ultimately be repaid.
This is known as the exit strategy.
For example, imagine you want to purchase a commercial property for £500,000, but you need to complete the purchase before you’ve sold another property.
A bridging loan could potentially provide the short-term funding needed to complete the purchase.
Once your existing property sells, the proceeds could then be used to repay the bridging loan.
Alternatively, you might refinance the property onto a longer-term commercial mortgage and use the new mortgage to repay the bridge.
The exact structure will depend on the transaction, the borrower and the lender.
When does a bridging loan make sense?
Bridging finance can be particularly useful when timing, flexibility or the condition of a property makes a conventional mortgage difficult to arrange.
Here are some of the situations where it may be worth considering.
1. You’re buying before you’ve sold
One of the most familiar uses of bridging finance is helping someone purchase a new property before their existing property has sold.
This can be particularly useful when there is a time-sensitive purchase opportunity or a chain is creating delays.
Rather than waiting for the sale to complete, bridging finance could potentially provide the funding required to proceed with the purchase.
Once the existing property sells, the proceeds can be used to repay the bridge.
This type of arrangement needs careful planning, however. The proposed sale and the expected value of the property being sold will form an important part of the overall exit strategy.
2. You’ve found a property that needs refurbishment
Some properties aren’t suitable for standard mortgage finance in their current condition.
For example, a commercial or mixed-use property may require significant refurbishment before it can be occupied, rented or refinanced.
A bridging loan could potentially provide the short-term funding needed to purchase the property and complete the necessary works.
Once the refurbishment is complete, the property could potentially be refinanced onto a longer-term mortgage or sold.
This is one area where specialist advice can be particularly valuable, as the lender will need to understand both the property and the proposed works.
3. You’re buying at auction
Property auctions often operate to strict completion deadlines.
This can make arranging conventional finance difficult if the mortgage process cannot be completed within the required time frame.
Bridging finance may provide a way of completing the purchase within the auction deadline, with longer-term finance potentially arranged afterwards.
However, auction purchases should always be approached carefully. Before bidding, it’s important to understand how the purchase will be funded and whether your proposed exit strategy is realistic.
4. You need to move quickly on an investment opportunity
Property investment opportunities don’t always wait for traditional finance processes.
If a suitable commercial, semi-commercial or residential investment property becomes available and the transaction needs to complete quickly, bridging finance could potentially provide the short-term funding required.
The key consideration is whether the investment makes sense once the costs of the bridging finance and the intended exit are taken into account.
5. You’re waiting for longer-term finance
Sometimes the long-term funding solution is known, but it isn’t available quickly enough to complete the immediate transaction.
Bridging finance can potentially act as temporary funding while a longer-term commercial mortgage or other finance is arranged.
However, this should be planned carefully. If the proposed exit relies on refinancing, it is important to have confidence that the longer-term finance will be achievable.
What is an exit strategy?
The exit strategy is one of the most important parts of a bridging finance application.
Put simply, it explains how you intend to repay the bridging loan.
Common exit strategies include:
Sale of the property
You purchase a property using bridging finance and sell it once the transaction or refurbishment has been completed.
The proceeds from the sale are then used to repay the bridging loan.
Sale of another property
You use bridging finance to purchase a new property while waiting for another property to sell.
The sale proceeds are then used to repay the bridge.
Refinancing
You use bridging finance initially and then refinance onto a longer-term mortgage once the property or your circumstances meet the relevant lender’s criteria.
A combination of sale and refinancing
In some circumstances, part of the borrowing could be repaid through a property sale, with the remaining balance refinanced.
The important thing is that your exit strategy needs to be realistic and achievable.
A lender will want to understand not only what you intend to do, but whether there is a credible route to repaying the borrowing.
Why is the exit strategy so important?
With short-term finance, the end of the loan term needs to be considered from the beginning.
For example, if your plan is to refinance onto a commercial mortgage, you need to consider whether the property and your financial circumstances are likely to meet the requirements of the long-term lender.
If your plan is to sell a property, you need to consider whether the expected sale value and timescale are realistic.
The FCA’s guidance on regulated bridging lending also highlights the importance of a credible repayment strategy where a bridging loan is intended to be replaced by longer-term mortgage finance.
At Mallard Commercial Finance, understanding how the borrowing will ultimately be repaid is a key part of assessing a bridging finance application.
How much can you borrow with bridging finance?
The amount you can borrow will depend on the individual transaction and the lender.
One of the key considerations is the value of the property or properties being used as security, alongside the amount you need to borrow.
Lenders will also consider the proposed exit strategy and the overall strength of the application.
Mallard Commercial Finance‘s current guidance explains that lenders primarily consider the value of the security and how the loan will be repaid when assessing bridging applications.
This is why it can be difficult to give a single answer to questions such as “How much can I borrow with a bridging loan?”
The answer depends on the individual circumstances.
How much does bridging finance cost?
Bridging finance is generally more expensive than conventional long-term mortgage borrowing.
That’s because it provides short-term funding and can offer greater flexibility in situations where standard lending may not be appropriate.
The overall cost can include:
- Interest
- Arrangement fees
- Valuation fees
- Legal fees
- Broker fees, where applicable
- Other lender or transaction costs
It’s important to consider the total cost of the finance, rather than looking at the interest rate alone.
The way interest is charged can also vary between lenders. For example, interest may be paid monthly or added to the balance of the loan, depending on the product and lender.
Mallard Commercial Finance explains that some bridging lenders offer rolled-up interest, where the interest is added to the loan and repaid alongside the original borrowing.
What do bridging finance lenders look for?
Every lender has its own criteria, but there are several areas that are likely to be important.
The property
The lender will want to understand the property being used as security.
This can include:
- Property type
- Location
- Current value
- Condition
- Potential value following refurbishment
- Intended use
The amount you’re borrowing
The amount of finance required will be assessed against the available security and the lender’s criteria.
Your exit strategy
As we’ve discussed, this is critical.
The lender needs to understand how the loan will be repaid.
Your experience
For some transactions, particularly more complex property projects, relevant experience can be an important consideration.
Your overall financial position
The lender may consider your wider financial circumstances, depending on the type of transaction and borrowing involved.
This is another reason why specialist commercial finance advice can be useful. Different lenders can take different approaches to individual circumstances and transactions.
Bridging finance vs commercial mortgage: what’s the difference?
One of the most common questions is whether you should use bridging finance or a commercial mortgage.
The answer depends on what you’re trying to achieve.
| Bridging finance | Commercial mortgage |
|---|---|
| Generally short-term | Generally longer-term |
| Can be used where speed is important | Typically involves a longer application process |
| Can potentially fund properties requiring refurbishment | Usually more suitable for property that meets the lender’s requirements |
| Often structured around a defined exit strategy | Designed for longer-term borrowing |
| Can provide flexibility for time-sensitive transactions | Can provide longer-term funding for business or investment property |
In some cases, the two can actually work together.
For example, a borrower could use bridging finance to purchase a property quickly and then refinance onto a commercial mortgage once the property is suitable for longer-term lending.
Bridging finance vs development finance
Bridging and development finance can sometimes be confused because both can be used in property transactions.
However, they serve different purposes.
Bridging finance is generally used for short-term funding and can be suitable for situations such as purchasing a property, completing a transaction or carrying out refurbishment.
Development finance is specifically designed to fund development projects and can be structured to cover costs such as land acquisition and construction works.
The most suitable option will depend on the project and what you are trying to achieve.
If you’re unsure which type of finance is appropriate, speaking to a specialist commercial finance broker early in the process can help you understand your options.
What are the risks of bridging finance?
Bridging finance can be a useful tool, but it shouldn’t be viewed as a quick or risk-free way of borrowing.
There are several important considerations.
The exit may take longer than expected
If your exit strategy involves selling a property, the sale could take longer than anticipated.
If it involves refinancing, you may find that circumstances or lender criteria have changed by the time you apply.
Costs can increase
The longer you have the bridging loan outstanding, the more the overall cost of borrowing may increase.
The property market can change
If your exit relies on selling a property for a particular value, changes in market conditions could affect your plans.
Your circumstances could change
Changes to your financial circumstances can potentially affect your ability to refinance or complete the planned exit.
This is why bridging finance should be carefully structured from the outset.
When might bridging finance not be suitable?
Bridging finance isn’t automatically the right solution simply because a transaction needs to happen quickly.
It may not be suitable if:
- There isn’t a realistic exit strategy
- The anticipated sale value is uncertain
- You don’t have sufficient security
- The costs make the transaction commercially unviable
- A suitable longer-term funding solution is unlikely to be available
- The timescale for repayment is unrealistic
A specialist broker should be prepared to tell you when a particular funding route may not be appropriate, rather than simply trying to arrange finance.
Mallard Commercial Finance: specialist bridging finance advice
Bridging finance can be a powerful tool when used for the right transaction and with a clear plan for repayment.
But choosing the right lender and structuring the finance correctly can make a significant difference to the overall transaction.
Mallard Commercial Finance has extensive experience across commercial and specialist finance, with access to a broad lender panel that includes high-street banks, smaller bespoke lenders and specialist providers.
Our team takes the time to understand what you’re trying to achieve, the property involved and your proposed exit strategy before exploring potential funding solutions.
Whether you’re purchasing a property before selling another, buying an investment opportunity, funding refurbishment or looking for short-term finance ahead of longer-term borrowing, we can help you explore the options available.
Looking for bridging finance?
If you’re considering a property purchase or have a funding requirement that needs a short-term solution, speak to Mallard Commercial Finance about your circumstances.
The sooner you understand your options, the sooner you can establish whether bridging finance is the right solution for your transaction.
Frequently Asked Questions
What is a bridging loan?
A bridging loan is a form of short-term finance designed to provide funding between two financial events, such as purchasing a property before another property is sold or arranging longer-term finance.
What can bridging finance be used for?
Bridging finance can potentially be used for property purchases, auction purchases, refurbishment projects, investment opportunities, chain breaks and situations where longer-term finance isn’t immediately available.
How long does a bridging loan last?
The term varies between lenders and individual transactions. Mallard Commercial Finance notes that bridging loans are commonly arranged over a 12-month term, although the appropriate term will depend on the circumstances and lender.
Do I need an exit strategy for bridging finance?
Yes. A clear and credible exit strategy is a fundamental part of a bridging finance application. This explains how you intend to repay the borrowing, whether through the sale of a property, refinancing or another suitable route.
Can I use bridging finance to buy a property that needs refurbishment?
Potentially. Bridging finance can be used in situations where a property isn’t currently suitable for standard mortgage finance and refurbishment is required before longer-term finance can be arranged.
Is bridging finance more expensive than a mortgage?
Bridging finance is generally more expensive than conventional long-term mortgage borrowing because it is short-term, specialist finance. You should consider the total cost of borrowing, including interest and applicable fees, rather than comparing interest rates alone.
Can I use bridging finance to buy a property before selling my existing property?
Potentially. This is one of the common uses of bridging finance and can allow a purchase to proceed before the sale of another property has completed.
Is bridging finance regulated?
The regulatory status of bridging finance depends on the specific circumstances, including the borrower, property and purpose of the borrowing. The FCA distinguishes between different types of bridging arrangements, so it should not be assumed that every bridging loan is regulated in the same way.
Do I need a bridging finance broker?
You don’t necessarily have to use a broker, but specialist bridging finance can involve complex lending criteria and different lender approaches. A commercial finance broker can help you understand potential options and identify lenders that may be appropriate for your circumstances.
How do I apply for bridging finance?
The first step is to understand the transaction, how much funding is required, what security is available and how the loan will be repaid. Speaking to a specialist commercial finance broker early can help you establish whether bridging finance is suitable and what information you will need to progress an application.
