What is Bridging Finance?
If you are new to bridging finance, here is a quick explanation of what bridging is and how it works.
A bridging loan is a short-term financing solution designed to “bridge the gap” between the purchase of a property and securing a long-term financial solution. This exit (repayment) strategy could involve selling a property, refinancing onto a standard mortgage, or a combination of both to repay the loan in full.
Typically, bridging loans are taken over a 12-month term. While many lenders do not charge early repayment fees beyond the first few months, often lenders require a minimum of three months’ interest payments. This means that if the loan is repaid within the first three months, the borrower is still liable for a full three months of interest. After this period, interest is usually charged only for the actual duration of the loan.
One common feature of bridging finance is rolled-up interest, where interest payments are added to the loan balance each month and repaid in full at the end of the term. This structure eliminates ongoing monthly payments, aiding cash flow, but it does mean that the total amount repayable includes accumulated interest. Lenders typically cap the total loan, including rolled-up interest, at 70-75% of the property value, but there are lenders that will go higher.
When assessing applications, bridging lenders focus primarily on two key factors:
• The value of the security – The loan amount is based on the value of the property/asset being used as security.
• The exit/repayment plan – The lender needs assurance that the borrower has a clear and viable plan to repay the loan, whether through property sale or refinancing.
Bridging loans are often used to purchase a new property while awaiting the sale of an existing one, to fund refurbishments on a property that may not qualify for a standard mortgage due to its condition, purchasing a property at auction to then refinance onto a standard mortgage or ‘flip’, and much more.
This makes bridging finance a valuable tool for investors, developers, and business owners needing fast, flexible funding.