Bridging loans – as the name might suggest – are usually used as a temporary measure to “bridge” a gap between purchase or re-finance of commercial property prior to alternative finance being sourced.  The shorter-term nature of the loan facilities often attracts a higher rate of interest and significant default costs if the short-term loan period is exceeded.  Bridging loans are often utilised in auction purchases, of where more well-known, “high-street” banks are reluctant to lend.  Historically, bridging lenders have been able to make loan offers available to borrowers on a quicker turnaround than other, more traditional lenders, which makes them particularly attractive to time-pressured transactions, such as auctions.

What Is A Bridging Loan?

A bridging loan is largely the same as any other mortgage used to purchase or re-finance property.  A lender will issue a facility offer (or mortgage offer, as it might be known) with attached terms and conditions, in the same way as any other bank or lender would.  The key distinction is that bridging loans are often for shorter periods of time – six or 12 months.  In order to reflect that condensed loan period, a bridging lender will usually apply a higher rate of interest and sometimes require that the full interest due over the term is calculated and deducted from the loan drawdown at the outset.  The lender will often apply significant product fees and if a default period is entered after the end of the loan period, significant default interest and other penalty charges can frequently apply.  Any loan offer should be carefully considered with a broker or financial advisor before any commitment is made.

Who Can Apply For a Bridging Loan?

It is not so much a case of who can apply for a bridging loan – as any company, individual or organisation is free to apply.  It is more a case of who will be acceptable to a bridging lender as a borrower, which will be based on ability to repay the loan, the assets owned by the borrower, the borrower’s current financial situation and any other secured lending in place at the time of the bridging loan request.  The firm is not able to offer any form of financial advice and all of our clients are strongly advised to seek the professional advice of a third-party broker or independent financial advisor when looking to use bridging finance.

How Do I Qualify For a Bridging Loan?

Eligibility for a bridging loan will be based on a particular lender’s individual criteria.  A lender’s appetite will usually be based on a range of different factors, such as the loan-to-value (LTV) ratio of the loan being offered compared to the property value, the borrower’s ability to repay the loan within the requirements of the terms and conditions of the loan offer and the borrower’s other security (such as what assets are available to offer additional security and who, if anyone, is able to offer a third-party guarantee to the obligations of the main borrower).  The firm reiterates the advice to seek the professional advice of a third-party broker or independent financial advisor when looking to use bridging finance, who will be able to offer more detailed guidance on what will be considered.

How Long Does It Take to Arrange A Bridging Loan?

The firm does not involve itself with the arrangement of a bridging loan – this is an activity that takes place either directly between a borrower and the chosen bridging lender, or via a broker or financial advisor.  Each bridging lender will have its own pre-loan on-boarding process, which will comprise of a range of activities designed to identify the borrower and understand what property is being purchased or re-financed and the borrower’s affordability.  The firm will become involved once a facility offer is issued to a borrower – we are able to act on a “dual-representation” basis (where we act for both borrower and client) or on a client-only representation, if the lender insists on separate representation.  Average transactions will take somewhere in the region of six to 12 weeks, depending on complexity and the nature of any requirements of the bridging lender which need to be met.

What Can A Bridging Loan Could Be Used For?

The purpose of a bridging loan will be defined in the terms and conditions of the loan from that particular lender.  Borrowers must carefully examine the loan offer to understand what they can and cannot use the borrowed money for (and any limitations that are imposed on the uses that are permitted).  Mostly, bridging loans seem to be used to fund auction purchases (or those where there is a degree of urgency or express timeframe), for property re-finances where other existing loan facilities are expiring or where lending is not available from more traditional banks, building societies or lenders.

Property Purchase Prior to Selling

If a borrower intends to use a bridging loan to purchase a property – whether that is because of the timescale in which the property purchase must complete (such as an auction) or the lack of availability of alternative borrowing – an exit strategy to repay the bridging loan must be considered.  For example, if a bridging loan is made available for a term of six months, the borrower should consider what will happen if the property is onward marketed but does not successfully sell prior to the expiry of the bridging lending.  Default costs and interest will apply, notwithstanding that the property has not sold and the borrower may need to consider alternative sources of repayment.

Meeting Transaction Deadlines

There are often strict deadlines involved with bridging loan transactions, such as offer expiry dates (which tend to be shorter than traditional lending) and the loan term itself.  As lawyers, the firm will only be involved with transactional deadlines and shall do its best to meet them in our representation of a borrower – and a lender, where applicable.  We will require both the co-operation of the borrower and bridging lender to achieve this and our ability to meet required deadlines will be subject to any uncontrollable, third-party factors, such as where a bridging lender is represented by a difficult third-party legal representative.

Buying Property At Auction

Bridging loans are sometimes an attractive option for borrowers purchasing property at auction, namely because of the shorter period of time which it takes bridging lenders to issue loan offers.  Whilst an assumption might be made that this briefer time is beneficial – and that the general availability of finance means there are no other factors for a borrower to bear in mind – care should be taken to consider wider issues that may be presented.  For example, a bridging lender’s legal representative may ask certain questions, which a vendor will not answer where contracts are exchanged on auction conditions.  Other considerations are outlined in our blog about auctions.

Developing A Property To Sell

Borrowers will sometimes utilise a bridging loan to purchase a property for development, or assist with the costs of the development of a property that is already owned.  Borrowers must be mindful of both the requirements of the lender in terms of what can and cannot be done within the confines of the loan offer and also that the development can be completed and the property sold within the loan period.  If this is not possible, a suitable re-finance strategy ought to be considered to avoid significant default interest and penalty costs.

How A Bridging Loan Solicitor Can Help

Our commercial property specialists across Sheffield and Barnsley have wide and established experience in acting for both buyers and lenders in respect of bridging finance facilities and secured lending.  Our lawyers are able to quickly identify the legal requirements for the relevant process and will offer you concise but detailed legal advice tailored to your particular situation, based on a key understanding of you, as a client, and the business that you operate.  Please contact us today to provide your initial details and one of our commercial property specialists will be able to respond, take further information and provide a bespoke quote.

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** NOTE:  This article is for guidance only and is not to be construed as or relied upon as legal advice.  If you require legal advice tailored to your situation, please contact us to arrange an initial face-to-face or telephone appointment and one of our solicitors will contact you to take more details.