Understanding Bridging Loans
A bridging loan is a form of short-term lending, secured against a property. Bridging finance can support cashflow before a more long-term arrangement can be made. Bridging loans are often seen as ‘bridging the gap’ between property purchases, if a chain collapses during a property transaction, however, are also very common in cases of property investment and development.
Eligibility Criteria
Eligibility criteria will differ for every lender and so it’s important to research requirements ahead of time and see how this aligns with your own circumstances.
Potential criteria to consider are as follows;
1. Credit score requirements
Your credit score will reflect how financially responsible you have been with previous financial commitments and facilities. Your credit history can be reflective of how you are likely to conduct yourself with future borrowing and so would normally be taken into consideration by a mainstream lender. You can obtain your own credit score information from multiple credit reference agencies such as Experian, Equifax and Call credit. A low or poor score is associated with previous poor account conduct, potential defaults, CCJs and bankruptcies. Irregularities or errors in your history should be corrected ahead of a lending application. At BIG we review credit history on a case-by-case basis and don’t generally reject an application based on credit score alone. However, we would pay close attention to previous account conduct with mortgages and secured products.
2. Income and employment status
Monthly income will be of importance if you are looking to service a loan monthly and need to document that you can meet the required repayments. Income and employment status also indicate your personal financial position, which may influence whether you can provide a personal guarantee or have any individual financial security. Most lenders would want you to be employed or self-employed with some source of income to support your current circumstances. At BIG, if we offer a serviced loan, we will need to see supporting documentation to prove the monthly payments can be satisfied. We can accept evidence of income by way of either current tenancy agreement, three months’ payslips, two years SA302s or two years financial accounts supported by the latest three months bank statements.
3. Age and residency status
As secured lending relies upon the property asset as a failsafe, if the borrower was to default on the bridging loan, age is normally less important than for a term loan which requires repayment over a longer period. The short-term nature of a bridging loan reduces the relevancy of an applicant’s age alone and therefore employment status, professional history and financial status are going to be key considerations. At BIG Property Finance we do not have a maximum age for our applicants but do require our clients to be a homeowner or own another property, if they are looking for a loan in their personal name. Age would be a factor when reviewing the planned exit for a loan, as if a term mortgage is required, age may be a limitation to this exit strategy. We require our clients to be UK residents with indefinite leave to remain.
Property criteria
1. Commercial / Semi-Commercial or Residential
The current use of the property will have a bearing on the loans that may be available and the amount you can borrow. A lender will also consider any planning applications or future planned use of the property that may impact its value and desirability. Residential properties are occupied as someone’s domestic dwelling, whereas commercial properties have some business use, such as retail units, hotels and industrial warehouses. Semi-Commercial property is that which comprises aspects of both uses. Lenders will consider the property’s location and the market for that property type for that area. As a rule commercial properties will be considered higher risk and then warrant a lower LTV and higher interest rate.
- Tenure: Freehold / Leasehold
Freehold: You own the property and the land it’s built on for an indefinite period of time. Leasehold: You own the property for a set time period, but not the land it’s built on.
Freehold property is more desirable as there are less restrictions on its use and maintenance. Leasehold flats are common as they form part of a larger building and the overall property and land is owned by the ultimate landlord. Leasehold property often comes with service charges or annual ground rent. The remaining length of a lease will impact the property’s value and can normally be extended towards the end of term. Property tenure does not need to limit your bridging loan options, however, lease terms significantly influence mortgage eligibility. Mortgage lenders typically require a minimum lease term to ensure the lease outlasts the mortgage term. Lease terms below a certain threshold, usually around 70 years, can substantially impact mortgage options.
2. Loan-to-value (LTV)
The loan-to-value ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. So a loan at 60% LTV means you are borrowing the equivalent of 60% of the property’s value. The higher the LTV the higher risk the loan, from the lenders perspective, and so this can warrant a higher interest rate or more stringent criteria. Maximum LTV rates will vary amongst bridging loan providers and will depend on the type of security, its condition and the planned future use of the property.
3. Property Location
At BIG Property finance we currently provide lending across England & Wales only. All lenders will have their own geographical requirements with certain specific restrictions applied to types of security. Different restrictions may apply to certain regions of the UK that are considered less desirable or higher risk due to current market conditions or demographics. For loans required for overseas property, a lender will need to be sourced that offers this facility.
The Application Process from Start to Finish
Below we outline an example of the application process for a bridging loan from start to finish, whilst this process will have some variation across lenders, it provides an indication on what you can expect.
Step 1: Research and Preparation
- Finding and choosing a bridging loan provider, conducting your own research or consulting the expertise of a broker.
- Preparing your financial documents – Do you have your current credit report, ID documents and financial information?
Step 2: Initial Inquiry
- Contacting potential lenders
- Discussing your needs and circumstances: Outlining property details, confirming funding required, term requirements, retained/serviced facility, exit strategy.
- Getting a preliminary quote: At BIG we aim to offer all indicative terms within three hours of an enquiry. Indicative loan terms outline our initial appetite towards providing a loan, and give an indication only, of what we might be willing to offer. This is always subject to additional information, due diligence, 180-day valuation and owners’ approval. Terms will confirm gross loan, net loan, interest rate and associated fees.
Step 3: Obtaining formal loan terms
Following receipt of indicative terms, a client may decide they wish to proceed with the loan offered. At this stage the underwriter will need to obtain further information from the client, so they can present a detailed loan appraisal to our credit committee for formal approval.
Following formal approval and agreement from the credit committee, we can then issue formal terms. Formal terms outline our proposed loan with clear requirements and must be signed and returned by the client. These terms are based on information provided to us and are not an offer of advance or a facility letter. A formal facility letter will be issued by our solicitors once the legal requirements have been met.
On receipt of a formal loan offer, it is sage to review the loan terms in detail and ensure you have a full understanding and consideration for all conditions and requirements before committing to the loan.
Step 4: Application Submission
- Filling out the application forms – Signing the loan terms, Completing an Asset & Liability statement, providing personal/company details and property schedule.
- Submitting required documents – Identification, Proof of income, Credit report, Redemption statement from existing lender.
- Providing additional information if requested – Commentary to credit issues, schedule of works and costings for planned refurbishments.
Step 5: Valuation and Legal Quotes
- A quote for the property valuation will be obtained and approved by the borrower.
Valuation quotes are required for all securities unless agreed as an exception by our credit committee. As standard, all quotations are obtained through the VAS Panel website. The surveyor will confirm the current property’s value and confirm if it is a suitable security.
- We need the 180-day value with vacant possession and market value of the property
- Some lenders will use the market value alone or investment value of the property.
Where the VAS system is not utilised BIG will look to use a surveyor local to the area known to the company. We will send quotes to the borrower for approval and payment.
Step 6: Underwriting
- Credit and background checks – Lender will conduct their own checks against the borrower/borrowing company, social media, companies house, AML/Fraud Checks
- Lender’s assessment of risk and terms – Credit history, Market Conditions, Land registry
Step 7: Legal Processes
- Unless a lender is able to offer dual representation, you will need to instruct your own solicitor and will also be liable for the lender’s legal fees. You will consent to these fees before proceeding and should check if this is a fixed quote.
- Engaging your own solicitor – Check their credentials and lenders requirements.
- Solicitors will conduct legal checks (title, property searches)
- Signing legal documents
Step 8: Fund Disbursement
- Finalising the loan agreement
- Disbursement of funds to your account or directly to the seller/creditor
Conclusion
In conclusion, the process of obtaining a bridging loan does have various stages, however, can happen very quickly. Therefore, being clear on your loan requirements and thoroughly researching your options ahead of commencing an application, can save you time and money later on before you pursue terms with a lender that you later regret. A bridging loan may not be suitable for your individual needs and so advice from an advisor/broker may allow you to explore other options and find the best product for you. Don’t be nervous to contact lending firms and ask questions to aid your understanding. Our tips for a smooth application process include;
- Maintaining a good credit score and being forthcoming about discrepancies.
- Keeping thorough financial records – Updating company accounts
- Being transparent and prompt with documentation
- Consulting the advice of a professional broker
At BIG we want to provide all our clients with a positive experience and quality service. Therefore, we like to work with investors and experienced individuals who fully understand the risks and responsibilities of obtaining a bridging loan. We are always happy to provide further information – contact us today on 121 348 7830 or at info@bigpropertyfinance.co.uk
