What is a Bridge Loan and How Can It Be Used For You and Your Business?

Bridge loans have become an increasingly popular type of product following the credit crisis of 2008 since individuals and businesses have been willing to embrace alternative non-bank forms of finance.

Also known as bridging loans or swing loans in the US, the idea is that this loan of $50,000 to $50 million provides a way to bridge the gap between the purchase of something and its sale.

More specifically, with regards to property, bridge loans use the existing equity of a current property to help finance the purchase of a new property. Once funded, often within a few days, you are able to use this to become a cash buyer and purchase a new property - and hence it has been hugely popular with investors and landlords looking to break traditional property chains and close out property sales.

Bridge loans are typically fast in terms of application and receipt. They are also usually paid back fairly quickly, often within 12 or 24 months, with a view to refinance and extend if need be.

Bridge loans are rarely offered by banks and credit unions. Instead, they are offered by private lenders, small groups of wealthy investors or challenger banks, with around 70 bridging companies in the UK, such as Precise, MT Finance, UTB, Shawbrook and there are thousands of brokers and intermediaries supporting this industry. The industry is said to be worth in the region of £7 billion per year, although this figure may now be higher.

How do Bridge Loans Work?

Bridge loans are used by prospective homeowners to help to 'bridge' the financial gap between their chosen property, enabling them to secure a mortgage.

For instance, it is not uncommon for homeowners looking to move finding themselves in a situation whereby they cannot afford a new down payment, or want to secure a property quickly in a hot property market, both before their own property has been sold. In these instances, a bridge loan can be used to help to cover the down payment and thus close the outstanding costs for the new property.

Once the existing property has been sold, homeowners can then use these funds to pay off the bridge loan. Lenders would typically expect the borrowers to pay back the loan within one year.

A key point is that this is a secured or collateral loan and you are using the property and its value to determine how much you are borrowing and the terms of your agreement. Vitally, if your loan is not repaid and becomes bad debt, your property is repossessed by the lender to cover repayments. (Source: Octagon Capital)

The Application Process for Bridge Loans

The application for a bridge loan is much faster than that for a regular mortgage. Most lenders will approve bridge loan applications within 72 hours.

There are a number of requirements that must be met by successful bridge loan applicants.

For instance, the maximum amount that can be borrowed through a bridge loan typically stands at around 80% of the combined value of the current property, and the one that is going to be bought.

A bridge loan lender might reject an application in an instance where the homeowner lacks sufficient equity in their current property. Furthermore, poor credit scores and high debt-to-income ratios can decrease the likelihood of a successful bridge loan application.

Furthermore, prospective applicants should be aware that lenders will typically expect collateral to secure the loan in the form of property.

Benefits of Bridge Loans For Businesses

Bridge loans are used mostly for property or real estate and this includes investors, borrowers, developers, landlords and more. This includes both residential real estate such as homes and apartments to commercial property such as garages, hotels, warehouses, office blocks, shopping centers and more.

For businesses, it is not usual to use bridge loans for growth purposes or to help a business undergoing financial hardship.

Essentially, any physical assets such as a property, vehicles or stock are used as collateral to bridge the gap of a potential sale or influx of cash. A number of airlines have used bridge loans during hard times, using their airplanes as forms of a secured loan.

Are Bridge Loans Regulated?

Only part of the bridging loan industry is regulated. The industry is made up of two parts; regulated and unregulated.

Regulated bridge loans are both approved and protected by the FCA. This means that the borrower will be offered protection against their lender.

At present, all commercial bridge loans are unregulated. This means the FCA does not offer any protection to this area of the industry. Typically, borrowers in the commercial industry are not considered to be financially vulnerable, and thus not having this FCA protection may be irrelevant to them.

The greatest risk with unregulated bridge loan lenders is that they may not provide entirely clear information to their prospective borrowers.