Explanation and definition of key terminology:
Additional security is normally used to obtain a better monthly bridging loan interest rate. Additional security can also be used to borrow a larger loan amount if the loan required on the primary security exceeds the maximum LTV acceptable by the lender.
This is a formal acknowledgement and safeguard of the lender’s bridging loan advance. A notice will be entered at the land registry in the name of the bridging loan lender. This will prevent the property from being refinanced or sold without the lender being repaid. Once the loan is repaid, the charge will be removed.
Closed Bridging Loans Closed bridging loans are the least risky type of bridging loan and are usually for those who have already sold and exchanged contracts on their existing property and are waiting for completion, but in the meantime, they have seen a new property that they want to purchase. This type of bridging loan is of minimal risk to the lender, so the best interest rates should be available.
Unlike mortgage finance, bridging loans do not normally require monthly payments. Each month during the agreed-upon term that the loan remains outstanding or unpaid, a month’s interest will be added to the balance. Compounded interest is where interest is paid on interest; for example, after month 1, a month’s interest is added to the loan. The second-month interest is therefore calculated on the original loan amount plus the first-month interest, e.g.
Net Loan: £50,000; 2% lender fee: £1,000; Assessment fee: £295; Direct Debit: £35
The initial loan is therefore £51,330.
After month 1, interest at 0.59% (£302.85) is added to the loan. The loan has now increased to £51,300 + £302.85 = £51,632.85. Interest after the second month will be calculated on the new balance at 0.59% (£303.74). This compounding continues until the loan is repaid.
Following the initial month, the interest on bridging loans is usually calculated on a daily basis. This means that if the loan is repaid or redeemed part way through a month, a full month’s interest is not due for that month, but instead interest is payable on the number of days in the month that the loan has been outstanding.
Bridging loans usually do not require monthly payments in the same manner as a mortgage or other more traditional finance methods. Due to this, the lender will require, from the outset, a realistic and feasible method with which the bridging loan will be repaid. This is known as an exit route, and the main vehicles used are the sale of one or more security properties or refinancing.
FCA-regulated bridging loan
Financial Conduct Authority (FCA)-regulated bridging loans are usually arranged on residential properties or properties where the borrower or an immediate member of the family lives, has lived or intends to live in over 40% of the available floor space.
The FCA aims to make sure that financial markets work well so that consumers get a fair deal.
This means ensuring that:
- The financial industry is run with integrity.
- Firms provide consumers with appropriate products and services.
- Consumers can trust that firms have their best interests at heart.
Not all firms arranging bridging finance are FCA-regulated.
First-charge bridging loans
The bridging loan lender will enter a charge onto the land registry title of the property or properties being used for the loan security. This charge will ensure that the security cannot be sold or refinanced without the bridging loan monies being repaid from the proceeds. Once repaid, the charge will be removed.
A first charge A bridging loan means that no other charges were showing at the land registry on the security at the time that the loan was arranged.
Gross bridging loan
The gross bridging loan is the figure calculated by adding the net bridging loan to any arrangement fees added plus interest payable if the loan was to run for the full term, i.e.
|Net Bridging Loan to Client:||£50,000|
|Arrangement fee at 2%:||£1,000|
|Telegraphic transfer fee:||£35|
|12 months of interest at 0.59%:||£3,754.44|
|Gross Bridging Loan:||£55,084.44|
The net bridging loan is the loan without any fees or interest added.
Heavy refurbishment bridging loans
Heavy refurbishment Bridging finance is normally arranged on properties requiring structural alteration, and/or planning permission or permitted development is needed for the required works. Interest rates tend to be slightly higher on this type of product to reflect the additional work and risk adopted by the lender.
Monthly payments are not required to reduce the size of the bridging loan. Instead, the loan is arranged for a set period, and for each month that the loan remains unpaid during the agreed term, a month’s worth of interest is generated, which increases the size of the loan outstanding.
Interest only is a repayment term used to describe a loan that does not require monthly payments to incorporate an amount to reduce the initial amount borrowed. With Bridging Finance, interest is calculated on the loan amount while it is outstanding, but no monthly payments are made. In this way, the initially borrowed loan amount never reduces but instead increases, i.e.
|Monthly interest generated at 0.59%:||£1,770|
Mortgages are long-term finance and are normally repaid on a capital and interest repayment basis throughout the term of, say, 25 years. This means that each month a payment is required, which includes the interest, say £1,770, plus part of the capital borrowed. With this payment route, over the set period, the initially borrowed loan amount will reduce, particularly in the latter term.
Bridging loans are short-term options and are always arranged on an interest-only basis, as a capital-and-interest format would be too expensive and impractical.
Loan to value (LTV)
The LTV is determined by a percentage of the total amount of loans secured on a property compared with the value of the security property, i.e.
|£100,000 + £50,000 (£150,000) / £300,000:||50% LTV|
With bridging finance, the LTV of the gross loan often dictates the interest rate to be charged and the maximum loan available.
Net bridging loan
The net bridging loan is the loan amount actually required without any arrangement fees or interest added, i.e.
|Net Bridging Loan to Client:||£50,000|
|Arrangement fee at 2%:||£1,000|
|Telegraphic transfer fee:||£35|
|12 months of interest at 0.59%:||£3,754.44|
|Gross Bridging Loan||£55,084.44|
Open bridging loans
Open bridging loans are bridging loans where the exit is not guaranteed. A typical example of this would be when an applicant has found their dream property but has yet to sell or market their existing property.
Unlike mortgage finance, bridging loans do not normally require monthly payments. Although different lenders have slightly different ways of calculating and adopting interest, the bulk of cases are arranged in a generic manner called retained interest. In this situation, the net loan amount required is forwarded to the applicant on completion of the loan. All fees associated with the arrangement are withheld by the lender, plus a notional amount to cover the interest that would be payable should the bridging loan run for the full term listed. The bridging loan requires repayment prior to or at the end of the agreed term, and the redemption statement from the lender will list, for example:
|Net loan to the applicant:||£50,000|
|2% lender fee:||£1,000|
|Redemption deed release fee:||£120|
|6 months retained interest @ 0.59% — 6 x £307.35:||£1,844.10|
Interest is usually calculated on a daily basis following the first month; however, the exact calculation method will be listed on the offer.
The total to redeem the loan would therefore be £53,294.10.
If the term is set for 12 months and repaid any time after the 1st month, then no exit penalties will be applicable, and interest is only paid for the time that the loan is outstanding, i.e., 1 month.
Second or additional charge-bridging loans
On occasion, it may not be financially advantageous for a borrower to have a first-charge bridging loan. An exemption from this could be where a customer has a particularly good first-charge mortgage that does not require repayment or if additional borrowing is required for a short period of time prior to a quick repayment and return to the original position, etc.
A second charge A bridging loan will rank in authority behind a 1st charge loan, so for instance, in the unlikely event that a property is repossessed, any proceeds from a subsequent sale will first be allocated towards the 1st charge lender. The second-charge lender will get the next slice of available funds. To enable a second-charge bridging loan to be activated, the bridging loan lender will usually need to obtain consent from the first-charge lender.
Security is the term used for whatever land or property the lender secures the bridging loan charge against.
Standard bridging or light refurbishment bridging
Standard and light refurbishment bridging finance attracts premium interest rates. This type of bridging finance is arranged on properties in pristine condition for those requiring cosmetic upgrades, such as a new kitchen, bathroom, redecoration, etc.
The term of a bridging loan is the time, usually calculated in months, for which the loan is arranged. Although the term is arranged for a set period, say 12 months, the loan can be repaid at any time prior to the end of the 12 months, without penalty, and by only paying interest for the time that the loan has been outstanding, not for the full term.
Unregulated bridging loan
Unregulated bridging loans are usually arranged on investment properties or properties where the borrower or an immediate member of the borrower’s family does not live, has never lived, or does not intend to live in more than 40% of the available floor space. The only exceptions would be a second charge on a borrower’s property if it is for over £25,000 and if it is to be used for business purposes.
The term “asset” refers to any item of worth that can be used as security for a loan. Assets can be anything ranging from a piece of real estate, either residential or commercial, to an expensive piece of machinery or equipment, or even a brand name. Basically, an asset is anything of value that can be used as collateral.
Asset turnover refers to the amount of profit a given set of assets is able to generate in relation to their initial cost.
A short-term borrowing product that is designed to bridge a financial gap. For example, if you need to raise funds to finance the purchase of a property while awaiting the outcome of another property sale, a bridging loan can cover this cost. Unlike most other borrowing products, bridging loans are repaid in full at the end of the loan term, along with any additional costs.
Bridging Loan Calculator Many bridging loan providers are now offering bridging loan calculators as an online tool that can be used to work out the cost of borrowing over a given time frame. You simply enter the amount you want to borrow, along with the monthly interest rate and administration costs, and the bridge loan calculator returns the relevant figures.
Commercial bridging loan
Commercial bridging loans are short-term borrowing products that are designed for businesses that are experiencing temporary cash flow issues. However, whereas the vast majority of bridging products available to residential homeowners are financially regulated by the FCA, commercial finance products are not. With this in mind, it is important to realise that a greater percentage of bridging loan providers offer unregulated products in comparison to those who do not, although most lenders offer both loan types. For this reason, it is important that the borrower read all the terms and conditions involved with commercial bridging loans, as they are not covered in the same way as a private borrower would. Commercial bridging finance can be used for all manner of business financing, such as the repayment of urgent debts, tax bills, and expansion purposes.
Any assets that can be sold within a year are referred to as current borrowing assets, and these can include expensive machinery, vehicles, and property, although other asset types could just as easily be used as security depending on the borrower’s needs.
Most bridging loans are secured for a period lasting between 1 month and a year, although sometimes terms can be agreed upon with the lender that covers a period of 2 years. On the other hand, development finance can be secured for up to 36 months, and the facility is typically released in increments, normally as different stages of the development project are realised. Development finance can be used by any developer who has a clearly defined exit strategy in place and who is also willing to invest their own funds in development while finding themselves unable to finance the project in full.
If funds are released or repaid in relation to a debt that exceeds the net value of a project at a given time, then this is known as a goodwill payment.
If a developer is responsible for completing a project that will cost £1,000,000 and they are willing to invest £200,000 of their own funds while their principal lender is also willing to contribute £500,000 towards the said project, a financial gap of £300,000 will exist. Mezzanine finance refers to any facility that grants the applicant this shortfall until the project is completed.
If you need to borrow funds that are secured against a particular asset, then this is known as secured finance or a secured loan. As you are providing the lender with a valuable asset that serves as security, the borrowing rates will often be much more affordable, and the repayment terms will also be more forgiving as a result of the loan being secured against the collateral being offered.
National House Building Council, or NHBC
The National House Building Council is the UK’s largest provider of new home warranties. The aim of this organisation is to provide a set list of improved building standards that must be adhered to in order to inspire additional confidence in homebuyers seeking to purchase a new-build property.
An NHCB Certificate is a specific document that affords the homebuyer additional rights should the property they purchase fall short in terms of building faults that arise in the first 10 years of buying that property following completed construction. The actual terms, limitations, and exclusions are laid out in the policy document.
When a lender performs a background check on a borrower’s finances using the services of a reference agency, this is known as a credit search. If you have ever defaulted on a loan agreement in the past or have not managed to pay your monthly bills on time, this information will be recorded and will be visible when the credit search has been performed.
Whereas a standard credit search will be recorded on your credit file, a soft search will not. Soft searches are useful in that they enable the lender to offer you a competitive quote without any detrimental effect on your normal credit file. When you apply for a loan via UK Property Finance, we will only perform a soft search in the first instance.
Whenever a lender offers a borrowing product, they are required by law to disclose the APR figure, which shows the cost of borrowing over a 12-month time frame. The click refers to the APR of a product, plus any additional borrowing costs covering the arrangement fees and any other charges added to the APR. This gives you a better idea of the overall cost of borrowing.
Certificate of existence or good standing
If you are trying to raise additional capital as a business loan, the lender will want to know that your company actually exists and has not been taken off the register. The certificate of existence or good standing is a valuable tool in that it shows the lender that your business is still trading and that your annual accounts are up to date.
CCJs, or county court judgements
A country court judgement, or CCJ, is an official notice that shows a debtor is not up to date with their repayments. This legal judgement will remain on a creditor’s record for a period of six years, and it will have a negative effect on the borrower’s credit rating.
Credit rating or score
When a lender is deciding whether a borrower is a liability or a worthy investment, they will typically perform a credit check, which returns the borrower’s credit rating or credit score. The information provided in this report is useful in that it gives the lender a reliable means of identifying any risks in terms of the loan repayment not being made on time.
Credit reference agency
A credit reference agency is any company that can provide an independent report on an applicant’s individual borrowing history. The information they provide is used to determine how reliable a borrower is in terms of their ability to repay and their attitude towards repayment.
A debt consolidation loan is a secured borrowing product that is designed to reduce a borrower’s repayments on a number of smaller debts. Debt consolidation products typically provide lower interest charges and extended repayment periods, which are far more manageable than a borrower’s existing outgoings.
ERC, or early repayment charges
If you want to settle the outstanding balance on a loan early, then this is known as an early repayment charge or an ERC.
A guarantor loan is used for borrowing and is intended for those who have insufficient equity or security to satisfy the lending criteria required by a finance provider. These products require a third party to act as a guarantor should you be unable to make repayments yourself.
An indemnity policy is an insurance policy that is designed to cover any costs that may arise owing to a defect that has been previously stated in a property’s title, which may result in a financial loss. For example, if a builder stated that no further improvements could be made to a property without his permission, yet that builder had died in the 1950s, and this served as an objection to further works being carried out on the property, then the indemnity policy might serve as a contradiction towards such works being executed. Policies such as these are normally taken out as a one-off agreement that serves throughout the entire life of a building’s existence.
Any company that is registered outside the confines of the UK is typically referred to as an offshore company. In most cases, offshore companies are formed as a means of the proprietor being able to avoid tax commitments and other costs that could be avoided if the business were registered overseas.
If you are looking to borrow funds that amount to less than £25,000 and your credit rating is exemplary, you might be approved for a personal loan. Such products are ideal when a borrower is unable to provide security in the form of a property asset.
Self-invested personal pension (SIPP)
A SIPP, or self-invested personal pension, is a government-approved pension plan that enables the subject to choose the location where their funds are invested. SIPPs are typically approved by HM Revenue and Customs, and a limit is imposed as to how much the individual is allowed to pay into the fund.
If a property poses a risk of serious damage to a third party, the local authority may serve what is known as a prohibition notice. Such a notice will take immediate effect, and the owner will need to take appropriate action quickly in order to get the notice lifted or reversed.