Bridging finance can be a useful tool for those looking for a short-term solution to bridge a financial gap. In this blog, we take a look how you can improve your chances of being successful in securing this type of loan, including the eligibility criteria and financial requirements you should take into consideration.
How do you get a bridging loan?
A bridging loan is a short-term financial solution used to provide immediate funding while waiting for long-term financing. Bridging loans are popular among homebuyers, as well as investors and property developers. This type of loan can be used for buying a property at auction, the purchase and renovation of a property, to prevent the breakdown of a property chain, and even for downsizing in retirement.
There are two main categories of bridging loans – regulated and non-regulated bridging finance. Regulated bridging loans are overseen by the Financial Conduct Authority (FCA) and usually apply when the borrower or their family will be living in the property. On the other hand, non-regulated bridging loans are used for investment or business purposes and are not covered by FCA regulations.
Understanding the type of bridging loan you need is a crucial first step, as it determines the legal protections in place and the application process involved. However, even if you know how bridging finance works, before you decide to take out this type of loan, it can help to understand exactly what may be required of you.
While the specific eligibility criteria can vary between lenders, it’s likely you will need to meet some basic requirements. These can include:
Age
You must be at least 18 years old to apply for a bridging loan. In some cases, lenders may impose a maximum age limit too, while others may have no limit.
Residency status
You must be a UK resident and have a registered address in the UK. The lender may also consider your application if you are a UK national residing abroad.
Employment status
To apply for a bridging loan, you can be employed, self-employed or retired.
Legal entity
You can apply as a private individual, a limited company, a partnership or a limited liability partnership.
Your experience
If you have previous experience, this may strengthen your bridging loan application, although this is not a mandatory requirement.
It’s likely you will also need to meet a set of financial requirements. It’s likely the lender will expect the following from you:
A solid exit strategy
Your lender will need a definitive plan from you as to how you’re going to repay the loan. This is an important part of bridging loan eligibility as it proves to the lender how you intend to pay the loan back, and a well-planned exit route can help you secure the finance that you need – and perhaps at the lowest interest rate.
There are many exit strategies you could choose, such as selling the property, refinancing, cash redemption, renovation of a property that is then sold for profit, or even inheritance.
The minimum lending amount
For regulated bridging loans, borrowing starts at around £37,500, while borrowing for non-regulated bridging starts at slightly less at £30,000.
In theory, there is no upper limit as to how much you can borrow for a non-regulated bridging loan, but it’s often thought that the loan size can go up to as much as £1 billion. Some lenders of regulated bridging loans have a set upper limit of £1 million.
Different lenders will offer different minimum and maximum loan amounts, so you may be able to shop around to find the limits that suit you.
A form of security
Since bridging loans are a type of secured loan, you will need to put forward high-value assets as security – otherwise known as collateral. If you are unable to repay the bridging loan, the lender has the right to repossess the assets as financial security.
A credit history check
The lender may carry out credit history checks to assess your ability to make repayments. However, it’s important to note that credit checks do not play as much of an important role in taking out a bridging loan as they do when taking out other types of loans, such as a residential loan. This means you may still qualify for a bridging loan even if you have a poor credit score.
If you meet all, or at least most, of the eligibility criteria, you should find that you’re in a good position to apply for your bridging loan. From here, you can submit your application to your chosen lender including details of your property. At this point, it’s likely you will be asked for further information such as:
- ID
- Proof of address
- Details of costings.
Do you need a deposit for a bridging loan?
Yes, most lenders typically require you to have a deposit if you want to take out a bridging loan. The amount of deposit you need to put down will be determined by your individual circumstances and the lender you choose to use.
Generally speaking, your lender will require a minimum deposit of around 25-30% for a bridging loan. Like with mortgages, the larger your deposit, the more favourable the interest rate can be. You can usually secure the lowest interest rates for a bridging loan with a deposit of approximately 40%.
If you have other assets you can use to secure your bridging loan, such as another property, you may find that you’re able to put down a small deposit. Like with a mortgage, the lower your loan-to-value (LTV) ratio, the lower your interest rate is going to be.
What can I use as security for a bridging loan?
We’ve already mentioned that you will require some form of security when taking out a bridging loan – but what exactly does this mean?
Bridging loans are usually secured against property, but the type of property can vary. The LTV ratio offered by the lender can be impacted by the type of property, the condition of it and how well it’s likely to sell on the market.
Residential property often holds the highest LTV ratio, closely followed by commercial property. You can also use land with or without planning permission as security for a bridging loan, however these typically have the lowest LTV ratio due to having a higher risk profile for the lender.
Applying for a bridging loan can seem complicated from the outside, but in reality it’s just a matter of presenting the right information to your prospective lender to show them that you’re capable of paying the funds back at the end of your loan term. Being prepared is key, and knowing what information you need to give will get you one step closer to securing the loan you require.
