Bridging Finance Explained: A Real £500,000+ Property Finance Case Study

How BFS helped an experienced property developer refinance a substantial bridging loan, protect the exit strategy and navigate a complex second-charge re-bridge transaction

Bridging finance can be incredibly useful when a conventional mortgage doesn't fit the transaction. But the bigger or more complicated the deal becomes, the more important it is to look beyond the headline interest rate.

At Balanced Financial Services (BFS), we arrange bridging finance for property investors, landlords, developers and businesses. That can include straightforward property purchases, but it can also involve substantial borrowing, multiple properties, existing mortgages, development projects and several different lenders and solicitors working on the same transaction.

A recent £500,000+ bridging finance case is a great example.

The challenge wasn't simply finding a lender prepared to lend the money.

We had to consider the client's existing bridge, the security available, a first and second charge, development properties, the proposed exit strategy, lender consent, valuation, legal work and what would happen if the client's expected property sales didn't complete when anticipated.

That's where bridging advice can become really interesting.

What is bridging finance?

Bridging finance is short-term borrowing designed to provide funds where longer-term finance isn't suitable, isn't yet available or cannot meet the required timescale.

In property, bridging loans can potentially be used for purchases, investment, development, refurbishment, auctions and transactions where conventional mortgage finance isn't currently suitable.

A bridge will normally need a clear exit strategy, meaning a credible plan for how the borrowing will ultimately be repaid.

That might be the sale of a property, refinancing onto longer-term borrowing or proceeds from another property transaction.

And that's one of the most important parts of arranging a bridge.

We don't just want to understand how you're getting into the loan. We want to understand how you're getting back out of it.

A real BFS bridging finance case study

This bridging finance case study is based on a real BFS client transaction. We have removed identifying information and changed the level of detail to protect our client's confidentiality.

The client was an experienced property investor and developer.

They already had a bridging facility of more than £500,000, secured against a residential property. The funds had been used for business and property development purposes. The original plan for repaying the bridge included proceeds from the sale of properties within an ongoing development. Most of those properties were sold subject to contract, but that introduced an obvious problem. The borrower couldn't control exactly when the property transactions would complete.  When you are dealing with short-term finance, "hopefully they'll complete in time" isn't a particularly comfortable exit strategy. So rather than simply waiting, we started examining the refinancing options early, helping to ensure our client wasn't left unable to meet their contractual repayment obligations.

Can you refinance an existing bridging loan?

Yes, refinancing an existing bridging loan can be possible, provided the borrower, security and proposed exit meet the new lender's requirements.

Sometimes referred to as "rebridging", this can be considered where the original exit hasn't happened as anticipated or where there is another reason for replacing the existing facility.

But taking another bridge shouldn't simply postpone the problem.

There still needs to be a credible repayment strategy.

In our client's situation, refinancing provided a way of addressing the approaching repayment of the existing facility without being completely reliant upon the timing of the development property sales.

But arranging it wasn't simply a matter of replacing one loan with another.

Can you have a bridging loan as a second charge?

Potentially, yes. Some bridging finance can be secured by way of a second charge over a property that already has a first mortgage.

However, the existing first-charge lender can become an important part of that transaction.

That was particularly relevant in this BFS case.

There was already a first-charge mortgage over the security property. The proposed replacement bridging finance would sit behind it, so consent requirements became an important part of progressing the transaction.

During the case, an issue was raised by the existing lender around consent to the proposed replacement second charge, leading to further communication between the client, solicitor, broker and lenders.

And this illustrates something important about complicated bridging cases:

Finding a lender willing to lend isn't necessarily the same as being able to complete the transaction.

Valuation, security, legal requirements and existing lenders can all matter and a broker who can communicate effectively with all parties can be the cement that keeps the deal on track and ultimately completing.

What is an exit strategy for a bridging loan?

An exit strategy is the plan for repaying the bridging loan.

Common property-related exits can include:

• selling the property;

• selling another property;

• refinancing onto longer-term borrowing;

• refinancing onto a mortgage once refurbishment or development is complete; or

• repayment from the proceeds of a wider property transaction.

Our client's proposed exit involved development property sales, but the timing of those sales wasn't entirely within their control.

That's why looking at the exit realistically is so important.

At BFS, we're interested not only in Plan A, but also in the question:

What happens if Plan A takes longer than expected?

Why can having a backup plan matter with bridging finance?

Because bridging is short-term finance, deadlines can matter much more than they do with a conventional long-term mortgage.

For this particular case, we didn't rely entirely upon one possible refinancing route.

Alternative funding was investigated while the preferred larger facility was progressing. One alternative discussed during the case involved a substantially smaller net facility, illustrating how different the available structures could be.

It didn't mean we wanted the client to take multiple loans.

It meant we wanted to understand the alternatives if the preferred solution encountered a problem.

When substantial borrowing and property are involved, discovering that Plan A won't work becomes considerably less frightening if you've already investigated Plan B.

How much does bridging finance actually cost?

This is one area where borrowers need to look beyond the advertised interest rate.

Depending upon the product and lender, the overall transaction may involve costs such as:

• interest;

• lender arrangement fees;

• valuation fees;

• legal costs;

• administration fees; and

• broker fees.

The structure of the interest can matter too.

For example, the original facility in our case included £61,560 of retained interest across the 12-month term. [SOMO | Outlook]

That's why two bridging loans with apparently similar headline rates aren't necessarily identical in terms of the actual amount received or overall cost.

Gross loan versus net loan

This distinction is particularly important with bridging.

The gross loan is the overall facility.

The net advance is what remains after any interest or fees being deducted from the facility, depending upon how that particular product is structured.

So if you tell us:

"I need £500,000",

one of our next questions is likely to be:

"Do you need to borrow £500,000, or do you actually need £500,000 available to use?"

They aren't necessarily the same thing.

What happens after a bridging loan has been agreed?

This is another area where we think the broker's role matters.

On a complicated bridging transaction, obtaining suitable terms and submitting the application may only be the beginning.

Our case involved communication between the client and various parties concerning underwriting, documentation, valuation, the existing lender, second-charge consent and the solicitors. BFS remained fully involved and acted as the communication bridge as those issues were worked through.

We don't believe our involvement should automatically stop because an application has been agreed.

Sometimes the difficult bit comes afterwards.

How do you repay a bridging loan?

The bridge is ultimately repaid through the agreed exit strategy, but the terms of the facility still matter when the time comes to redeem it.

In our client's case, we went back through the existing bridging agreement before redemption.

The timing was important because of the way interest accrued under that particular agreement. We identified that redeeming before the next interest period could potentially avoid approximately another month's interest, subject to the definitive completion date and confirmation through the lender and legal process.

We also went back through correspondence from when the original facility was arranged and identified an agreement to provide a 90% refund of the valuation fee on redemption, subject to the applicable conditions.

For us, that was just as much part of looking after the transaction as arranging the replacement finance.

The job isn't necessarily finished when the money arrives.

What should you consider before taking a bridging loan?

Before proceeding with bridging finance, there are several questions worth answering.

What are you trying to achieve?

An auction purchase, development project, refurbishment and refinancing an existing bridge are very different transactions.

The finance needs to fit what you're actually trying to do.

How much money do you actually need?

Don't automatically assume the stated facility is the cash you will receive.

Understand the gross loan, net advance, interest and fees.

What is your exit strategy?

How will the bridge ultimately be repaid?

More importantly, is that exit realistically achievable within the proposed term?

What happens if your exit is delayed?

Property sales don't always complete when expected.

Development can take longer than anticipated.

Transactions can fall through.

Build some thought around what happens if your original timetable changes.

Is there already borrowing secured against the property?

If there is an existing mortgage, the position of both the existing and proposed lenders needs to be understood.

What are the total costs?

Look further than the monthly interest rate.

Consider the interest, arrangement fee, valuation, legal costs and other applicable charges together.

Why use BFS for bridging finance?

At Balanced Financial Services, we don't believe every property finance problem automatically needs a bridging loan. Depending upon your circumstances, a conventional mortgage, buy-to-let mortgage, second charge, development finance or another specialist finance solution might be more appropriate. Equally, sometimes bridging finance really is the right tool.

Our job is to start with the transaction rather than the product.

We want to understand:

• What are you buying or refinancing?

• How much do you need?

• What security is available?

• What are you trying to achieve?

• And how are you going to repay the borrowing?

From there, we can investigate the options.

Bridging Finance FAQs

How quickly can a bridging loan be arranged?

Bridging finance is commonly associated with transactions where speed matters, but there isn't one guaranteed completion timescale.

The complexity of the case, underwriting, valuation, legal work, security and any existing lenders can all influence the transaction. A complicated second-charge case, for example, may involve parties that wouldn't exist in a straightforward purchase.

How much can I borrow with a bridging loan?

There isn't one universal maximum.

The amount available will depend on the lender and transaction, including the property being offered as security, valuation, loan-to-value, purpose of the borrowing and proposed exit.

BFS has experience dealing with substantial bridging facilities, including transactions exceeding £500,000.

Do I need an exit strategy for bridging finance?

Yes, a credible exit strategy is a fundamental consideration with short-term bridging finance.

This might include selling the property, refinancing onto longer-term borrowing or receiving proceeds from another transaction.

The important thing is to consider the exit before taking the borrowing rather than waiting until the bridge approaches the end of its term.

Can I refinance a bridging loan?

Potentially, yes.

A replacement bridging facility may be considered where an existing bridge needs to be repaid, but the replacement lender will consider the new application on its own merits.

Taking another bridge also doesn't remove the need for a credible eventual exit.

Can a bridging loan be a second charge?

Potentially. Some bridging loans can be secured as a second charge where another lender already holds the first charge over a property.

The requirements of the existing lender and proposed bridging lender need to be considered as part of the transaction.

Can bridging finance be used for property development?

Bridging finance can be relevant to some property development and investment situations.

BFS has worked on bridging transactions involving funds used for property development purposes and development-related exit strategies.

What fees are involved with a bridging loan?

This will depend upon the lender and product, but a bridging transaction can potentially involve interest, arrangement fees, valuation costs, legal costs, administration charges and broker fees.

The overall cost and net funds actually available should therefore be considered rather than looking at the interest rate alone.

Does BFS arrange bridging finance in Norfolk and across the UK?

Balanced Financial Services is based in Norwich, Norfolk and helps clients with bridging and specialist property finance.

If you're considering a property transaction, you don't have to know exactly what form of finance you need before speaking to us.

Talk to BFS about your property finance plans

You might have an auction deadline.

You might be refinancing an existing bridge.

You might have found a property that doesn't fit normal mortgage criteria.

Or you might simply have a complicated transaction and not know how best to fund it.

That's fine.

Bring us the property, the problem &/or the plan. We'll help you work out whether the finance stacks up.

Balanced Financial Services - Telephone: 01603 961618

Important information

Bridging finance is short-term borrowing and can be considerably more expensive than a conventional mortgage. Interest, fees, lending criteria and security requirements vary between lenders.

Your property may be at risk if borrowing secured against it is not repaid in accordance with the loan agreement.

Not all forms of bridging, buy-to-let and commercial finance are regulated by the Financial Conduct Authority.