In the fast moving world of finance, there are many different types of product that may be used to provide a source of funding. One of the most flexible and adaptable of these is bridging finance, a form of finance which is commonly used to enable businesses and individuals to swiftly seize opportunities. Because bridging finance offers a quick solution for a wide variety of different applications it’s often put to use within the property development sector, where it provides a valuable method of securing property without the need for a mortgage. Likewise, bridging loans are also often found within the commercial sector, as businesses take advantage of the ability to quickly gain capital for expansion.
As a highly flexible form of finance bridging loans come in many different flavours, and there are many different formats of loan available within this sector. In this article, we’ll discuss the most common form of securitisation for a bridging loan, a “first charge” which is used to provide collateral for the loan itself. As with any financial product, there is a cost associated with bridging finance, and though it is in many situations a powerful tool anyone considering this form of loan should consult their broker to ensure this is the right product for them.
The nature of a bridging loan is somewhat different from many mainstream financial products, and there are certain basic attributes which all bridging loans have. In general, a bridging loan can be defined as a high-value short term loan that is secured against an asset; individual loans may vary greatly, but all are designed to meet short term needs for large amounts of funding.
The type of collateral which is used to secure the loan can vary from lender to lender, and almost anything may be used to secure a loan. The most common type of asset that’s used as collateral is property; bridging finance is widely used within the property development sector, and as a result, the majority of bridging loans are secured on property. Businesses may often use their existing assets such as heavy machinery, premises or equipment as collateral, and there are several lenders who specialise in commercial finance. In addition, high net worth individuals who wish to secure a bridging loan may use personal assets such as fine wines, sports cars, boats and private property as security, as there are multiple specialist lenders who accept these forms of collateral.
One form of collateral which is rarely used is the borrower’s own home. Lending products for domestic properties are regulated by the Financial Conduct Authority, while bridging loans themselves are not. This means that any lender wishing to take residential property as security must receive FCA certification in order to do so, and many bridging providers do not go down this route (though there are some who do offer regulated home loans). However, loans for Buy-to-Let property do not require FCA certification, so landlords are still able to use bridging finance to secure property.
Before a loan is granted, the lender will carefully examine the assets which are to be used as security in order to establish their true value. The asset must be sufficiently valuable to give the lender a reasonable chance of recouping their investment should the borrower fail to repay, so this stage of the lending process is vitally important.
In the event that the borrower should fail to repay their loan at the specified date, the lender has the option to repossess and sell the assets which were used as security. If the assets which have been securitised are owned outright by the borrower, then they are said to have a “first charge” on the asset. This means that they have the right to reclaim their money from the property before anyone else, although they may not be the sole contributor to the loan; if several different lenders have been involved in a purchase, they will need to co-operate to reach an agreement.
Because a first charge gives a lender a reasonable chance of reclaiming their loan, they are by the far most preferred option for most lenders. In fact, many bridging lenders won’t offer any other form of security, and only the minority of lenders offer second charge loans at all.
As mentioned previously, a first charge bridging loan may be secured on nearly anything, depending on the specific lender. Most commonly, these are used by property developers, so we’ll use a property development loan as an example. If a developer needs a loan to purchase a property or plot of land, they will submit an application to their lender for the necessary funds. The lender will then evaluate the property to determine if it’s worth what the borrower is paying for it and whether the lender will be able to recoup their loan if the borrower fails to repay. All being well, the lender will then supply a loan, with the understanding that if it is not repaid at the end of the term the property may be repossessed and sold to make up the deficit.
It’s worth noting that the loan must be repaid in full to avoid the lender taking possession. If even a small portion of the loan is left outstanding, the lender has the option of reclaiming and selling the property in order to make their money back, which can be disastrous for a developer who’s poured time and money into a project. In situations like this, the borrower will typically take out a second bridging loan or agree to extend the original loan rather than forfeit their property.
A full understanding of what a 1st charge bridging loan entails and what it can be used for is vital for anyone considering this form of finance. The flexibility and adaptable terms of many bridging loans make them an attractive product, but borrowers should always be conscious of the potential consequences of defaulting on a secured loan.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
A bridging loan is regulated when it is secured against a property that is currently occupied, or will soon be occupied, by either the borrower or an immediate member of their family. All bridging loans that enable the commercial acquisition of a property or for funds to be raised exclusively for business purposes are not regulated by the Financial Conduct Authority (FCA). The split between regulated and unregulated bridging loans is roughly 50/50 now.
A 1st charge bridge is the principal loan on a property, and it takes precedence over all other charges. A 2nd charge loan meanwhile is secured against a property that already has a loan or mortgage outstanding. 2nd charge loans generally require consent from the 1st charge lender.