Lenders’ eligibility requirements where bridging loans are concerned focus on one thing and one thing alone:
The ability of the borrower to comfortably repay the loan on time and in full.
Of course, this also rings true with all other lenders and loan types across the board. What matters most to a lender is whether or not they will get their money back, without having to chase up a borrower, or plunge them into major financial difficulties.
What makes the difference with bridging finance is the way in which the facility issued is scheduled for a strictly short-term repayment. Rather than being repaid gradually over a series of instalments, the full balance is due on an agreed date in a lump-sum payment.
This makes qualifying for bridging finance entirely different to processing more typical loan or mortgage applications.
Ultimately, the lender will take three things into account, in order to establish the viability of the applicant’s case:
- Do they have a clear and workable plan for repaying the loan?
- Will they be able to repay the loan in full within an acceptable timeframe?
- Are there any obstacles that could stand in the way of repayment?
Across all three of these considerations, the lender will scrutinise the strength of the applicant’s exit strategy. An exit strategy for a bridging loan can be just about anything, but the vast majority fall within one of the following broad categories:
This is where evidence is presented regarding the upcoming receipt of cash on the part of the applicant, which could take the form of inheritance, a pension lump-sum withdrawal, or investment maturity. If they can prove they have a significant amount of cash heading their way in the near future, this will qualify as a viable exit strategy.
In the case of property development projects, the developer or construction company may have already lined up a qualified buyer in advance. Long before ground has even been broken, one or more parties may have confirmed their interest in purchasing some or all of the development upon completion. They may even have entered into a binding contract with the developer, which can subsequently be used as evidence of an exit strategy for bridging finance.
Fix and flip
One of the most common uses for bridging loans is purchasing and renovating off-market properties for profit. To qualify for bridging finance, the applicant needs to convince the lender that their project is viable and will result in a property of an acceptable standard that will definitely sell within the near future. Given the ferocious competition on the UK housing market as of late, it is comparatively rare for projects like this to take any more than six months to complete.
A refinance strategy comes into play where a borrower wishes to retain ownership of a property or development (in part or in full) upon its completion. This is commonplace where investors seek to retain possession of BTL properties (residential or commercial) and let them out to generate long-term gains. In this case, the applicant’s intention may be to transition (refinance) the bridging loan to a longer-term repayment product at the end of the initial term. The bridging loan may be taken out for one year, after which it is repaid with a 25-year commercial mortgage. If the applicant has already been approved in principle for such a product in advance, they will have a good chance of qualifying for affordable bridging finance.
For more information on any of the above or to discuss the benefits of bridging finance in more detail, call today for an obligation-free consultation or visit ukpropertyfinance.co.uk