Bridging finance has often been regarded as a dark, mysterious world that only specialist brokers can fathom and source, using lenders no one has ever heard of. With such relative anonymity it’s understandable that most consumers have no idea of its cost or potential uses.

The first thing to learn is how it works. Most bridging finance is thought by consumers to be a clever loan that’s used to break a property chain, allowing someone to buy before they have sold. Historically, it’s been viewed as an expensive route because the borrower would likely have a mortgage on their existing property running at the same time as the bridging loan on their new property.

Because this ‘doubling up’ on mortgages is expensive, bridging loans have to be short term – that is, less than 12 months. In the past, the rates could be as much as 1 per cent a month; these days they’re lower, with a 1 per cent fee. This still isn’t cheap, but bridging lenders aren’t lending for a long period and they have to make money.

Given how hard payments on two mortgages would be on monthly cashflow, bridging mortgages don’t require the borrower to actually make payments on the loan; they allow the interest to roll up – which is expensive but easier for those concerned with managing cashflow.

The loan plus interest is settled in full when the property is sold or a mortgage taken out to replace the bridging loan, doing away with affordability calculations. Bridging lenders are more interested in the exit strategy – how they will get back their money, including interest. Their focus is on the expected timescales and any other assets in the background that could be called upon should the exit strategy not work. Given that most exit strategies depend on the sale of a property or a replacement mortgage, bridging lenders want to keep the overall LTV down. If anything needs to be sold in a hurry, the price can be reduced to assist the process.

Using a bridging loan

What can one do with such a loan? Pretty much any legal purpose is permitted with most bridging lenders.

Normal mortgage providers have restrictions on debt consolidation, or they simply won’t allow certain things, such as paying a tax bill or gambling debts, or even injecting money into a business – all of which are legal reasons to borrow money.

Bridging can help people meet needs that normal mortgage lenders can’t service, but the loan will not be agreed without an acceptable exit strategy.

Apart from breaking a property chain, the other main use for bridging finance is property development.  The issue for normal mortgage lenders is that, when any notable building work is carried out on a property, it tends to be the case that the property itself was uninhabitable at the outset (or would be during the works). Bridging finance is designed for this in that it doesn’t rely on monthly payments, so cashflow isn’t an issue and the exit strategy is often to sell the asset or remortgage to a normal lender. As most works are set to take up to six or nine months, the usual maximum term of 12 months should be fine.

Works management

What bridging lenders are interested in is the kind of experience the borrower has in managing property works of the proposed magnitude, or if there will be a suitable project manager, architect and/or builder. Their lending enables the work to begin whereas normal lenders may baulk at the scale of what’s to be done.

Ordinary lenders also have a problem with the LTV because they can lend only based on the value of the property at the outset. If a new wing is proposed – thereby enlarging the property and increasing its future value – a normal lender may be unable to assist because the LTV might rise too far. However, a bridging lender will value the property at the start and consider what it will likely be worth at the end of the works.

As for overall cost nowadays, expect a 1 per cent fee plus valuation and solicitors’ fees. Interest rates start from about 0.43 per cent per month (approximately 5.16 per cent a year), which is much less than the former 1 per cent a month.

Luke Somerset, chief operating officer, John Charcol