Bridge loans typically run for three to 12 months and are used to provide an interim funding solution for property developers to accomplish strategic near-term objectives before the main line of finance is put in place. They are secured by a first charge on the property.
To provide an example, a property developer may require a bridge loan when he is applying for planning permission for a site he has purchased but cannot get a regular development loan. Instead he can take a bridge loan which, as the name suggests, covers him for the planning period. If planning permission is granted, then he would refinance with development finance or sell the site and take the profit resulting from the uplift in value from securing the planning permission.
Our bridge loan products are secured by a first charge on the property and therefore stand first in line in the event of default. A legal charge is the means by which lenders enforce their rights to the security. The first charge status makes bridge loans less risky than those beneath them.
The loan is typically for an amount up to a maximum of 70% of the value of the land or building in its existing state. The valuation is provided by an independent third party RICS accredited valuer.
The total interest due on the loan is usually deducted from the loan monies advanced at the outset, for example if the property value is for £1m and allows for a 70% LTV loan at 10% per annum, then the actual amount the developer will receive will be £630k (70% of £1m less interest of £70k).
Due to the borrower giving a first charge as security and the interest being taken upfront, bridge loans are a low risk investment and typically provide fixed annualised returns of 8%-12%. They are most suitable for those investors who do not like to take too much risk and prefer the advantage of knowing exactly how much they will make, and who are looking to invest over a shorter time frame.
The risk for an investor is that the borrower is unable to repay the loan, in which case it goes into default. If that happens, the land or building will be sold and the bridge loan repaid first. This will however take extra time for the investment to be returned.