Bridging Finance: Busting Myths


Amanda Lewis Arbuthnot Specialist Finance

Bridging finance continued to provide an essential source of funding during the pandemic (and still does), which saw property transactions reach record levels.

As sales boomed, housing stock became extremely limited with even the most distressed properties being sold after just a few days on the market.

Increased volumes combined with record low-interest rates, and the stamp duty holiday encouraged purchasers to look for refurbishment or development projects using bridging finance to leverage funds.

Despite its popularity and increased media coverage, there are still lingering misconceptions surrounding bridging finance, also known as bridge loans and bridging.

In this piece, we identify common misconceptions, to help better understand this popular source of finance and how Arbuthnot Specialist Finance (ASFL) mitigates some of the key doubts property professionals may have.

Bridging is a loan of last resort

Bridging has often been seen as a last resort for people who have left funding too late or are unable to secure funds elsewhere.

Contrary to this, bridging can place property professionals in a stronger position through the availability of immediate cash, which allows them to leverage funds.

Ultimately, property professionals often seek bridging to overcome a short-term need. Their immediate strategy may not fit within the criteria for a term loan, and they do not want to be saddled with the Early Repayment Charges that some lenders may require.

There is no better example than when ASFL finance purchases at property auctions where funding is needed almost immediately.

This shows that for many experienced investors and developers, bridge financing is their first choice to support a short-term property strategy.

Bridging Finance is too expensive

Bridging finance can be more expensive compared to other forms of lending, but this is due to the higher risk taken on by the lender.

The sector has become increasingly competitive, with cost levels varying significantly depending on the lender and their approach to the risk assessment.

The ASFL Business Development Management (BDM) team help to structure deals at the outset to mitigate risk and reduce rates where applicable.

ASFL have the benefit of the wholesale market and guaranteed funding – being part of a wider banking group, we offer interest rates from as low as 0.6% PCM.

It is also important to look at the fee structure of a bridge loan. The true cost can sometimes be difficult to understand, and it is critical to work with a provider that is transparent and upfront.

For ASFL, besides the high level of service, being transparent is something we pride ourselves on. We do not charge any hidden fees meaning no early repayment charges, no minimum interest period fees, and no non-utilisation fees.

We only charge daily interest on the amount of debt outstanding at any time; every payment you make reduces your balance, and the lower your balance, the less interest you pay.

The penalty for defaulting is severe

Default penalties in the bridging market are generally high, with some lenders charging 1% per month to cover additional time spent assessing the loan.

In fact, some charge as much as double or triple the contractual rate for a loan which passes expiration. Contrastingly, ASFL does not charge default fees. Instead, our focus is on client relationships and communication.

We will attempt to restructure a loan where necessary, and work with the property professional to produce an exit plan which suits both parties, without penalising the property professional for something which may be out of their control.

This is particularly important in current conditions as economic factors and an inflationary environment affect the availability of workers, the cost of materials, and previously agreed fixed price contracts.

The lender may not always have the right funding structure in place

Many dedicated specialist lenders are dependent on external credit lines, which can sometimes lead to complicated funding structures or loss of funding.

Cases may arise where a lender is not able to secure the funding or loses funding mid-project, meaning clients may be let down during the agreement or close to completion.

Many funding lines have been affected by market uncertainty following ongoing Brexit concerns and Covid impacts.

This can result in increased fees for property professionals as they may need to cover costs for new arrangement fees, and valuations whilst covering costs of an on-going development.

In addition, property professionals may also struggle to find a lender who is happy to take on a part-complete development which carries higher risk and more complications.

It is important to understand the capabilities of your lender and to have honest and frank conversations about what you will need from them and when.

ASFL are not dependent on any external funding lines, meaning absolute certainty of funds once entering into a facility.

Another bonus is that clients can benefit from a unique bridge-to-let relationship with the wider bank. We can provide bridging finance as well as the exiting mortgage facility for the right client and proposition.

Arbuthnot Latham’s commercial bank provides a wide range of flexible borrowing facilities providing certainty and reduced exit fees.

Bridging Finance puts your asset at risk

There was a time when bridging finance was offered with no consideration of the exit strategy, with the belief that higher rates covered the risks.

Some even saw bridging lenders as eager to repossess property, with an appetite for charging high default interest rates and a ‘hard sales’ approach.

In recent years, however, an influx of property professionals and lenders have entered the market, introducing a sector change.

Bridging finance has now become a cost-effective tool for property professionals to leverage their capital to achieve a more efficient and enhanced return on their investment.

As the market has become more competitive, customer service and lending standards have only increased.

It is best practice for lenders to prioritise the client so that both parties can work together on similar projects again.

As a standard, bridging finance tends to be transaction-based but for ASFL we lead with relationships. As a lender who understands your industry needs, we are better placed to assess and service you.

If you want to find out how bridging finance can help you or your client achieve their real estate goals using the financing we provide, please do get in touch or submit an enquiry.