Interim finance (interchangeably termed as bridge loans) is becoming increasingly common in real estate finance transactions. Bridge loans are a temporary financing arrangement, which borrowers use to meet short-term liquidity requirements until long-term financing has been sourced. Usually backed by collateral such as real estate, these types of loans typically have a maturity of less than one year, high interest rates and significant arrangement and exit fees. Whilst the terms of a bridge loan are less favourable to a borrower than those generally offered by traditional lenders, borrowers typically accept them because interim finance offers a temporary, fast and convenient way to secure a property.
In real estate finance transactions, funds typically need to be made available at short notice and irrespective of conditionality and/or speculative elements to a transaction. As such, bridge loans are fast becoming an essential part of the equation for many real estate finance transaction.
On development deals, some of the more traditional banks are unable and/or unwilling to take planning risk or in some circumstances they will not lend without a sufficient number of pre-lets/pre-sales in place. In circumstances such as these, bridging lenders are often able to provide a funding solution.
Whilst both bridging and traditional loans are available to corporates and individuals, a new wave of alternative lenders has widened the range of bridge funding available in the market, catering for the varied requirements of borrowers both in terms of loan amount, length of loan and pricing. For example, an increasing number of providers such as Holme Finance Bridging Loans provide loans from £5,000, and other larger players such as Bridge Bank Bridging Loans provide loans of up to £25,000,000. Equally, lenders range significantly in their monthly interest rates, with Mint Bridging’s monthly rate between 0.99% and 2%, compared with Roman Finance Bridging Loan’s rate of 0.45% and 1.45%.
The key variables of any bridge loan will depend on the circumstances of each borrower, the proposed scheme, the nature of the asset being acquired or refinanced, whether it is an income-generating asset or whether interest needs to be capitalised throughout the term, the proposed duration of the loan and the chosen loan provider. However, it is clear that the efficient and effective nature of bridging finance has paved the way for bridge loans to form an essential part of any current real estate finance transaction.