Our jargon buster explains some of the key terms involved in the bridging finance industry. From the application process to repayment structures, our simple glossary explains everything you need to know.
Auction Finance: When purchasing property at an auction, you will be required to pay a 10% deposit on the day and the remaining 90% within a 28 day period. Due to the time constraints, auction finance is a service that we can offer to help you get the money you need to secure the property and finalise the deal.
Bridging Loan: A type of short-term finance aimed to ‘bridge the financial gap’ if you need to complete a deal where there is a strict deadline. Common for property buyers, developers and investors who want to act quickly and avoid losing the deal.
Buy-to-let: This refers to buying a property with the purpose to rent it out to tenants and generate income. Some of the people that use bridging loans are simply buying a property, refurbishing it and renting it out to the public.
Capital: Financial assets or the value of financial assets. In this case, it is likely to be the property or business that you need the loan for. When you pay your loan, it is broken up into interest and capital, with the capital part paying off the value of the property and the interest is the fees you are charged by the lender for borrowing the money.
Conveyancing: The legal and administrative work required to transfer the ownership of land or buildings from one person to another.
Decision in principle: In the early stages of an application, the lender will give a decision in principle which is a written letter saying that we will grant you a loan provided your valuations are correct and you pass our checks.
Drawdown: When someone withdraws money from a loan facility. Bridging lenders will drawdown money when they lend it to borrowers. So it is another way of saying ‘lending money’ or ‘loan amount’ e.g The loan drawdown is £100,000.
Equitable charge: This allows you borrow on a second charge loan or mortgage without the permission of the first charge lender. So if you have a mortgage with one lender and they will not allow you a second loan, you can apply with another lender by securing their interest by way of equitable charge.
Equity: This is how much ownership or stake you have in a business or property. If someone is looking to buy a property worth £1 million and already has £500,000 available, they have a 50% equity in the property and therefore only need to borrow £500,000 more.
First charge mortgage: This is the mortgage that takes first priority with your monthly repayments. This is likely to be the home that you are living in. It is common to have more than one mortgage and more than one property but when your repayments need to be made each month, the first charge is where your payments will go. This is important for lenders to know because if you want funds for additional properties, they need to consider when they will get paid after other mortgage payments have been settled.
Fixed rate: The rate of interest is charged does not change during the loan term and remains stable. This allows borrowers to know exactly how much they will be paying during the loan term.
Freehold: A property contract arrangement whereby you own the property and land and can make changes to it as your wish. Read about freehold vs leasehold here.
Gazump: When a new and higher bid is accepted on a property despite the seller already agreeing terms with a previous buyer. It is a negative connotation associated with ‘stealing’ a bid from under someone’s nose.
Gross development value (GDV): Once the developer has renovated or refurbished the property, this is the how much the property should be worth on the open market. Lenders use this value as an idea of how much they can lend out in the first place, which is typically 50% GDV.
Interest: This is amount that is charged by the lender for borrowing the money. The lenders we feature on BridgingLoanHub charge interest rates starting from 0.59% per month.
Interest deducted: This is a repayment option where the interest is deducted from the monthly payments and you only pay the capital. However, this means that you will be borrowing less as the interest is taken away. For example, if you borrow £100,000 and the interest is £12,000 for 12 months, instead of borrowing £100,000, you will only be allowed to borrow £88,000 because the interest has been removed.
Leasehold: This is where you are contracted to an agreement on your property for 99 to 999 years. Although you own the flat or property, you still have to pay ground rent, service charges and ask permission to add things.
Loan-to-value (LTV): Expressed as a percentage, this is how much of a loan you require in relation to the value of the property. So if you have a mortgage of £700,000 for a property worth £1 million, you have a LTV of 70%. The maximum LTV you can have for a bridging loan is 70% for regulated firm and 75% for non-regulated lenders.
Lump sum: This refers to how the funds are distributed and whether it is the full amount or broken up. For the lenders we feature, the money is transferred to your account within 10 to 14 days in one lump sum.
Non-status lenders: Companies that are not regulated by the FCA are known as ‘non status lenders.’ It means that they do not have to run credit checks as part of the application process and will look at the current value of the property or business and its potential value when making their decision.
Property development finance: Borrowing money for the purpose of developing a property. You can borrow up to 50% of the GDV (Gross Development Value) and it is a considered a slightly longer term proposition, with less urgency than a bridging product.
Second charge mortgage: This is the mortgage which takes second priority when it comes to repayments. For this reason, lenders tend to offer a lower LTV and amount you can borrow because they realise that your first mortgage is the priority and if you are struggling financially, your second mortgage may not be repaid in full.
Secured loan: You are required to put something down as collateral in order to be eligible for the loan. This is usually the property that you are trying to buy or refinance but can also be a car, business, office space or valuables such as jewellery or art. By having this security, the lender can offer you lower rates than unsecured products because if you default on the loan, they have the right to repossess the property or collateral and re-sell it in order to recover their losses.
RICS Valuer: The lenders we work with will typically send a qualified surveyor or valuer from The RICS (Royal Institution of Chartered Surveyors) to ensure that they get a thorough and accurate valuation of the property in question.
Repossession: In the event that you default on your loan and all other options of refinancing or paying in smaller amounts has been exhausted, the lender may decide to repossess your property and sell it on the open market in order to recuperate the funds that they lent out to you.
Rolling interest: A preferred repayment method by some borrowers, rather than paying the interest and capital on a monthly basis, the interest can be ‘rolled up’ until the end of the loan term. This is a lot more practical for some buyers and investors because they might be doing up the property and waiting to resell it a higher price, so they need every penny they can get. But once they sell the property and make a nice profit, they don’t mind paying the interest, even though it will be a little more because it has been compounded over time.
Variable rate: This is where the interest rate changes during the loan term and is influenced by the Bank of England base rate, currently 0.25%. Some borrowers and lenders prefer using a variable rate because in case the base rate goes up or down, the borrower could potentially pay less for their loan.