Your 2024 Guide to Bridging Loans in Ireland

Navigating property transactions in Ireland often involves perfect timing and financial intricacies. In a perfect world, an investor would enjoy a seamless transition from selling one property to acquiring the next with each step aligning flawlessly.

However, situations often arise where a prime investment opportunity presents itself before the sale of an existing property, which you intend to liquidate to use the proceeds for the acquisition of this new, promising investment.

Enter bridging loans, purposefully designed to alleviate the stress and financial constraints of property acquisitions. These loans provide the necessary funds precisely when they’re needed, filling the funding gap between transactions.

Important to note – nearly all bridging lenders in Ireland will not consider funding primary dwelling homes, or personal private residences due to the additional complexities of this type of lending.

What is a Bridging Loan?

Bridge financing, also recognised as gap financing, is a specialised short-term financial mechanism tailored for property investors and developers. It functions as a strategic tool addressing the time-sensitive capital requirements of businesses operating in dynamic markets. Specifically engineered to bridge the gap between immediate financial requirements and the establishment of long-term funding structures, this financing avenue empowers seasoned investors to swiftly seize opportunities, capitalise on time-critical investments, or navigate urgent financial obligations.

Bridge loans typically come with higher interest rates compared to traditional bank loans and are backed by collateral such as business inventory or real estate used to give the lender a sense of stable security.

What are Bridging Loans Used For?

Bridging loans are usually quicker to secure, so they are an excellent option for anyone who needs to finance a project fast. However, they can be used for numerous purposes which we cover below.

Collapse or delays in a property chain

Bridging loans are invaluable when a property chain encounters disruptions or delays, a fairly common scenario in the real estate domain. These loans become essential when an investor’s acquisition relies on the proceeds from selling another asset within the same chain. Should any part of this interconnected process falter or face unexpected delays, it jeopardises the entire sequence. 

In the event of such disruptions, bridging loans offer an efficient financial solution, stepping in to swiftly provide the finances required. This expedites the transaction and ensures the completion of the intended purchase within the designated timeframe despite obstacles within the property chain.

Purchasing of auction property

Auctions are lucrative grounds for seasoned investors seeking unparalleled opportunities as they can be known to offer below-market-value properties and hidden gems. However, the immediacy of payments in auction purchases poses a significant challenge for many investors. Stringent timelines demand swift and immediate payments, often compelling investors to secure substantial funds promptly. 

This is a situation where bridge financing becomes a crucial lifeline for investors navigating auctions. With the potential for substantial financial commitments, having access to sizable and rapid funding becomes paramount. Bridge financing functions as a reliable solution, enabling investors to swiftly fulfil auction obligations and avoid the risk of deposit forfeiture or future auction bans. 

Extended sale window

Bridge financing serves as a strategic tool for investors seeking an extended window to sell their existing properties. This financial mechanism offers investors the flexibility to access immediate capital for new acquisitions while allowing them to have a more patient approach to the sale of their current holdings.

This extended timeframe empowers investors to wait for opportune moments in the market, potentially yielding higher sale prices. This essentially provides investors with the financial freedom to hold onto their properties for longer, thus leveraging market conditions to their advantage and maximising the potential returns on their investments.

Purchasing unmortgageable property

Bridge loans also serve as a valuable tool for experienced investors when they are considering properties deemed “unmortgageable” by traditional lenders for various reasons. Such properties might have legal complications, require extensive renovations, lack standard amenities, or simply fail to meet some criteria set by banks for getting a traditional loan.

As bridging loans can often bypass the rigorous property requirements typical of conventional mortgage lending, investors can focus on enhancing the property’s value and attractiveness, ultimately rendering it eligible for traditional mortgage refinancing.

Therefore, bridging finance serves as a vital financial tool enabling investors to seize opportunities presented as “unmortgageable” properties, unlock their potential, and transition them into lucrative, mortgageable assets for long-term investment purposes. 

Key Factors to Consider When Getting a Bridging Loan

Exploring bridging loans in Ireland unveils essential factors which require careful consideration. Key among these are the repayment hierarchy assigned to your lender, the negotiated interest rates, and the allocated repayment periods. Together, these elements form the loan’s basic framework and conditions.

First charge vs Second charge

A ‘charge’ refers to the legal claim or interest held by a lender against a property as security for the loan amount. It signifies the lender has priority over the property if the borrower defaults on the loan. With bridging loans, two primary options are available when it comes to charge. 

A first charge bridge loan occurs when a borrower owns the property outright. In this case, the lender providing the bridge loan holds the primary position and is the first entity entitled to repayment if the property is sold.

Conversely, if the property already has an existing mortgage or loan, that initial financial commitment holds the first charge position. The subsequent bridge loan secured against the property becomes a second charge loan. The lender would take second priority for payment if the property is sold. 

Opting for a second charge bridging loan necessitates obtaining consent from the primary lender holding the first charge and this adds a layer of complexity to the borrowing process. Second charge bridge loans tend to be costlier than their first charge counterparts due to the increased risk associated with the secondary position in repayment priority, so many lenders won’t consider advancing loans on a second charge only.

Fixed or Variable Interest

Just as in mortgages, borrowers taking bridge loans have the option between a fixed interest rate and a variable interest rate.

Opting for a fixed-rate bridging loan entails committing to a set interest rate throughout the loan term. This offers stability and predictability, shielding borrowers from fluctuations in interest rates, and thus maintaining consistent repayment amounts. 

Conversely, a variable-rate bridging loan exposes borrowers to market fluctuations, as the interest rate can fluctuate in response to changes in the lender’s rates. While variable rates can offer initial cost savings if rates decrease, they also carry the risk of potential increases, impacting the borrower’s repayment amounts over time. 

Which one is better? Well, the decision between fixed and variable rates hinges on the borrower’s risk tolerance, financial planning preferences, and assessment of prevailing market conditions, offering different trade-offs between stability and potential cost savings.

Open and Closed Bridging Loans

The distinction between open and closed bridging loans lies primarily in their repayment structures. Open bridging loans offer flexibility as they don’t have a set repayment date. Borrowers have the freedom to repay the loan whenever funds become available, although lenders generally expect repayment within a year. However, some lenders could extend this period under certain circumstances. 

On the other hand, closed bridging loans come with a predetermined repayment date. Borrowers are required to repay the loan by a fixed deadline, which could be based on a specific event, such as the sale of a property. Closed bridging loans tend to be more cost-effective than open ones due to the specified repayment timeframe which enables lenders to anticipate the payment. 

The choice between open and closed bridging loans depends on the borrower’s financial circumstances, urgency of repayment, and willingness to accept potentially higher costs for the flexibility offered by an open loan.

How Much Does a Bridging Loan Cost?

Are bridging loans expensive? Typically, yes. This form of financing is more expensive than traditional bank loans. You end up paying more and the extra cost is offset by the convenience of the ability to obtain significant amounts of cash in a relatively short time and the certainty of available funds to complete the value-creative event.

That said we can generally classify the costs of a bridge loan into two elements: interest rates and fees.

Interest rates

Bridging loans usually come with higher interest rates compared to traditional loans, primarily due to their short-term nature and the urgency they address. Unlike traditional loans, where interest is calculated annually, bridge loan interest accrues on a daily basis.

The charging of interest on a bridge loan can occur through two distinct methods: monthly payments and retained interest. 

Monthly interest payments resemble the structure of an interest-only mortgage, where the borrower pays the interest amount each month without it being added to the principal loan. 

On the other hand, the interest can be retained where the borrower borrows the interest amount upfront for a predetermined duration. Upon full repayment of the loan, any portion of the initially borrowed interest that remains unused is refunded to the borrower.

Unlike standard mortgages, interest rates for bridging loans are negotiable with the lender. Therefore, it’s advantageous for borrowers to explore reputable lenders to secure more favourable rates. Conducting thorough research and identifying a trusted lender can significantly impact the interest rate offered, allowing borrowers the opportunity to secure a more competitive deal. 

Processing fees

In addition to the interest rate, borrowers may encounter various other fees associated with bridging loans, such as:

• Arrangement fee which is typically around 2% of the loan amount, commonly incorporated into the total loan repayment by the borrower.
• Administration fee that often necessitates an upfront payment as required by many lenders.
• Legal fees usually involve an initial partial payment to the conveyancing solicitor, with the remaining balance settled upon completion of the loan repayment.
• Valuation fees are determined by the lender’s policies and may vary based on the urgency of fund disbursement.

Basic Requirements for an Investment Bridging Loan

Despite common misconceptions, the application process is not overly complex. To proceed with the application, you’ll need to prepare specific information for the lender.

Loan security

One of the primary requisites for obtaining a bridging loan is providing security for the loan amount. Borrowers are typically required to pledge a tangible property asset as collateral to secure the loan. Often, this collateral is the very property intended for purchase, although other assets of value may also be considered. 

The property serves as a guarantee to the lender, ensuring that in case of default, they have recourse to recover the outstanding amount by selling or claiming ownership of the pledged asset. The evaluation of the asset’s value and its suitability as security are crucial steps in the loan approval process, as they directly impact the loan amount, terms, and conditions offered by the lender. This is why bridge lenders in Ireland typically won’t consider taking Private Residences as security for loans.

Loan size and repayment term

The borrower’s provision of the loan size and repayment terms are a critical aspect of the bridging loan application process. Some lenders, such as Novellus, stipulate a minimum loan value. Notably, Novellus sets its minimum loan value at around €500,000, with no specified upper limit. 

Regarding repayment terms, bridging loans typically offer a duration spanning from 12 to 36 months, allowing borrowers a spectrum of choices to align the repayment period with their specific financial circumstances and investment strategies.

Property type

This information delves into the intended use of the property, whether it’s earmarked for residential letting as an investment, designated for industrial purposes, or tailored for retail use. For seasoned investors, these distinctions hold immense significance as they guide the lender in understanding the strategic intent behind the property acquisition. 

Moreover, alongside property type, disclosing details about the property’s condition and structure assumes equal importance. These specifics provide crucial insights into the asset’s present state, which enables the lender to evaluate the investment’s feasibility, customise the loan terms to suit the property and evaluate the exit strategy. 

Exit Strategy

The exit strategy is a well-defined roadmap outlining how the borrower intends to repay the loan after the bridging period. This could be through selling the property in question or an alternative asset, seeking refinancing options either with the existing lender on a longer term or an alternate lender, engaging in a property development venture, or arranging for cash redemption. 

The significance of a clear exit strategy lies in its function as a risk mitigation tool for both borrowers and lenders. It demonstrates the borrower’s foresight, financial acumen, and contingency planning, reassuring the lender about the feasibility of loan repayment. 

Moreover, a robust exit strategy not only safeguards against potential financial uncertainties but also aids in securing the most favourable terms and conditions for the bridging loan. Essentially, a well-thought-out exit strategy not only ensures a smoother loan approval process but also lays the groundwork for a successful and timely loan repayment.