Bridging Loan Glossary

Bridging Loan Jargon Decoded.

Arrears

Refers to missed or overdue payments on a bridging loan, typically involving monthly interest payments where not retained or rolled up. Arrears indicate that the borrower has failed to meet the agreed repayment schedule, which may trigger default provisions under the loan agreement.

Assured Shorthold Tenancy (AST)

The most common type of residential tenancy agreement in the UK, typically used when a private landlord lets a property to an individual as their primary residence. It provides the landlord with a legal right to repossess the property at the end of the fixed term, subject to proper notice.

Auction Purchase

The acquisition of a property through a public auction, where the contract becomes legally binding immediately upon the fall of the hammer. In the context of bridging finance, auction purchases are a common use case due to the short completion deadlines typically required; most commonly 28 days.

Bank of England Base Rate (BoE)

The Bank of England Base Rate is the official interest rate set by the Bank of England’s Monetary Policy Committee. While bridging loans typically have fixed or interest rates, some lenders may price their loans as a margin above the base rate.

Broken Chain

Occurs when a property transaction fails within a chain of dependent sales and purchases, causing delays or collapse of linked transactions. Bridging Loans are often used to resolve broken chains, typically enabling a buyer to proceed with a purchase whilst waiting for their own sale to complete.

County Court Judgement (CCJ)

A formal legal decision issued by a county court in England, Wales, or Northern Ireland following a creditor’s successful claim against an individual or company for non-payment of a debt. The judgment legally confirms that the debtor owes the stated amount and outlines the terms under which repayment must be made.

Charges:

- First Charge

The primary legal claim over an asset, giving the holder priority over others if the asset is sold or repossessed.

- Second Charge

A secondary legal claim over an asset, ranking behind the first charge.

- Third Party Charge

A legal claim over an asset owned by someone who is not the borrower, used to secure a loan or obligation.

Conditions Precedent (CPs)

Specific requirements that must be satisfied before a loan can be drawn down.

Corporate Guarantee

A commitment from a separate company to cover the borrower’s debt if the borrower defaults.

Conveyancing

The legal process of transferring property ownership. It involves tasks such as preparing documents, conducting searches, and ensuring a smooth and legal transaction. A solicitor or licensed conveyancer is required for this work.

Cross-Collateralisation

When more than one property or asset is used as security for a single loan or multiple loans, allowing lenders to claim against multiple assets in the event of default.

County Court Judgement (CCJ)

Charges:

- First Charge
  The primary legal claim over an asset, giving the holder priority over others if the asset is sold or repossessed.

- Second Charge A secondary legal claim over an asset, ranking behind the first charge.

- Third Party Charge
  A legal claim over an asset owned by someone who is not the borrower, used to secure a loan or obligation.

Conditions Precedent (CPs)

Specific requirements that must be satisfied before a loan can be drawn down.

Corporate Guarantee

A commitment from a separate company to cover the borrower’s debt if the borrower defaults.

Conveyancing

Cross-Collateralisation

When more than one property or asset is used as security for a single loan or multiple loans, allowing lenders to claim against multiple assets in the event of default.

Decision-in-Principle (DIP)

A lender’s initial confirmation that they are willing to lend, subject to further due diligence and underwriting.

Deed of Priority

A legal agreement between two or more lenders that sets out the order in which they will be repaid if the borrower defaults, protecting the position of the senior lender.

Early Repayment Charge (ERCs)

A fee that may be charged if a bridging loan is repaid before a minimum term or outside agreed conditions. While ERCs are not commonly applied in bridging finance, some lenders may include them, particularly where a minimum interest period has been agreed to ensure a basic return on the loan.

Equity

The difference between the property’s market value and the outstanding mortgage balance. It represents the portion of the property owned by the landlord.

Energy Performance Certificate (EPC)

A document that provides an assessment of a property’s energy efficiency and environmental impact, rating it from A (most efficient) to G (least efficient). The minimum EPC rating for rented properties is currently E, with the UK government planning to raise the minimum to C by 2030.

Facility Agreement

The legally binding contract between the borrower and the lender that sets out the detailed terms of the loan, including repayment terms, security, and covenants.

Fees:

- Arrangement Fee
  A fee charged by the lender for setting up the loan, usually a percentage of the gross loan amount.

- Exit Fee
  A charge imposed by the lender when the loan is repaid, often calculated as a percentage of the loan amount.

- Procurement Fee
  A fee paid by the lender to iBrokr for sourcing and arranging the loan on behalf of the borrower.

- Total Costs
  The overall cost of borrowing, including all interest payments and associated fees.

Freehold

Where the owner holds the title to both the property and the land it’s on indefinitely.

Guarantees:

- Corporate Guarantee
  A commitment from a separate company to cover the borrower’s debt if the borrower defaults.

- Personal Guarantee (PG)
  A promise by an individual, usually a company director, to repay the loan if the borrowing company cannot.

Gross Development Value (GDV)

The estimated total value of a property or development once it is completed and sold at market rates.

Ground Rent

A regular payment made by a leaseholder to the freeholder, often on long leases.

Ground-up development

The construction of a new building on a plot of land where no existing structure is present. You might use Development Finance to fund a project like this.

HMO

House in Multiple Occupation: An HMO (House in Multiple Occupation) is a residential property rented out by at least three unrelated people who share facilities such as a kitchen or bathroom. HMOs are common in student housing and shared accommodation and are a popular investment strategy.

Heads of Terms

A non-binding document that outlines the key terms and conditions agreed upon by both parties before entering into a loan agreement.

Interest:

- Interest Rate
  The percentage charged by a lender on the loan amount.

- Floating Interest
  An interest rate that fluctuates based on an external benchmark.

- Retained Interest
  Interest deducted upfront from the loan amount to cover the agreed loan term.

- Rolled-up Interest Rolled-up interest refers to the accumulation of unpaid interest over the term of a loan, where interest charges are periodically added to the principal balance rather than being paid as they accrue. The total accrued interest, combined with the principal, becomes due for repayment in full upon maturity or early settlement of the loan.

- Stepped Interest
  A variable interest structure where the rate increases or decreases at predefined intervals during the loan term.

Interest Cover Ratio (ICR)

A financial metric that measures a borrower’s ability to cover loan interest payments from the net rental income generated by the property. It is calculated by dividing the net rental income by the interest payable on the loan. While not commonly applied to short-term bridging loans, the ICR becomes important when a bridging facility is backed by rental income or where the exit strategy involves refinancing onto a buy-to-let or term loan. Lenders use ICR to ensure the property can support long-term borrowing.

Joint Venture

A business arrangement where two or more parties collaborate on a property project, typically sharing capital, risk, and profit.

Know Your Customer (KYC)

A compliance process where lenders or brokers verify the identity of a borrower to meet anti-money laundering (AML) regulations. IBrokr collects all the information required for a lender to complete KYC checks, saving valuable time and enabling swift completions.

Loan Terms:

- Gross Loan
  The total loan amount approved by the lender before any deductions, including interest, fees, and retained payments.

- Net Loan
  The amount a borrower receives after deducting any fees, interest, or deductions from the gross loan.

- Purchase Price
  The agreed amount paid by the borrower to acquire a property or development site.

- Loan to Value A ratio that compares the loan amount to the market value of the property being used as security. It is expressed as a percentage and is a key measure of risk for lenders.

Leasehold

A type of property ownership where the buyer has the right to use and occupy the property for a specific period, usually subject to payment of ground rent to the freeholder.

Margin

The interest rate charged by the lender minus the benchmark rate, when floating over a benchmark.

Maturity Date

The final due date for repayment of a bridging loan, typically within 12 months.

Mezzanine Finance

A type of second charge loan that ranks subordinate to senior debt but ahead of equity. It is typically used to bridge the gap between the main loan facility and the total funding required, enabling borrowers to achieve a higher loan-to-value (LTV). Mezzanine finance allows developers to raise additional capital without diluting equity, but due to the higher risk to the lender, it often carries higher interest rates and may include profit-sharing elements or exit fees.

Open Market Value (OMV)
The estimated price a property would achieve in an open and competitive market under normal conditions.

Planning Permissions

- Outlined Planning Permission

Does not include specifics for the design but provides a ‘permission in principle’. It does not provide consent to commence works but is rather used by developers to explore whether a development would be viable.

- Detailed Planning Permission

Provides consent for a development scheme based on a detailed design. This often includes pre-conditions attached to the approval that must be satisfied for the approval to be valid and formally discharged in writing by the local planning authority (LPA).

- Permitted Development Rights

Are automatic grants of planning permission that allow certain building works and changes of use to be carried out on a property without having to make a full planning application. These rights cover householder improvements but will also encompass some development schemes such as the conversion of offices to residential use.

Profit on Cost

A metric used to show the expected profit of a project, as a percentage of total costs. Lenders use Profit on Cost to assess the viability and resilience of a scheme. A typical benchmark is 20% or more, providing assurance that the project is not only profitable but also has a buffer to absorb cost overruns or market fluctuations.

Quantity Surveyor (QS)

A construction professional who monitors build costs, valuations, and progress on a development project. In the case of a heavy refurbishment bridge, lenders might appoint a QS to verify drawdown stages, manage cost overruns, and report to the lender.

Refinance

The process of replacing an existing loan with a new facility, often to access better terms or raise capital. A common exit strategy for bridging loans, particularly when moving onto a term mortgage

Retention

A portion of the loan that is withheld by the lender until certain conditions are met, such as completion of works or provision of documentation.

Senior Debt

The primary loan facility secured against a property, typically holding the first legal charge. In bridging finance, this is the main facility repaid before any subordinated (mezzanine) loans.

Special Purpose Vehicle (SPV)

A new entity with one purpose: to buy or develop property. For lenders, this makes assessing potential lending much less complicated, and they will place emphasis on the financial status of the SPV directors and their ability to service any borrowing. For borrowers an SPV provides greater tax efficiency.

Security

The property being financed typically serves as the primary security for the loan, with the lender taking a legal charge over the property. If the borrower defaults, the lender has the right to repossess and sell the property. Additionally, other assets may be added as security to further reduce risk and enhance the lender’s position, depending on the loan terms and agreement.

Serviceability

The borrower’s ability to afford interest payments, based on income or rental coverage. Often more relevant in regulated bridging or investment lending where monthly interest is serviced.

Term Sheet

A non-binding summary of the key terms and conditions of a loan offer.

Title Deed

Legal documentation that proves ownership of a property.

Underwriting

The process in which a lender assesses the risk of a loan application, including evaluating the borrower’s financial situation, the property value, and the exit strategy.

Valuations:

- AVM Valuation
  Uses data and algorithms to estimate a property’s value without a physical inspection.

- Desktop Valuation
  A valuation carried out remotely using online tools and comparable data.

- Red Book Valuation
  A formal, professional property valuation following RICS standards.