Bridging finance is a growing choice for borrowers looking at the alternative finance market both in the US and the UK. In the UK, bridging finance is closely linked to rapid property deals, auction purchases, and refurbishment activities with short-term timeframes. In the US, the equivalent type of short-term financial instruments exist, though they are expressed under different wording, structures, and regulatory frameworks. The question, therefore, is this: Is bridging finance in the UK the same as bridging finance in the US? The quick response is: Not quite!
What is bridging finance in the UK?
Bridging finance in the UK describes a type of short-term financial instrument, which is used to bridge a financial gap between two points in time. Bridging finance is most commonly used for property-related activities, where speed is of the essence. For example, an individual might utilise bridging finance to purchase a property before selling their current one, or purchase an uninhabitable property, which does not qualify for a mortgage.
Bridging finance is secured on the asset, and the term can vary from one month up to 12 months or more, with higher interest rates than those charged with a conventional mortgage. Bridging finance is commonly used by property developers, landlords, and increasingly individuals seeking flexibility.
Bridging finance is supported by trade associations such as the Bridging and Development Lenders Association, which supports lenders and raises standards in the bridging finance market in the UK. The bridging finance market in the UK has evolved considerably over the last decade, with the market becoming more institutionalised and regulated.
The US equivalent: Hard money and bridge loans
The most similar product in the US, in terms of bridging finance in the UK, is typically referred to as “bridge loans” or “hard money loans.” While the term “bridge loan” is indeed used in American finance, it is not necessarily exclusive to bridging finance. In property-related transactions, however, it is most common to hear “hard money lending.”
Hard money loans can be described as short-term loans that tend to be secured by real property. The loans tend to be provided by individuals or firms rather than banks. The loans tend to be comparable to UK bridging loans, as they tend to be used in flipping, remodeling, or purchasing of property. However, there are significant differences in relation to regulations that exist in each country. In contrast to the UK, where national regulations exist under the FCA, in the US, they may exist at the federal level, e.g., under the Consumer Financial Protection Bureau.
Key differences in structure and regulation
Regulation is the most significant difference between these markets. In the UK, bridging loans are either regulated or unregulated, depending on who is borrowing the money or what the funds are being used for. In the UK, if the property is a borrower’s primary residence, the loan is subject to FCA regulation.
In the US, the regulation environment varies by state. Consumer regulations vary, ranging from tight regulation on licensing and interest rate caps in some states, while in others, the rules are more liberal. This has created a patchwork system that sometimes seems unfair.
Standardisation is the other difference. The UK’s bridging market has become more standardised, with a uniform approach to valuations, exit strategies, and loan amounts. In the US, in the private money market, the terms vary greatly from lender to lender.
Cost and risk considerations
Bridging loans in the UK and hard money loans in the US tend to carry a higher price tag than conventional home loans. The cost of borrowing is higher because the lender is taking a risk over a short period of time, which may involve tricky situations or time constraints.
However, it is important to note that the pricing is not always linear. In the case of bridging loans in the UK, the cost is often expressed as a percentage of the loan amount per month, which is typically between 0.5% and 2% of the loan amount per month.
On the risk assessment front, too, there is a slight variation between the two countries. In the case of bridging loans in the UK, lenders tend to focus more on the exit strategy of the borrower, which may involve refinancing into a buy-to-let mortgage or selling off the property. In the case of hard money loans in the US, lenders tend to focus more on the current value of the property and its value after repairs, if required.
A shared purpose, different ecosystems
If you look at bridging finance in the UK or hard money/bridge lending in the US, at their heart, they have a similar fundamental objective: rapid, short-term capital with collateral based on property. They enable individuals, investors, or homeowners to take action quickly when traditional sources of capital are either slow or out of reach.
However, they also have very different ecosystems. Bridging finance in the UK is generally a tighter, more cohesive, and standardised environment, whereas in the US, it is a larger, less cohesive, and decentralised environment. Therefore, it is very important for those operating in bridging finance, particularly those who have to work across international boundaries, to understand these nuances. Bridging finance is flexible, it is agile, it is fast, but it is also very different on either side of the Atlantic.