A bridging underwriter checks four things. They are the borrower, the property, the loan terms and the exit. The exit matters most. A bridging loan lasts only months, so the file must show how it will be repaid. It must also show what happens if the sale or refinance runs late.
Start with one question
Ask who will live in the property. If the borrower or a close relative will live there, the loan may count as a regulated mortgage. That means different rules and a different process, so settle it first. If nobody will live there, it is a normal business loan.
The borrower
Check who the borrower is and who stands behind it. Many bridging borrowers are small companies set up for one deal. So check both the company and the people.
- The company: number, status and owners. The KYB guide covers this.
- The people: ID, address and a personal guarantee, if you take one.
- Source of funds: where the borrower's own money for the deal comes from.
- Track record: past deals, and what happened to them.
- Other debts: what the borrower and the guarantor already owe.
A guarantee is only as good as the guarantor. Ask for a statement of assets and debts and check it against what you can see.
The property
Look at the security as if you had to sell it in a hurry. That is the point of the check.
- Title: read the register. Check that the owner is the borrower, and look for other charges or limits on selling.
- Valuation: use a valuer you instruct, not one the borrower picked. Ask for the market value and a shorter-sale value, such as a 90 or 180 day value.
- Use and condition: is it lived in, let, empty or a building site? Is there planning, and is it granted?
- Recent price: if the borrower bought it lately, compare that price with the valuation. A big gap needs a reason.
The loan terms
Work out the full cost and the size of the loan on day one and on the day it is repaid.
- Loan to value on day one.
- How interest is paid: monthly, held back from the advance, or added to the loan and paid at the end.
- Fees: arrangement, exit and legal costs.
- The term, and what happens if it runs over.
- For works, how money is released and who checks the progress.
Interest that is added to the loan makes the debt grow. So the amount you get back at the end is larger than the amount you lend.
The exit
There are three usual exits. The borrower can sell the property, or refinance with a long-term lender. Or the money can come from somewhere else, such as another asset. Each one needs proof.
For a sale, look at similar sales nearby and ask an agent how long it should take. For a refinance, ask for an agreement in principle from the new lender. Then check the income test that lender uses. For any other source, ask for proof that the money exists and is free to use.
Then test the plan for when things go wrong. Cut the sale price and add months to the sale. See if the money still covers the loan, the interest and the fees. A good file shows the answer as well as the plan.
Red flags
- An exit that depends on the very work the loan pays for, with no proof it will be finished.
- A refinance with no lender named.
- A valuation from a valuer the borrower chose.
- A purchase price far below the valuation, with no reason.
- A title with limits or charges the borrower did not mention.
- A very short time to complete, pushed by the borrower or the broker.
- A guarantor whose assets are mostly the property being financed.
A worked example
This is an example with made-up numbers. It is not a real deal.
A borrower asks for a gross loan of £525,000 against a property valued at £750,000. That is 70% on day one. The rate is 0.85% a month, added to the loan, for 12 months. The exit fee is 1%. To keep the sums simple, assume the interest is not compounded.
Interest is £4,462.50 a month, so £53,550 over the year. The exit fee is £5,250. The repayment at month 12 is £525,000 plus £53,550 plus £5,250, which is £583,800.
The exit is a sale. Test one: the property sells for 15% below the valuation, at £637,500. Sale costs take 2%, which is £12,750. That leaves £624,750, so £40,950 above the debt. Test two: the sale takes six months longer. Extra interest is £26,775, so the debt is £610,575. The same sale leaves £14,175. The loan is still covered, but the margin is thin. A person on the credit team decides whether that is enough.
What can and cannot be automated
Software is good at the sums in that example. It can work out the loan to value and the full repayment. It can run the tests again when an input changes. It can read the title, the valuation and the bank statements into facts. It can check that the name on the title is the borrower. It can also ask for any paper that is missing.
It cannot decide if an exit is believable. That takes judgment about the local market, the borrower and the builder. A person also decides if a valuer is independent and if a price gap has a good reason.
Klarefi is the intake step here. It reads what the borrower or broker sends and asks for what is missing while they are still there. It links each figure to its source. Your credit team then runs the tests and decides.
Use the document checklist for the full list of papers. Our guide to loan software covers the wider process.