The intricacies of property finance in the UK is often found to be confusing, particularly when people tend to mistake the use of “gap finance” and “bridging finance” interchangeably. Lenders and financial advisers alike even confuse these terms, likewise many borrowers or the general public are completely unaware of the differential elements to each. This is of course understandable – both solutions serve as temporary fixes for cash flow problems, so it is not a surprise that many often think they are one of the same.
However, this is where a little educating comes in handy: they are not quite the same, but there is some common ground in them both.
Bridging finance, put simply, is a specialised loan product; whereas gap finance is used for plugging holes in one’s finances – or the ‘gap’, hence its name.
It can be beneficial to have a deeper knowledge of the two so you may better lower your costs, avoid unneeded confusion, and stay clear of pitfalls when trying to sort a transaction to the best of your benefit.
In essence, they come across as the same
First thing first – both can be used as a way to solving the same problem – namely coming to the rescue when there is a clash of timing and lack of resources that can scupper an opportunity.
In both gap and bridging, they share the same values of:
- being a short-term agreement,
- property-backed (security asset),
- best suited for time critical events,
- used in preparation for a future event, like a sale or refinancing.
So on the surface, both can be seen as “temporary cash to get things done” when taking the view of a borrower. But the most important point is to understand why – and how – they subtly differ.
Differences highlighted
The simplest definition we can put to you, is:
- Bridging finance = an identified loan product.
- Gap finance = funding which is playing the role.
A bridging loan is simple enough: short-term, secured on a property, and paid off in one go at the end. Gap finance is a means to overcoming a monetary deficiency – however that deficiency may not be cleared by one exit only.
Scenario A: Buy before you sell
You arrange to buy a new house, yet waiting on the final details for the sale of your current building. There’s a pressing need to finish the deal asap or you could lose your next home to another buyer.
Bridging finance is the most suitable form of finance in this option:
- there is an exit that is clear and pre-defined: selling the old property.
- it will be only a temporary lending of monies.
- paying back the loan is done in one payment only.
- less or even no complications to using bridging in this case.
In a strict sense, it’s also gap finance, but as the structure fits more suitably – it is more appropriate to call it bridging finance in this case usage.
Scenario B: Shortfall appears in development funds
In this case let’s look at it as being a small developer. Your chosen lender (the primary) has agreed to finance 65% of the valued projection of the project. Whilst you do hold some equity of your own, it is not enough to cover the full amount needed upfront, thus you needed a gap finance to cover the rest (the difference of your equity plus the 65% from the primary). The primary has agreed to grant the funds but stages the release based on all planning conditions being met and set out milestones for the build having been accomplished. Therefore, your gap financing can be used to cover shortfall during those times.
Here, it makes more sense to call this scenario gap finance. As not only is about getting things done fast, it is on filling holes (or gaps) in your funding throughout the project. The gap you have therefore gets smaller on each release, as more money is coming in from the primary incrementally, rather than everything done in one swoop.
Gap finance essentially works by:
- being a secondary behind the primary senior debt.
- being repaid little by little during your project.
- reducing the overall gap as more primary funds comes in.
- has better, or more, bespoke terms than a single upfront bridge agreement.
It would therefore be too much of an oversimplification to just call this “bridging” as doing that misses the moving parts and essence of how gap finance works.
Straightforward vs. flexible paybacks
- Bridging finance: repayment is a certainty and cleared off at the end – with interest and other charges included in this.
- Gap finance: repayment is often staged or will depend on multiple future events – for example in a development you may sell plots of lands to other investors to repay part of your loan in chunks.
Such flexibility can be handy; however, it also involves risk in case those things do not work out as planned.
Understanding the risk to each
Both are more expensive than long-term mortgages, essentially you’re paying the price to get speed and short-term lending. However, bridging finance generally has more definite costs and exits. Costs for gap finance tend to be more due to its complex nature, additional paperwork, and layered risk.
The final thought
In one sense, bridging finance is a type of gap finance. However, not all gap finance operates in the structure of a bridging loan (i.e. funding the buying of a house to repay by sale of another = bridging. Using and accessing funds incrementally for a development = gap). If you get it right, you will be able to avoid unpleasant surprises. Be sure you know what type of product is best suited to your case in question.