What is a bridging loan?

A bridging loan is a short-term secured loan. It is used to ‘bridge the financial gap’ when buying a new property before selling a current one. For example, a bridging loan can be used to buy a property at auction before you have sold your current home. They can also be used to fund the purchase of a property for redevelopment or renovation for sale or rent, for short-term refinancing, for paying off a development lender and for business working capital or even for paying a tax bill or divorce settlements.

Are bridging loans regulated?

Bridging loans can be regulated or unregulated depending on how you intend to use the property and how long you want the loan. A regulated bridging loan is required if the money being borrowed is for a property you or a member of your close family intends to live in or have lived in during the previous 12-months. An unregulated bridging loan can be used to buy a property as an investment or for commercial reasons.

There are two types of bridging loans

· Open bridge loans; these have no set end date. This means they can be repaid whenever your funds become available. They usually last for up to a year, and sometimes even longer depending on the provider.

· Closed bridge loans; these have a fixed end date. This date is usually based on when you know you’ll have funds available to pay back what you owe. They’re usually for people who need to borrow money on a very short-term basis, lasting just a few weeks or months.

Open bridging loans are usually more expensive than closed bridging loans because they’re more flexible. Whichever kind you choose, you need to work out an ‘exit route’ – a way to repay your bridging finance - before you take the loan out.

Bridging loans can have fixed or variable interest rates

Bridging loans can come with fixed or variable rates of interest. A fixed interest rate will not change for the duration of the loan, while a variable rate may be changed. The result is that your monthly payments with a fixed rate will remain the same for the period, while a variable interest rate could see your monthly payments change.

First or second charge bridging loans

A bridging loan is secured against a property. If you already have a mortgage on your property, then the secured loan will be the second charge against it. The term second charge refers to the priority of the lender to be repaid if your property is repossessed and sold.

How does affordability work for a bridging loan?

Regulated bridging loans will require you to pass an affordability test. This means the lender will want to know more about your income and expenditure to check that the loan is affordable.

Unregulated bridging loans do include an affordability test albeit these are usually less stringent than a regulated loan. The lender will also focus on the asset being able to act as security for the loan. The exceptions to this will be if the bridging loan interest is being paid monthly or if the borrower intends to pay off the bridging loan using a form of finance that requires an affordability test.

How much can I borrow using a bridging loan?

Data shows lenders offer bridging loans of between £50,000 and £25m. The amount you can borrow using a bridging loan will be based on your affordability (if this is required) and the value of the property. Lenders offering unregulated bridging loans may use a 90-day sale fixed valuation. This valuation is often up to 20% lower than open market value and the lender will then offer bridging loans of between 60% and 90% of the 90-day value. For example, a property with an open market value of £500,000 might be valued at £450,000 using the 90-day valuation. The lender would then have a potential loan value of between £270,000 and £405,000. This will also depend on the value of any existing loans secured against the property and if the lender thinks your property may be harder to sell due to its commercial status or location.

What terms are available for a bridging loan?

You can take a bridging loan over a term from as short as one day and for some, the loan is open-ended, but in most cases, lenders offer terms up to 24 months, with a few lenders offering 36 months terms.

How long does it take to get a bridging loan?

It is possible to obtain a bridging loan in a matter of a few hours and receive funds within a matter of days. The standard amount of time however is usually a couple of weeks.

Bridge loan interest rates

Interest rates on bridging loans tend to be pretty high. They could range from around 0.4% to 2%. But these can differ depending on the lender you choose and your own credit history.

Bridging loans don’t last very long as they’re just a way to ‘tide you over’ for a few weeks or months. As they are short term, bridging loans usually charge monthly interest rates rather than an annual percentage rate (APR). This means that just a small difference in the interest rate can have a big impact on the overall cost of your bridge loan.

But the interest’s not always charged monthly. There are three main ways it can be charged. These are:

· Monthly – You pay the interest monthly and it’s not added to your bridging finance.

· Deferred or rolled up – You pay all the interest at the end of your bridge loan. There are no monthly interest payments.

· Retained – You borrow the interest for an agreed period, and pay it all back at the end of the bridge loan.

Some lenders let you combine these options. For example, you could choose retained interest for the first six months, and then switch to monthly interest.

Don’t forget there are lots of other fees and charges that you’ll have to pay on top of the interest too. You’ll need to check the costs carefully before you go ahead.

Bridge loan fees:

Aside from interest costs, here are some of the other costs you may have to pay:

· An arrangement or facility fee: What you pay for setting up the bridge loan. It’s usually around one to two per cent of the total loan.

· Exit fees: This is usually around one per cent of the bridge loan if you pay it back early. Not all lenders charge an exit fee.

· Administration or repayment fees: This is what you pay for the paperwork to be completed at the end of your bridging finance.

· Legal fees: This pays the lender's legal fees. It’s usually charged at a set rate.

· Valuation fees: This pays for the surveyor to value your property.

· Introducer or broker fees: If you use a broker, this pays for their work in looking at bridging loans for you and choosing the best bridging loans for you.

There might be other fees too, so bear this in mind before you decide if bridging finance is right for you.

What to consider when applying for a bridging loan?

Here are three things to consider when looking for the best bridging loan:

1. The amount you want to borrow and for how long; Lenders will consider bridging loans starting from £50,000 up to £25m. Terms range from one month up to three years.

2. The value of the property you want to buy; The valuation of your property will also determine the maximum amount a bridging lender will offer. This may not be the market valuation but lower in order to give the lender some protection in case you default on the loan.

3. If you already have a mortgage on the property; In some cases, you may want to use a bridging loan on a property that you already have a mortgage on, for example a buy-to-let property that you want to renovate in order to sell or increase future rental income. In this case the bridging loan would be a second charge and this may reduce the number of lenders available to you.

Why use a bridging loan?

A bridging loan can help you to make a property purchase quickly, however you will need to be sure that you have a clear strategy to repay the debt in a short amount of time, usually less than two years, but a few lenders will consider three year terms.

What is a commercial bridging loan?

A commercial bridging loan is a short-term loan, secured on a commercial property, development land or agricultural land. They are available to businesses and individuals that need access to funding quickly.

Can I get a bridging loan to buy a house?

Yes, you can use a bridging to buy a house, but it should only be used to secure the purchase of a property. It should be used for a short period of time, usually no more than two years and then refinanced using a mortgage, buy-to-let mortgage or repaid through the sale of the property.

Should I take a bridging loan or remortgage?

If you want to buy a new property you could choose to either remortgage a current property and use the equity as a deposit or to make your purchase or take out a bridging loan on your new property. The amount you could borrow using a bridging loan may be lower than a remortgage, but a bridging loan will be quicker if speed is important. A bridging loan is also likely to have a higher interest rate and will therefore be more expensive than funds released from a remortgage.

Can you get a bridging loan with bad credit?

Yes, it is possible to get a bridging loan when you have poor credit. This is because the lender’s focus is on ensuring the property you use as security for the loan will sufficiently cover them in case you default. In addition, if you plan to sell a property to pay off the bridging loan, then the bridging lender is less likely to be concerned about a bad credit history. However, if you plan to remortgage then they may judge that your credit score will inhibit from you doing this successfully.

The types of bad credit issues that shouldn’t affect your ability to exit your bridging loan include: No credit history, Low credit score, CCJs, IVAs, Late and missed payments and Debt management schemes.

In the majority of cases the lender will judge the severity and age of any credit issues in relation to how this might impact your ability to pay off the bridging loan in full when required. For example, a late payment for a digital entertainment package from ten years ago versus a declaration of bankruptcy in the past six months.

How to use a bridging loan for property development

You can use a bridging loan to buy and renovate a property or to develop land for a housing or commercial development. You will need to find a property that you can add value to, this will give the lender headroom and confidence that their debt will be repaid when the development is completed, sold or refinanced. Developing property does involve risks, you will need to be confident that you can develop your property quickly enough and will add enough value to cover your development, interest costs and other fees.

An example of a £100,000 bridging loan;

This is how much it could cost you to borrow £100,000 over 1 month, 6 months and 12 months, with a monthly interest rate of 0.65%:

Term

1 month Interest; £657 Fee; £2,030 Total; £102,687

6 month Interest; £3,942 Fee; £2,030 Total; £105,972

12 month Interest; £7,884 Fee; .£2,030 Total; £109,914  

* Fees are based on: 1% facility fee, £250 valuation fee, £35 bank transfer fee, £295 Admin fee and £450 legal fee.

So, the longer it takes you to repay the loan, the more it will cost you. The same is true if the interest rate is higher.

Pros and cons of bridge loans

Pros ;

· You’ll receive money quickly

· You can borrow a large sum of money

· You can have a lot of flexibility if needed

Cons ;

· It is secured against your home, so could risk losing your home

· Interest rates for bridge loans can be petty high

· Bridge loans come with a lot fees attached, so it can be a costly

Alternatives to bridging loans

Bridging loans are specialist loans in that you borrow money for such a short time. There are some alternatives to bridging finance, though. These include:

· Second mortgage: You could look into getting a second mortgage.

· Remortgage: You could remortgage your current home to free up some money.

· Secured loan: Here’s how secured loans work.

· Personal loan: You could check if a personal loan could work for your needs.

· Let to buy: If you want to buy a property and the sale of your first property falls through, a let to buy mortgage could be worth investigating.