Bridging Finance

What is a Bridging loan?

A bridging loan is a short-term loan, often with a repayment period as brief as a few weeks. These loans are designed to “bridge the gap” and are commonly used for purchasing property at auction or when you need to buy a property before selling your existing one. Unlike mortgages, bridging loans can be secured quickly if speed is of the essence.

A bridge loan is a secured loan, which means you must provide an asset, such as your home, as collateral. As there is a risk of losing your asset, bridging loans are sometimes known as the loan of last resort.

How does a bridging loan work?

With a bridging loan, you can typically borrow between £50,000 and £10 million, depending on the equity you have available. The maximum loan amount, including any retained or rolled up interest, is usually capped at 75% of the property’s value. The loan is secured against the property, or sometimes multiple properties, to raise the necessary funds. Unlike a mortgage, a bridging loan is not directly tied to your income.

Here’s an example of how a bridging loan works:

You plan to buy a house for £400,000 and need a £150,000 deposit, with the rest covered by a mortgage. However, your current house hasn’t sold, and you only have £25,000 in savings. To cover the remaining £125,000 of the deposit, you take out a bridging loan. Once your current house sells, you use the proceeds to repay the £125,000 loan.

What are Bridging Loans used for?

Bridging loans can be used for a variety of purposes including:

Purchasing property: you may wish to buy a new home before selling the current one, or to buy a property at auction.

Refurbishing a property: Bridging loans can be used to fund the refurbishment of residential, commercial or business property, with the hope that the changes will increase the property’s value. Alternatively, if the property you buy is deemed unmortgageable, you can use the funds for the refurbishment to make it habitable so that a traditional mortgage can be arranged.

Purchasing land: A bridging loan may help to cover the cost of buying land and the building work for a new home, while you apply for a mortgage. Fix a broken property chain: you can bridge the gap finding a new buying if your property chain falls through.

What types of bridging loan are there?

First Charge and Second Charge: When you take out a bridging loan, a “charge” is placed on your property. This legal arrangement outlines the order in which lenders will be repaid if you’re unable to pay off your loans. If you already have a mortgage, the bridging loan will take a second charge position.

Fixed or Variable Interest: Bridging loan interest rates can be either fixed or variable. With a fixed rate, you’ll know the exact cost, and your monthly payments will remain consistent throughout the loan term. A variable rate, however, allows the interest rate to fluctuate over time.

Open Bridging Loan: An open bridge loan has no specific repayment date, but it typically needs to be paid off within a year, or up to 24 months in some cases. This option is ideal if you’ve found a property to buy but haven’t yet sold your current home.

Closed Bridging Loan: A closed bridging loan comes with a set repayment date. This type of loan is well-suited for situations where you’re selling a property and waiting for completion to use the proceeds toward your new purchase.

What fees are payable on a Bridging Loan?

There are various fees to be aware of when applying for bridging finance. These include:

Valuation Fees: To secure a bridging loan, a property valuation is usually required. range from £900 – £2000 depending on the lender and how fast you need the funds.

Administration fee: This is often payable upfront. Arrangement Fees: Lenders typically charge arrangement fees, which are usually a percentage of the loan amount (commonly around 2%).

Exit Fees: Some lenders impose an exit or redemption fee when the loan is repaid. However, most of the lenders we work with do not charge exit fees.

Legal Fees: Both you and the lender will need legal representation. Some lenders offer solicitors who can represent both you and the lender (dual representation), which can help save time and money. Part will be payable upfront to your conveyancing solicitor and the rest on completion. As with most types of financing, the interest rate on the loan will depend on several factors, including your income, savings, the repayment term, and the loan amount. These factors will influence both your interest rate and the total cost of the loan.

What are the pros and cons of bridging loans?

Pros:

Speed: They enable you to complete a property transaction quickly and could be paid out in a matter of days.

Flexibility: In most instances, there are no early repayment charges should you choose to exit a bridge early and there is often flexibility to amend the loan and increase the value or extend the term. This is particularly helpful for property developers who wish to borrow varying amounts depending on their projects’ status and their assets’ valuation.

Larger loans: Bridging loans are secured against property so there is potential to borrow very large sums of money. Property Condition: Traditional lenders are often restricted in the types of properties they can lend against, especially if the property is uninhabitable or requires significant renovation, like converting offices into apartments. Bridging finance companies have fewer limitations, making them ideal for unconventional or complex property projects.

Cons:

Higher Interest Rates: Bridging loans generally come with higher interest rates compared to other types of loans, with interest typically charged on a monthly basis.

Fees: There are often additional costs involved, such as arrangement fees, exit fees, and legal fees.

Risk of Repossession: Since bridging loans are secured against your property, your home may be at risk if you fail to meet the repayment terms.

Do you need an exit strategy for a bridging loan?

Yes- This is typically either the sale of an asset or the asset’s refinancing onto a longer-term finance such as a mortgage.

How long does it take for a bridging loan to be approved?

A bridge is a short-term loan and therefore they are usually approved within a few days although on complex cases, they make take a little longer.

Do bridging lenders do credit checks?

Yes, bridging loan lenders will always perform a credit check before offering a loan.

Is a bridging loan right for me?

A bridging loan may be a good option if you require a short-term loan for a large amount of money that you can repay quickly. If you’re unsure whether or not bridging finance is right for you, contact our expert advisers here at The Mortgage Masters. They will go through all the options available to you and support you through the whole process.

Your home may be repossessed if you do not keep up with repayments.