What is a bridging loan?
A bridging loan – or ‘bridge’ loan – is a short-term loan used to ‘bridge the gap’ between making a payment and having the funds available to do so.
The best example of a short-term bridging loan is when you want to buy a house but are waiting for the sale of your old property to complete.
A bridging loan is a secured loan. So you’ll need to use a high-value asset, like your house, as collateral.
Please note you can’t compare bridging loans with Compare the Market.
How do bridging loans work?
Bridging loans are designed to tide you over for a very short period, sometimes as little as a few weeks. For example, if you want to buy a home and haven’t yet sold your previous property, you could:
Put down as much as you can afford for the deposit
Take out a bridging loan to make up any shortfall
Repay the bridging loan as soon as the sale of your old house goes through.
It’s very expensive to borrow with a bridging loan. They should only be used as a short-term cash injection until other funds arrive.
Never take out a bridging loan without knowing how you’re going to pay it off.
Think carefully before securing debts against your home. Your home may be repossessed if you don’t keep up repayments on your mortgage or other debts secured against it.
What is a bridging loan suitable for?
Bridging loans are often used for:
Buying property
Property development and renovations
Home improvement projects
Buy-to-let investments
Raising capital for business ventures
Paying a large tax bill
Divorce settlements.
Did you know?
Once a specialist financial product for property developers and investors, bridging loans are becoming a popular way for homebuyers to secure a property.
If you’re in a chain, a bridging loan could stop you missing out on your dream home if a buyer drops out.
Types of bridging loans
There are two types of bridging loan:
Open bridging loans
This type of loan doesn’t have a fixed length, meaning you can pay it off once you have the money. However, most lenders will expect you to pay it off within a year.
Closed bridging loans
A closed bridging loan is one you must pay off by a set date. They’re useful when you’ve exchanged contracts and are waiting to complete, and usually last just a few weeks.
Open loans are usually more expensive than closed bridging loans.
Whichever type of bridging loan you choose, have a back-up plan to cover your repayments if there are any delays. As with other loans, the interest rate on a bridging loan can be fixed or variable.
How much can I borrow with a bridging loan?
How much you could borrow with a bridging loan depends on your credit rating and the value of your property. Loans can range from £5,000 to upwards of £10 million. Each loan provider will have its own lending limits.
The amount lenders are willing to lend against the property value is known as the loan to value (LTV) ratio. This is usually shown as a percentage.
LTV is the size of your mortgage or bridging loan in relation to the value of the property. To minimise the risk to themselves, lenders are usually willing to lend up to 75% of a property’s value.
How much does a bridging loan cost?
Bridging loans are meant for the short-term, so bridge loan lenders usually price them on a monthly, rather than an annual, basis. Remember, bridging loans tend to have high interest rates.
Depending on the deal you choose, interest may be charged:
Monthly
You’ll pay interest monthly, then pay back what you owe at the end of the loan.
Deferred
Interest is ‘rolled-up’ and paid as a lump sum at the end of the loan, along with what you borrowed.
The amount you owe will increase every month as that month’s interest is added. You’ll pay interest on the interest added, as well as the original amount borrowed.
Retained
This is when you borrow the interest, as well as the loan, for a set period, then pay it all back at the end of the loan.
In some cases, you can mix the way you pay interest – for example, retained for the first few weeks, then monthly until the end of the loan.
When considering the total cost of a bridging loan, you’ll also need to factor in these set-up fees:
Arrangement fees
Valuation fees – to cover the cost of sending a surveyor to value your property
Exit fee – if you pay off your loan early
Administration/repayment fee – the cost of paperwork at the end of the loan period
Legal fees.
Providers may charge other fees, so it’s worth doing a bridging loan comparison to get the best deal for your needs.
What are bridging loan charges?
When you apply for a bridging loan, the lender will add a ‘charge’ against the property or asset you’re using as security. This prioritises which debts are paid off first if you can’t repay the loan.
First charge loans
If you own your property outright or are using the loan to pay off your mortgage, the bridging loan will be paid before any other debts if you fall behind with repayments.
Second charge loans
If you have a mortgage and fall behind on repayments, the mortgage will be paid off before the bridging loan if you have to sell your home to pay off debts.
What to consider when choosing a bridging loan
You’ll want to find the best bridging loan for you. This may not always be a cheap bridging loan, but it should be the right one for your needs. Think about:
How much you want to borrow
The LTV of the property you’re using as collateral
How long you need the loan for
If you have a mortgage on your property
The interest rate and other associated costs.
How to apply for a bridging loan
Because a bridging loan is tied to your property, the process for applying for a bridging loan is similar to a mortgage application. A bridging loan provider will check your credit history, monthly income and outgoings, and outstanding mortgage balance.
The property you’re using to secure the loan will be valued. You’ll then finalise your loan amount and repayment plan, before receiving a formal offer.
Need mortgage advice?
If you’re not sure about your bridging finance options, speak to a broker, who can offer expert advice.
Our partners, London & Country Mortgages Ltd (L&C)**, can offer fee-free, expert and independent advice on all aspects of mortgages and bridging finance.
**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).
L&C are not part of Compare the Market Limited. Compare the Market receive a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria.
L&C will not charge you a broker fee should you decide to proceed with a mortgage.
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FAQs
What are the pros and cons of bridging loans?
Pros
A short-term solution to tide you over while waiting for other funds to arrive
You could borrow large amounts
Flexible borrowing
Quick application process.
Cons
Expensive – high fees and interest rates
Your home is at risk if you can’t meet repayments
Not suitable for long-term borrowing.
Does a bridging loan affect a mortgage application?
A bridging loan will affect your mortgage application if you apply before the bridging loan is paid off. This could make getting a mortgage difficult as lenders will look at any outstanding debts you have, as well as your income and your credit score.
What are the alternatives to a bridging loan?
Alternatives to bridging loans include:
Taking out a second mortgage
Releasing equity in your current property
Switching your mortgage to a buy-to-let and renting out your property to buy another
Taking out a secured loan
Taking out a personal loan.
Can you get a bridging loan with bad credit?
You might be able to get a bridging loan with bad credit. In fact, it could be easier than getting alternative types of finance as the loan is secured against a property. But remember, you could lose your home if you can’t repay what you owe.
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.
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