Bridging loans
A bridging loan can be a useful way of borrowing money in the short-term, while you’re waiting for other funds to arrive – for example, when you’re selling a house to buy another. Here’s what you need to know about bridging loans and how they work.
A bridging loan can be a useful way of borrowing money in the short-term, while you’re waiting for other funds to arrive – for example, when you’re selling a house to buy another. Here’s what you need to know about bridging loans and how they work.
What is a bridging loan?
A bridging loan - also known as a ‘bridge’ loan - is a secured loan that’s used to ‘bridge the gap’, allowing you to buy something while still waiting for the money for something else you’ve sold to arrive.
The best example of a bridging loan is when you buy a house but are still waiting for the sale of your old property to go through.
Bridging loans are often used when buying a property or land at auction. The money can be used as an immediate deposit to secure a property at short notice.
They’re popular with property developers and landlords who buy properties with the intention of selling them on quickly.
Please note that you can’t compare bridging loans with Compare the Market.
What is a bridging loan suitable for?
Bridging finance is often used for:
- buying a property
- property development and renovations
- cash flow cover for home improvement projects
- buy-to-let investments
- raising capital for business ventures
- paying a large tax bill
- divorce settlements.
A bridging loan should only be used as a short-term cash injection to ‘tide you over’ while waiting for other funds to arrive. If you take out a bridging loan you should always know what your exit strategy for paying off the loan is.
As it’s a secured loan, you’ll need to use a high-value asset like your house or land for collateral.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or other debts secured against it.
Did you know?Once a specialist financial product for property developers and investors, bridging finance is becoming a popular way for homebuyers to secure a property. If you’re caught up in a property chain, a bridging loan could prevent you from 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 of time. This means you can pay off the loan once you have the money available - although most lenders will expect you to pay it off within a year.
Closed bridging loans
These have a fixed date when you have to pay off the loan. This type of loan is typically used when you’ve exchanged contracts on a property and are waiting for completion. They usually last just a few weeks.
Open loans are usually more expensive than closed bridging loans. Whichever type you go for, you should have an alternative ‘back-up plan’ to cover the cost of the loan if there are any delays.
As with other loans, the interest rate on a bridging loan can be fixed or variable.
How much money can I borrow with a bridging loan?
The amount you can borrow with a bridging loan typically depends on your credit rating and the value of your property. Loans can range from £5,000 to £10 million or more. Lenders will also have their own lower and upper lending limits.
The amount lenders are willing to lend against the value of the property is known as the loan to value (LTV) ratio – and is usually shown as a percentage figure. Put simply, LTV is the size of your mortgage or bridging loan in relation to the value of the property. Usually, to minimise the risk to themselves, lenders are typically willing to lend up to 75% of a property’s value.
How much does a bridging loan cost?
Bridging loans are typically meant for the short-term, so lenders usually calculate and price them on a monthly basis rather than an annual one. Bear in mind that bridging loans tend to have fairly high interest rates.
Depending on the deal you choose, interest may be charged:
Monthly
Here you’ll pay interest monthly, then pay back what you owe at the end of the loan.
Deferred
Instead of paying interest each month, it’s ‘rolled-up’ and paid as a lump sum at the end of the loan, along with what you borrowed. The amount you owe will grow every month as that month’s interest is added, and you pay interest on the interest added in the previous months as well as the original amount borrowed.
Retained
You borrow the interest as well as the loan for a set amount of time, then pay it all back at the end of the loan.
In some cases, you may be able to 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 the typical costs and fees that come with a mortgage, like arrangement, administration, and legal and valuation fees. You may also need to pay a redemption fee. Set up fees can typically total to around 1-2% of the loan you want to take out.
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 should be paid off first if you’re having trouble paying off your loans.
- First charge loans – if you own your property outright or are using the loan to pay off your mortgage, the bridging loan would be paid off first before other debts, if you fall behind with repayments.
- Second charge loans – if you still have a mortgage and fall behind on repayments, the mortgage would be paid off before the bridging loan if your home has to be sold to pay off your debts.
What to consider when choosing a bridging loan
When choosing a bridging loan, you’ll want to find the best deal to suit your needs. Think about:
- how much you want to borrow
- the LTV of the property you’re using as collateral
- how long you want the loan to last
- if you have a mortgage on your property
- the interest rate and other costs associated with the loan
- if you should apply directly or use a broker
How to apply for a bridging loan
Unfortunately, you can’t compare bridging loans with Compare the Market, and they aren’t commonly available through the usual high-street banks either. Usually, you’d need to speak to a mortgage broker.
Because a bridging loan is tied to your property, the process for applying for a bridging loan is similar to a streamlined mortgage application. You’ll face various checks into your credit history, monthly income and outgoings, including any outstanding mortgage balance. The property you’re using to secure the loan will then be valued, before you finalise the loan amount and a repayment plan, before receiving your formal offer.
Need mortgage advice?
If you’re not sure about your bridging finance options, it might be wise to speak to a broker. They’ll be able to 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.
You can get in touch with them here.
Go to L&C mortgages**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.
Frequently asked questions
What are the pros and cons of a bridging loan?
Pros
- a short-term solution to tide you over while waiting for other funds to arrive
- you can 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
- you may need a large deposit or other security for the amount you want to borrow
What are the alternatives to a bridging loan?
A bridging loan could fill the gap, but it’s also worth considering other ways to borrow money. For example:
- you could look into taking out a second mortgage or
- releasing equity in your current property
Can you get a bridging loan with bad credit?
Yes, you could still get a bridging loan with bad credit, but you will face a hard credit check during your application. Therefore, your credit score will need to be good enough to pass. Also, your credit score is one of the main things, along with the value of your property, that determines how much you could borrow. This means, having a bad credit score will usually mean you can’t borrow as much, if you’re eligible. However, having a certain amount of equity in your property can help offset a bad credit score.
