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Bridging loans are used when you need to pay for something new while waiting for funds to become available from the sale of something else.
In real estate they’re often used by people who are buying a property, but are waiting for the sale of another property to go through.
Bridging loans are secured loans. This means you need to have a high-value asset to apply for one, such as a property or land.
A bridging loan (or ‘bridge loan’) can be useful if you need to borrow money for a short period. It can help to ‘bridge the gap’ if you want to buy a new home before selling your old one. Bridging loans can also be used if you buy a property at auction, where you’ll need the money immediately but may not have sold your current property yet. In this guide, we explain how bridging loans work and who they could be right for.
How do these loans work?
There are two types of bridging loan: ‘closed’ and ‘open’.
Closed bridging loans With a closed loan, there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.
Open bridging loans With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one year. Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage.
They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it, as well as proof of what you are doing to sell your current property if relevant. You should also have a back-up plan in place in case your repayment strategy fails.
You can borrow between £50,000 and £10 million with a bridging loan. The amount depends on how much equity you have available. The maximum loan, including interest, is normally limited to 75% loan to value. The loan is then secured on the property or it can be across multiple properties to raise the required funds. A bridging loan, unlike a mortgage, is not directly linked to your income.
The bridging loan is repaid either by the sale of the property or by raising finance through a traditional mortgage route.
Bridging finance could be used for lots of reasons. These include:
- Buying a property
- Property development
- Buy-to-let investment
- Business ventures
- Paying a tax bill
- Divorce settlements.
- Bridging loans are also used by property developers at auction. This is because they often need to pay a deposit to secure their purchase at short notice.
Alongside the interest rate, there are other bridging loan fees you may have to pay. These include:
- Arrangement fee paid to the lender – typically 2% of the loan and added to the loan.
- Administration fee – can be payable upfront.
- Legal fees – part payable upfront to your conveyancing solicitor and the rest on completion.
- Valuation fees – range from £900 – £2000 depending on the lender and how fast you need the funds.
- Broker fees – payable on receipt of the mortgage offer – from £500 flat fee to a % of the loan.
What are the pros and cons of a bridging loan?
Make sure you balance up the pros and cons before you apply for a bridging loan.
Pros of bridging loans:
- You can quickly borrow the money to keep your property transaction on track.
- It is possible to borrow very large sums of money.
- The repayment terms can be flexible to fit in with your plans.
- It is possible to secure lending on properties where high street lenders may not.
Cons of bridging loans:
- Bridging loans are a secured form of borrowing, so you’ll need to put up an asset against the loan. This means you risk losing that asset, for example a property, if you can’t repay the bridging loan.
- You pay for the convenience of fast, flexible finance with a higher interest rate.
- Bridging loans can come with a range of fees that add to their expense.
How to choose the best bridge loan
Before you start to compare bridging loans, there are a few things you’ll need to think about. They include the following:
How much you want to borrow. Lenders offer bridging finance from £5,000 up to £10 million and beyond.
How much your property’s worth: This affects how much you can borrow and the bridge loan rates you’ll get so you will need an accurate valuation.
How long you need to borrow for: Bridging loans can be as short as one month, to as long as two years.
Whether you have a mortgage on your property: This affects how much you can borrow through a bridge loan. It also affects whether you can look at first charge or second charge loans.
How to get a bridging loan
You can apply to a specialised broker or direct to the lender for a bridging loan. There are several things lenders will assess when deciding whether or not to approve your application.
The lender will usually require at least one property to be used as security against the loan. This will likely need to be another property to the one you are selling, so you may need to own more than one property to secure a bridging loan.
The lender will also want your exit plan. That is how you will repay the loan and by when. If you need to take out a traditional residential or buy-to-let mortgage, for instance on the property that has been renovated or the property you are buying, you will need to show the lender proof that the mortgage will be forthcoming. They will undertake affordability checks as standard with normal mortgage lending or look at the rental income you will be generating. This is to satisfy the lender that you will be able to secure a mortgage and you can afford any repayments required on the new loan.
Prior to the 2008 financial crisis bridging loans were a more common lending product offered by the high street banks such as Nationwide, Halifax and Santander. At this time, bridging loans were used by people not wanting to lose out on their dream home.
However, many stopped offering them after the credit crunch. Currently, only Lloyds Bank offers bridging loans to its private banking customers. Nowadays professional or experienced investors take advantage of this facility.
These days bridging loans tend to be offered by alternative lenders rather than the high street banks such as United Trust Bank, Precise mortgages, MT Finance or some regional building societies such as Harpenden.
A bridging loan is specialist finance, and you should seek independent advice as they are considered a loan of last resort. You need to establish if more suitable alternatives are available and specialist brokers (such as Chartwell Funding) are experienced in helping to arrange these loans if and when required.
Here’s a step-by-step guide on finding the best bridging loans and best bridging finance rates, and then filling out your application.
Decide what you need from your bridge loan. How much do you need to borrow? How long do you need to borrow it for?
- Gather the important details about your current situation. How much is your property worth? Do you have a mortgage? How much is your mortgage and how much equity is in your home? You’ll need all this information to find cheap bridging loans that fit your needs.
- Use the comparison table at the top of this page to compare bridging loans and find the best bridge loan rates for you.
- Decide whether you want to speak to a broker or apply online. A broker may be able to help find you a loan but make sure you’re aware of any charges applied if you do choose to use one.
- Pick which bridge loan to apply for. Read the small print to find out about all the costs and fees.
- Once you’ve applied, wait to hear whether your application’s approved. This could take 24 hours.
- If you’re approved, and you accept the loan, the bridge loan money will be transferred to your bank account.This could take up to two weeks.
It’s pretty quick to apply for a bridge loan. After you compare bridging loans and find the best bridging loan rates you can do your application online. You’ll usually find out if your application’s been approved within 24 hours.
Once your application’s approved, the money could be in your account within two weeks. This is because it takes time to have your property valued, for the lender to do their checks, and for the money to be transferred.
If you need the money sooner, you might be able to pay extra to have your bridge loan processed faster.
Many lenders will still consider your application for bridging finance even if you have bad credit. But, as you’re seen as a more risky customer, your loan might have a higher interest rate. This will make it more expensive. You’re unlikely to be able to get the very best bridging loan rates if you have bad credit. It may be worth improving your credit score before you apply.
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.