A bridging loan is a short-term loan typically taken out over 2 weeks to 3 years that can be used to cover a financial shortfall until a longer-term loan can be arranged. It can be used for a variety of purposes but most commonly for buying a property, refinancing debt, or consolidating loans.
Bridging loans are typically secured against the value of a property and come with high-interest rates in return for their convenience and speed of set-up. This makes them suitable to individuals who have a solid repayment plan in place and know they can repay the full amount including interest within the agreed term when previously tied up funds are released.
Who Are They For?
Bridging loans are useful for people who need to access large sums of money for a short period of time when their existing cash is already tied up, usually in a property. For example, homeowners or commercial investors that want to buy their next property may have the deposit funds required but it’s tied up in an existing property and it won’t be released until the new sale is completed.
In this example, the individual may take out a short term bridging loan to cover the gap in funds because know that they will be able to repay the bridging loan in full in a short period of time once the original deposit cash is released. In this scenario, a bridging loan is a useful tool that serves the purpose of literally bridging a finance gap.
Bridging loans are intended for exactly this purpose and should not be used by anyone in debt that is looking to increase the amount of cash they have available to spend.
When To Use A Bridging Loan
A bridging loan can be a useful tool if you need to purchase a property quickly and do not have time to organise traditional financing. The example above illustrates that a bridging loan can be used to buy property when deposit funds are tied up but there are a few more examples when buying property when it may be beneficial to use a bridging loan.
Bridging loans are typically used in the following situations:
Purchase a property at auction
To continue a property purchase if your sale has fallen through
To invest in redeveloping the property for later sale or for letting
To buy land for development
You need to buy a property before your current property is sold
You are in a chain and one of the buyers has pulled out
You need to refinance your mortgage but have been refused by your lender
As bridging loans are short term finance products, they can be taken out over a term as short as one day but for most, lenders offer terms up to 24 months, with a few lenders offering 36 months terms.
How Much Can You Borrow?
The amount that you can borrow with a bridging loan will depend on your individual circumstances, the value of the property that it’s being secured against, and whether it’s a regulated or unregulated bridging loan. Unlike a traditional loan, bridging finance is not linked to your income unless opting for regulated bridging which is explained in more detail below.
Bridging lenders instead typically offer between £50,000 and £25m with the maximum loan, including interest normally being limited to 75% of the value of the property. The loan is then secured on the property or it can be secured across multiple properties to raise the required funds.
For regulated bridging, as with any type of finance, the lender will need to conduct a full assessment of your income, debts and expenses, as well as the value of the property that you want to buy to determine that you will be able to repay the loan in full within the agreed timeline. As a general rule of thumb, most lenders will offer loans of up to 50% of the property’s value.
For unregulated bridging, affordability tests are conducted but they’re usually less strict than those done for a regulated loan. Instead, the lender will look at the value of the asset that is being used as security of the loan.
How Much Does A Bridging Loan Cost?
The cost of a bridging loan will vary depending on the lender and the terms of the loan but the costs tend to be more than a typical mortgage or cash loan due to the speed and flexibility of borrowing available in bridging finance.
Typically, you will need to pay an arrangement fee, administration fee and broker fee which is usually calculated as a percentage of the total loan amount. Then add on fixed priced legal and valuation fees, plus the interest on the loan itself, which can all add up to a significant cost.
The interest rate will almost certainly be higher than any rate you would find on a traditional mortgage, and you can expect to pay anything from 6%APR up to 20%APR depending on the loan. This means it is doubly important to shop around for the best deal especially after factoring in arrangement fees of around 2% of the loan value.
When it comes to repaying the interest, which is a significant cost in any loan, some bridging lenders don’t require a monthly repayment. There are instead three ways that interest can be charged on a bridging loan, so make sure you understand which option you have agreed to. Monthly, rolled up and retained interest payments are briefly summarised as:
Monthly – interest-only payments are paid each month and not added to the loan.
Rolled up – Interest payments are added to the loan and paid when the bridging loan is cleared – this can quickly add up when compounded monthly.
Retained – You borrow the interest upfront for an agreed period and then when the loan is paid back, any unused interest is returned to you.
How Does It All Work?
There are several types of bridging loans available to consider. Each comes with its own pros and cons and should be fully assessed for suitability for the individual taking on the bridging loan before proceeding. Read on for a summary of regulated and unregulated, open and closed, variable and fixed interest rates, and first and second charge bridging loans below:
Regulated And Unregulated Bridging Loans
Regulated bridging loans are needed if the money you are borrowing is for a property that you or a member of your family intends to live in or has lived in during the 12 months before the loan. Unregulated bridging loans can be used if the property is being bought for investment or commercial reasons.
Fixed Or Variable Interest Rates
Just like a regular loan or mortgage, bridging loans are offered with either fixed or variable rates of interest. A fixed-rate of interest will be set and not changed for an agreed period of time. The fixed period may be a proportion of the repayment term or the whole repayment term.
Variable interest rates mean that the interest you pay will vary throughout the course of the repayment term and will fluctuate in line with a benchmark or index such as the Bank of England’s base interest rate.
First Or Second Charge
Large loans are offered by lenders on the basis that they can take control of assets owned by borrowers when there is a problem with loan repayment. For example, if you have taken out a mortgage on a property and stopped making the repayments, the bank that lent you the money to purchase the property in the first place can repossess and take charge of the property in order to settle the outstanding debt (or mortgage) against it.
Due to the nature of bridging loans, it means that more than one loan can be taken out against the value of the same asset. When this occurs, the first loan will be referred to as the first charge and the second loan referred to as the second charge.
In the event of any issue in settling either loan, the first charge must be settled before the second charge can be. Once the first charge is settled, the second charge is entitled to receive the residual value of the property if available to put towards the debt owed.
As bridging loans are regularly second charge loans, they attract higher interest rates and are offered over short lending periods. This is because they are considered to be a higher risk. After all, the property the loan is secured against may not fully cover the loan offered once the first charge is settled.
Closed Bridging Loans
Closed bridging loans come with a fixed repayment date. This means that the loan will be offered on the proviso that it is repaid on or by a certain date. This usually works best when you know you will complete a property purchase on a certain date so that funds will be available to settle the loan.
Open Bridging Loans
In contrast to closed bridging loans, there is no fixed repayment date for an open bridging loan but the lender would expect it to be repaid within a year and that a repayment strategy is in place such as using equity from a property sale.
Pros And Cons Of Bridging Loans
Pros Of Bridging Loans
Bridging loans can be arranged quickly
Large sums are available – up to £25 million
Flexible repayment terms to suit your individual circumstances
An alternative to high street lenders
Cons of bridging loans
The loan is secured using an asset, usually property) which means you could lose the property if you can’t repay the loan
Higher interest rates reflect the speed and convenience of the lending
Be aware of fees that increase the overall cost of bridging loans
You may be paying for two loans if the bridging loan is taken out on a property that you already have a mortgage on.
Which Lenders Offer Bridging Loans?
As bridging loans are a specialist financial product, they are typically offered by companies that specialise only in bridging finance and aren’t found on the High Street very often. Regular lenders like banks and Building societies don’t tend to offer bridging loans as part of their services and not all bridging lenders are authorised by the FCA, so always research the lender thoroughly before agreeing to bridging loan terms.
Big-name bridging lenders include; United Trust Bank, Precise Mortgages, MT Finance, West One, LendInvest, Octopus and many more.
What Is Commercial Bridging
A commercial bridging loan is a short-term loan, secured on a commercial property, development land or agricultural land and works in the same way as standard bridging loans are secured on residential property.
Alternatives To Bridging Loans
If you need quick financing but have been refused a bridging loan, there are a few other, more traditional options that you can consider to get the funds you need.
Taking out a personal or secured loan
Remortgaging your property
Refinancing existing debt
A bridging loan is a short-term loan typically taken out over 2 weeks to 3 years that can be used to cover a financial shortfall until a longer-term loan can be arranged. It can be used to help you to make a property purchase quickly, but you will need to have a clear repayment strategy in place so that the loan can be repaid within the agreed timeframe, usually less than 2 years. Bridging loans aren’t for everyone, but they are a valuable tool for property investors or those in need of a short term cash injection until longer-term funds are available.
Due to their short term nature, and ability to provide finance when it’s really needed, bridging loans are typically expensive. It’s important therefore to shop around and compare deals to ensure that you’re getting the best deal you can in terms of interest rates and repayment terms.
Always read the terms and conditions carefully so that you know exactly what you’re signing up for and it’s a good idea to seek independent financial advice before taking on large sums of debt like a bridging loan.