Finding the best bridging loan for your circumstances can ease the burden at a time when several financial and practical plates are spinning at all at once.
But, as ever, the first step is to fully understand what this kind of borrowing is, how it works and what the risks are.
What is a bridging loan?
A bridging loan is a type of short-term finance typically used when you want to buy a new home before selling your old one.
The loan ‘bridges the gap’ between the purchase and sale.
Bridging loans are usually taken for a maximum of 12 months, and they can normally be arranged relatively quickly.
What else can a bridging loan be used for?
Although bridging loans are typically used when there’s a gap in a residential property transaction, they are often used by investors and property developers too.
For example, if you buy a property at auction, you normally have to complete the transaction within 28 days. This won’t be enough time to arrange a standard mortgage so bridging finance is used instead. The buyer can then remortgage to a mortgage from a mainstream lender later on.
Bridging loans can have other uses for property too. For example:
- Property renovation
- Purchasing an unmortgageable property
- Buying a property with a short lease
- Time-sensitive property transactions
Bridging loans can also be used for non-property reasons such as:
- Paying off debts or tax bills
- Solving short-term business cash flow problems
- Divorce settlements
Is a bridging loan a secured loan?
Yes, bridging loans are a type of secured loan, so you’ll need to put up an asset as security for the loan.
Having a ‘charge’ against your property means there is a legal agreement allowing the lender to pursue the sale of your property if you fail to pay the loan as agreed.
If there are no other mortgages or loans on your property, the bridging loan will be a ‘first charge’ loan. If you have a mortgage on your property, the bridging loan will be a ‘second charge’ loan. The charges denote the order debts will be paid when the property is sold.
Because bridging loans are secured loans you can usually be accepted for one even if you have a poor credit score. The downside is that your property will be at risk of repossession if you don’t repay the loan as agreed.
You can usually borrow between £5,000 and £25m (sometimes more) on a bridging loan. Exactly how much you can borrow will depend on the value of the property you put up as security.
Where can I get a bridging loan?
- Building societies
- Specialist bridging lenders
- Bridging brokers
- Mortgage brokers
What is a bridging loan exit strategy?
Bridging loans are designed to be a short-term funding solution. When you take one out you will usually need to have a plan as to how you will pay it off: this is called the ‘exit strategy’.
Typical exit strategies include:
- Selling the property you bought with the bridging loan
- Selling another property you own
- Remortgaging to a standard mortgage
- Selling a business or other asset
- Cash from a business deal, divorce or inheritance
What are open and closed bridging loans?
Bridging loans can be ‘open’ or ‘closed’.
Open bridging loans are usually more expensive. They don’t have a set repayment date so are more flexible than closed bridging loans.
Closed bridging loans require you to have an exit plan and set payment date when you take out the loan. Closed bridging loans are usually taken for a few weeks or months.
How much does a bridging loan cost?
Bridging loans are expensive compared to other types of mortgage or loan.
Because bridging loans tend to be short term, interest is charged daily rather than annually. Annual Percentage Rates (APRs) can be anywhere between 6% and 20%. In comparison, standard mortgages can be as cheap as 1% or 2%.
Like other types of property finance, lenders offer bridging loans with either fixed or variable interest rates.
As well as interest you are likely to have to pay arrangement fees to the lender, an administration fee, a valuation fee, and legal fees for conveyancing.
If a broker arranged the loan, there will probably be a fee for that too.
Do I need to make monthly payments on a bridging loan?
Bridging lenders don’t always require a monthly repayment. Instead, interest payments are ‘rolled up’. This means they are added to the loan and paid at the end of the term. However, this means that interest costs are compounded monthly and can mount up quickly.
With some bridging loans you can pay the interest monthly – like an interest-only mortgage. Then you repay the loan capital at the end of the term.
Another option is ‘retained interest’. For example, a £100,000 loan with interest at 1% would be £12,000 interest over a 12-month period. The lender retains the £12,000, and the loan amount paid to you is £88,000.
Are bridging loans regulated?
Bridging loans can either be regulated by the Financial Conduct Authority (FCA) or unregulated, depending on the nature of the lending.
If a borrower’s home (or a home occupied by any members of the borrower’s immediate family) is being used as security for the loan, the bridging loan must be sold as a regulated loan.
Regulation means that consumers are protected from incorrect advice or mis-selling from lenders or brokers.
However, bridging loans taken out in company (not individual) names will be unregulated, as it’s treated as a business transaction. This means the borrower has less protection.
Pros and cons of bridging loans
Bridging loans mean quick access to cash which can enable time-sensitive house purchases and business transactions to go ahead. They often prevent property chains from collapsing when a buyer pulls out.
Bridging loans can also provide funds for property purchases where the property is unmortgageable for any reason – such as being uninhabitable or having a short lease.
With the right security, you can borrow a lot of money on a bridging loan and have various options when it comes to repayment.
On the downside, bridging loans can be very expensive. If you secure the bridging loan on your home and then can’t repay the loan, your home could be repossessed.
For many borrowers, alternative finance options might work out better.
How do I find the best bridging loan?
Especially when it comes to higher-risk finance options such as bridging loans, it’s important to compare your options and understand the product before signing up to it.
A whole-of-market broker dealing in bridging loans will be able track down the best option for your personal circumstances, and guide you through the process. Some brokers do not charge a fee to the customer.
You can compare bridging loan providers online for rates and terms online too, and cross-reference any advice or recommendations against it.