A bridging loan allows you to borrow large amounts of money over a short period; anything from a few days to a year. Here we explain how bridging loans work and what they are used for.
A bridging loan is a secured loan used to buy property or land.
A bridging loan helps the borrower ‘bridge’ a short-term financial gap, for example if they need to complete on a house purchase before they’ve completed the sale of their existing home.
They are more expensive than other loans but because they are taken out over a short period, the overall cost will still be lower than if you take out a mortgage, which charges interest over 20 to 25 years.
Bridging loans are used for:
Buying property at an auction - a property bought at auction requires immediate payment but the buyer may not have sold their current property
Buying a house – for example if a family need to relocate immediately but have not completed on the sale of their house
Property development - bridging finance is used by landlords and property developers to fund the renovation and refurbishment of properties which are sold off-plan or quickly afterwards
Bridge loans can also be used to raise short-term finance for:
Buy to let investments
Bridging loans are secured loans. There are two types of bridging loan: closed and open.
This type of bridging loan has a fixed repayment date. A closed bridge loan might be used if the borrower knows exactly when they will secure the finance to pay off the loan; for example, they have not quite sold their property – they have exchanged contracts – but the sale has not yet been completed.
This type of bridge loan does not have a set repayment date, although most bridge loans need to be paid back within a year.
This might be a suitable type of bridge loan if, say, someone was using their loan to renovate or refurbish a property which would be quickly sold on.
Bridging loans tend to be from £25,000 and can go up to as much as £100 million.
What you can borrow depends on:
The value of the property you’re using for security
Your credit rating
The deposit or equity you have in the property – most lenders will offer a loan to value of up to 75% of the property
If you are taking out a first-charge loan, you’ll typically be able to borrow more than if you were taking out a second charge loan
The rate of interest you will pay will be higher than a standard home loan, and fees mean bridging finance can be a costly option
Bridging loans are taken out for short periods, so they charge interest monthly, rather than annually. You will also need to pay a fee.
The equivalent annual percentage rate (APR) on a bridging loan is between 6.1% and 19.6% – so much higher than standard mortgages
Be aware that you will be charged a fee for taking out your loan: this is an arrangement fee for setting up the loan and is around 1 to 2% of the loan.
Other fees include:
Exit fees: not all lenders charge this, it can be up to 1% of the loan if you pay it back early
Other fees you may pay, which are also associated with property purchase:
Administration or repayment fees
Introducer or broker fees
To secure either types of bridging loan you need to provide proof that you can afford to pay back the loan.
Proof of the property you are purchasing and the price you plan to pay for it
What you are doing to sell your current property, or evidence of an imminent sale
You may also need to prove you have a back-up plan to pay back the loan if your plans fall through
A bridging loan involves a ‘charge’ being placed on your property. This is part of the secure nature of the loan.
The charge is a legal agreement that prioritises which lenders are repaid first should you fail to repay your loans
A first charge loan is the one that has to be repaid first if you fall behind with repayments, a second charge loan would follow and so on
If you still have a mortgage then that will be the first charge loan and paying that back takes priority
If you don’t have a mortgage then the bridging loan will be the first charge loan
If you already have a mortgage then the bridging loan is a second charge loan
A second charge mortgage is where there’s already a loan or a mortgage against the property. Second charge lenders usually need the permission of the first charge lender before they can be added.
There’s no limit on how many charges can be listed on a property.
The distinction lets the lender know who has priority in the repayment if you can’t pay off the loan by the end of the term.
If you’re taking out a new bridge loan secured against the property, then you would be a first charge loan.
First charge bridge loans are cheaper than second charge ones – because you are less of a risk to the lender.
As with a mortgage you can choose how to pay back the interest on your bridge loan.
Having a fixed rate bridge loan interest will ensure you know exactly how much interest you’ll be paying throughout the rest of the term.
With a variable rate loan, the interest rate can change. The lender sets the rate, usually in line with the Bank of England base rate, which means payments can go up or down.
You can choose to pay back the interest:
Monthly – it is paid as you pay the loan
Deferred or rolled up – you pay all the interest at the end of your bridge loan
Some lenders may allow you to pay back your bridge loan interest with a mixture of both.
Bridge loans are offered by many different lenders, ranging from international banks to small local specialist lenders.
A specialist broker could help you find the right bridging finance, or you could go direct and compare rates yourself.
Before taking out your bridge loan you also need to consider:
The value of your property: this will determine how much you can borrow
How long do you need the loan: bridging loans can be as short as one month, to as long as two years
Whether you already have a mortgage: this will affect whether you have a first charge or second charge loan
Do you want to pay a fixed or variable rate: a fixed rate will give security while a variable rate offers flexibility if you believe rates will go lower
If you have a bad credit history you can still get a bridge loan but expect to pay a higher interest rate as you will be seen as a more risky customer.
When you apply for a bridge loan you need to be able to afford the repayments. If you have a poor credit history you will not get access to some of the best bridging loan rates
Use a mortgage calculator to work out if you can afford a bridge loan
Once you’ve applied for your bridging loan you’ll usually find out if your application has been successful within 24 hours.
It will take around 2 weeks to get the money, as the lender will want to carry out additional checks, such as a property valuation.
Depending on the lender you might be able to pay extra to have your bridge loan processed faster.
If you are confident you can pay back a bridge loan then there are several advantages to this type of finance:
You’ll get the money quickly – normally within 24 hours
You can borrow a large amount – up to £250 million
Flexible borrowing – you can choose how to pay back your interest depending on when you expect to pay back the loan
Over the long term it may be cheaper than a 25-year mortgage
The cons of bridging loans are that the interest rates and fees are high, and the loan will be secured against your property. That means you risk losing your home if you can’t pay your loan back.
There are other financial options, particularly if you are looking to sell your home, you might want to consider before taking out a bridging loan.
You could look into getting a second charge mortgage – especially if you are using the money to refurbish or renovate a property that you don’t intend to sell quickly
If you are considering borrowing more than £25,000 you may want to consider a secured loan.
If you are looking at borrowing less than £25,000, a personal loan may be an affordable option.
If you are using your loan for property development, including refurbishment and construction, you may want to consider this type of finance.
This table explains how much it would cost you to replay £150,000 over 1 month, 6 months and 12 months
The loan has a monthly interest rate of 0.65%
The fees include: 1% facility fee, £250 valuation fee, £35 bank transfer fee, £295 Admin fee and £450 legal fee.
|Loan term||1 month||6 months||12 months|
|Total to repay||£153,505||£158,380||£164,230|