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What is a bridging loan?

Alicia Babaee, Consumer Finance Specialist
Written by Alicia Babaee, Consumer Finance Specialist

2 September 2020

Bridging loans could help you buy a property while you wait for the sale of your existing home.

bridging-loan

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 any other debt secured on it.

Bridging loans are used to finance the gap between when you need to pay to purchase something, but you’re 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 have to have a high-value asset to get one, such as a property or land.

What can you use a bridge loan for?

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.

Bridging loan for property development

Bridging finance is popular with landlords and property developers who need to fund projects on properties which they will sell off quickly afterwards.

Residential bridge loan 

Bridging loans are also becoming popular with people who are moving house too.

Types of bridging loans 

There are two types of bridging loans … 

  • Open bridge loan

These have no set end date. This means they can be repaired whenever your funds become available. They usually last for up to a year, and sometimes even longer.

  • Closed bridge loan

These have a fixed end date. This date is usually based on when you know you’ll have funds available to pay back what you know. They’re usually short-term bridging loans, lasting just a few weeks or months. 

Open bridging loans are usually more expensive than closed bridging loans because they’re more flexible. Whichever kind you choose, you need an ‘exit route’ – a way to repay your bridging finance.

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. These are:

  • 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.

  • 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. 

First charge or second charge loan?

When you apply for bridging finance, the lender adds a ‘charge’ to the property you’re using as security. These charges set the priority of debts if you can’t repay your loan. If a property was seized and sold to pay off outstanding loans, a first charge loan would have to be paid first before a second charge loan could be paid back.

First charge loans are where the bridge loan’s the first or only borrowing secured against your property. Mortgages are normally first charge loans. But if you have no mortgage or outstanding borrowing on your property, a different kind of loan – like a bridge loan – can be your first charge loan.

Second charge loans are 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.

Fixed rate vs. variable rate

As with most loans, the interest rates on bridging loans can be fixed or variable.

With a fixed rate, the interest is fixed across the term of the bridge loan. This means all the monthly payments will be the same.

With a variable rate, the interest rate can change. The lender sets the variable rate, usually in line with the Bank of England base rate. This means your payments can go up and down.

What do bridging loans cost?

Bridging loans can be an expensive way to borrow money. 

Bridge loan interest rates

Interest rates on bridging loans tend to be pretty high. They could range from around 0.4% to 2%. But these can differ depending on the lender you choose.

Bridging loans don’t last very long as they’re just a way to ‘tide you over’ for a few weeks or months. As they are short term, bridging loans usually charge monthly interest rates rather than an annual percentage rate (APR). This means that just a small difference in the interest rate can have a big impact on the overall cost of your bridge loan.

But the interest’s not always charged monthly. There are three main ways it can be charged. These are:

  • Monthly – You pay the interest monthly and it’s not added to your bridging finance.

  • Deferred or rolled up – You pay all the interest at the end of your bridge loan. There are no monthly interest payments.

  • Retained – You borrow the interest for an agreed period, and pay it all back at the end of the bridge loan.

Some lenders let you combine these options. For example, you could choose retained interest for the first six months, and then switch to monthly interest.

Don’t forget there are lots of other fees and charges that you’ll have to pay on top of the interest too. You’ll need to check the costs carefully before you go ahead.

Bridge loan fees

Interest isn’t the only cost on bridging finance. There are quite a lot of other fees you might come across. These include:

  • Arrangement or facility fee: What you pay for setting up the bridge loan. It’s usually around one to two per cent of the loan.

  • Exit fees: This is usually around one per cent of the bridge loan if you pay it back early. Not all lenders charge an exit fee.

  • Administration or repayment fees: This is what you pay for the paperwork to be completed at the end of your bridging finance.

  • Legal fees: This pays the lender's legal fees. It’s usually charged at a set rate.

  • Valuation fees: This pays for the surveyor to value your property.

  • Introducer or broker fees: If you use a broker, this pays for their work in looking at bridging loans for you and choosing the best bridging loans for you.

There might be other fees too, so bear this in mind before you decide if bridging finance is right for you.

How to apply for a bridge loan 

Here’s a step-by-step guide on finding the best bridging loans and best bridging finance rates, and doing your application.

  1. Decide what you need from your bridge loan. How much do you need to borrow? How long do you need to borrow it for?

  2. 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.

  3. Use the comparison table at the top of this page to compare bridging loans and find the best bridge loan rates for you. 

  4. Decide whether you want to speak to a broker or apply online.

  5. Pick which bridge loan to apply for. Read the small print to find out about all the costs and fees.

  6. Once you’ve applied, wait to hear whether your application’s approved. This could take 24 hours.

  7. If you’re approved, wait for your bridge loan money. This could take up to two weeks.

How long does it take to get a bridge loan?  

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.

How much can I borrow on a bridge loan? 

Most lenders offer loans ranging from £5,000 and up to £10 million. It essentially depends on your credit rating, and most importantly, the value of the property you’re using for security and the value of the property against the bridge loan. In some cases, bridging loans of over £100 million can be possible.

Bridging finance with bad credit 

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.

Bridge loan lenders

There are lots of different places you could get a bridge loan from. These range from major world banks, to small, specialist lenders. You’ll see a list of the best bridging loans and compare bridging loans from different companies in the comparison table at the top of this page.

A broker could help you find the right bridging finance. They may charge a fee but they’ll probably be able to find you the very best bridging loan rates.

An example of a £100,000 bridging loan

This is how much it could cost you to borrow £100,000 over 1 month, 6 months and 12 months, with a monthly interest rate of 0.65%:

Loan term1 month6 months12 months
Interest£657£3,942£7,884
Fees*£2,030£2,030£2,030
Total to repay£102,687£105,972£109,914
* Fees are based on: 1% facility fee, £250 valuation fee, £35 bank transfer fee, £295 Admin fee and £450 legal fee.

So, the longer it takes you to repay the loan, the more it will cost you. The same is true for if the interest rate is higher.

Pros and cons of bridge loans

As with most things, bridging loans come with pros and cons.

The pros are that the application process is fast, you can borrow large amounts and that the borrowing is flexible. Plus you’ll get the money pretty quickly.

The cons of bridging loans are that the interest rates and fees are high, and the loan’s secured against your property. That means you risk losing your home if you can’t pay your loan back.

Alternatives to bridging loans

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:

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.

If you need short term finance a bridging loan could fill the gap

Compare bridging loans

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