A bridging loan is a short-term, secured loan that can be used to bridge the gap between the sale of one property and the purchase of another. It can be a helpful option for landlords, property developers, or anyone else who needs to access cash quickly while in between purchases.
What Is A Bridging Loan?
Bridging loans are short-term loans that can be used to bridge the gap between the sale of one property and the purchase of another. The time and payment period you take out a bridging loan depends on the type of bridging finance needed.
Residential bridging loans, which are secured against a borrower's primary residence and regulated by the Financial Conduct Authority (FCA), tend to have a maximum term of 12 months. Commercial bridging loans, or bridging finance secured against a buy-to-let or investment property that will not be lived in, are unregulated loans that may be available for up to two years.
How Does A Bridging Loan Work?
Bridging loans are a type of secured loan, which means you will need to use an asset, such as a house, as collateral to borrow money in case you can’t repay your loan. If you cannot pay off your bridging loan, the lender may repossess the security (your property) to recover any money you owe, so you must be able to settle the loan within the agreed 12-month period.
Bridging loans are interest-only loans, meaning you are only charged interest on the loan each month. The capital, or the amount borrowed, only needs to be repaid at the end of the agreed loan term. The lender normally retains the total amount of interest and adds this to the amount being borrowed and fees. The total amount needs to be repaid on completion.
How Much Does A Bridging Loan Cost?
Bridging loans are generally recognised as an expensive way of raising finance.
Interest rates vary significantly depending on the type of security offered and the loan-to-value (LTV) the lender is lending to. Interest rates start at around 0.75% per month. Yet there are often other costs associated with loans, such as:
Arrangement fees, typically 1% or 2% of the amount being borrowed
Valuation or survey fees
Other admin fees, such as drawdown and redemption fees
While these costs may seem high, bridging loans can be cheaper than you think, especially if you use them for the right reasons and in the right way. For example, if a bridging loan allows you to buy a property at the best price because you can act fast, it could save you money in the long run.
How Long Does It Take To Get A Bridging Loan?
The time it takes to get a bridging loan approved can vary depending on several factors, such as the amount of money you need, the type of property you're buying or renovating, your credit history, and the lender's requirements. The legal work is usually the most time-consuming part of the process.
It’s possible to get an “in principle” decision generally within 24 - 48 hours. To get an “in principle” decision, you usually need to provide details of the security you are offering, the work you propose carrying out and how you will settle or exit the loan.
In general, bridging loans can take anywhere from 72 hours to 8-12 weeks to complete.
Are Bridging Loans A Good Idea?
Bridging loans can be a helpful financing option for certain situations, but they also have pros and cons. Here are some of the main advantages and disadvantages to consider before agreeing to a bridging loan in the UK:
Advantages of Bridging Loans
Speed Of Funding: Bridging loans can be approved and funded much more quickly than traditional mortgages, making them a good option for property buyers who need to move quickly.
Flexibility: Bridging loans can be tailored to the borrower's specific needs, with options for open or closed loans, first or second charges, and more.
No Early Repayment Charges: Most bridging loans don’t carry any early repayment charges, meaning if a borrower can pay off the loan early, they can do so without incurring additional costs.
Unmortgageable Property: Some properties that would not qualify for a traditional mortgage can be acceptable for a bridging loan – for example, properties bought at auction. You can then refinance later after developing the property.
Disadvantages of Bridging Loans
High-Interest Rates: Bridging loans typically have higher interest rates than traditional mortgages, making them more expensive in the long run.
Short-Term Loans: Bridging loans are typically short-term loans, meaning you must repay the loan within 12 months.
Security: Bridging loans are typically secured against the asset that is being purchased. This means the lender can take possession of the asset if you default on the loan.
How To Pay Off A Bridging Loan
Before you take out a bridging loan, any lender will want to know how you intend to repay the loan. This is referred to as the ‘exit’. Remember that the maximum term of a bridging loan is 12 months, so you need to be confident that you will be able to repay at the end of this period.
If you’ve bought a property to refurbish and then sell quickly for a profit, ask yourself the following questions;
Am I buying the property for a realistic price?
How much will I need to spend on the property to get its maximum value when I sell it?
How much can I sell the property for once refurbished?
Should I allow a buffer in case the project runs over cost? For example, raising an extra £20,000 to finish the project might be challenging if there are unforeseen costs.
How long will it take to sell the property once I complete the refurbishment?
Depending on the circumstances, some lenders may allow you to extend the loan term for, say, six months. However, this comes at a cost where you will likely have to pay another arrangement fee, a valuation fee and further legal charges.
If you feel it’s unlikely that you can settle the loan within the agreed term, you must contact the lender and explain why, what further works are required, and a time frame.
Any lender would expect you to make early contact with them if there was a possibility of the loan not being settled in the 12-month period. It is strongly recommended that you pay attention to all communications from the lender.
Should I Use A Bridging Broker?
There are hundreds of bridging lenders in the UK. While most of them lend in the unregulated sector (generally commercial or buy-to-let properties), a number also operate in the FCA-regulated market (generally, applicants using their own home as security).
While you could do your own research to find a reasonable, low-rate, unregulated product, it’s a very competitive market, and lenders are constantly changing their terms to attract more business. A good specialist bridging broker should be able to find you the most appropriate product for your needs as they will have relationships with many lenders and know their criteria. Some lenders, for example, prefer applications with security within the M25.
Most regulated bridging lenders do not accept business directly from applicants. You would have to apply through a broker as there is an advice process to follow that can only be carried out by a broker regulated by the Financial Conduct Authority. Be careful when looking for a broker, as their fees vary considerably.
How To Get A Bridging Loan
If a bridging loan could work for you, or you want to talk through bridging loan options, please contact the Second Mortgage team today. We’ll be more than happy to talk you through your options and offer our expertise. With years of experience in the loans industry, we understand how the process works and work hard to get the best rates for you.
Simply click on our get a quote button or apply now for a team member to contact you and explain your options.