The full guide to bridging loans

Categories: bridging loans | guides

Bridging loans are a relatively fast way to secure funding for a new property investment, either while a previous project is finalised, if you are buying at auction where a short completion deadline is in place, or if a property needs renovation or refurbishment, before being eligible for a mortgage.

They can also be used to fund temporary gaps in business cash-flow.

With these types of loans, you don’t need to wait around, as in the right circumstances, bridging loans can pay out in a matter of days.

In this guide, we’ll answer important questions relating to these loans, including:

What is a bridging loan?

Firstly, what is a bridging loan? A bridging loan (also known as bridging finance) is a short-term financing solution that plugs the gap until a long-term finance solution is found, or the property is sold on.

Some key features of these loans include that they are:

• Offered on a short-term basis;
• Secured against a property;
• Processed more quickly than a mortgage;
• Repaid monthly or at the end of the term;
• Available to most borrowers, including those with bad credit (for more information see our guide “Getting a bridging loan with bad credit”)

Who should apply for a bridging loan?

There are few restrictions on who can apply for bridging loans and a lot of it comes down to whether it’s a regulated bridging loan, or an unregulated bridging loan.

• Regulated bridging loan: Used for a property you will eventually live in.
• Unregulated bridging loan: Used for property that will be done up and sold on, or will be rented out to third parties.

If you need fast access to cash for a property purchase or development, you could consider applying for a bridging loan. Bear in mind that whether you have a regulated or unregulated bridging loan, you will need an exit strategy, which is basically a repayment plan. It serves as proof that you can and will repay the loan.

If you’re buying at auction, your exit strategy could be a traditional mortgage or, if you’re buying to sell, you can repay the loan with funds from the sale.

When you should apply for a bridging loan

If you’re asking questions like, “What is a bridging loan?” and “How do bridging loans work?” The first step is clearly to learn more about this type of financing. This guide can go some way to doing that, but our broker teams will help you with the rest.

Here are some of the scenarios where a bridging loan can help:

• Buying a house that isn’t covered by a traditional mortgage (such as a house in a poor state of repair).
• Buying a house at auction.
• Buying another property before the sale of a previous one.
• Expanding a property portfolio.
• Financing conversion or refurbishment with a view to selling for a profit.
• Paying business bills whilst you wait for debtors to pay you.

The difference as to whether you need a regulated or unregulated bridging loan all comes down to whether you are going to live (or have lived) in the property or not. If you are, you will need a regulated bridging loan.

There is one further scenario that is typical for needing a regulated bridging loan, and that is:

• Preventing the breakdown of a chain.

If you are selling your house and have a property that you want to buy, but you lose the buyer of your house, you might take a bridging loan so you can go ahead with your purchase whilst you find another buyer for your home.

Bridging loans for property development

Where property development is concerned, bridging loans can also be very helpful. Borrowers can get anywhere from £25,000 to millions of pounds.

Bridging loans can step in to cover the financing of a project not covered by traditional commercial mortgages, such as the development of dilapidated properties and projects that require “change of use” planning permission.

For more information, check out our bridging loans for property developers guide.

How do bridging loans work?

To give you an idea of how bridging loans work, let’s look at a couple of scenarios. One is regulated (you need the loan for a property you will live in) and one is unregulated (you need the loan for a property you are doing up and selling, or intend to let to tenants – whether the property is a home or a place of business).

Regulated example: You buy a property that you want to make your home, but you want to extend it before you move in. You could use a bridging loan to buy the property and cover the costs of the renovations, and pay off the loan with a mortgage that will be based on the new, potentially higher, value of the property.

Unregulated example: You see an investment opportunity is coming up for auction. You have a deposit in cash, but you need to get funding for the remaining amount. The auction is in the next few weeks and you are likely to have a 28-day completion deadline, so a mortgage will take too long. You can use a bridging loan to buy the property, whilst then arranging a mortgage, which you can use to pay back the loan.

In short, you take out a loan, use the funds as necessary, and repay with either the sale of the property, a different form of borrowing, or funds from another source.

Borrowing amount

The amount you can borrow will depend on the lender and your circumstances. Bridging loans are typically available from upwards of £25,000. The higher limits are in the tens of millions, so they should cover most of your needs.

First or second charge loans?

Bridging loans are available as first and second charge loans:

• First charge bridging loan: Is the primary loan secured against the property. In the event of a default, it will take priority and the lender will seek to recover their investment, before anyone else with an interest in the property.
• Second charge bridging loan: There is already a mortgage on the property and so the bridging loan is secondary. The lender will be second in line following a default to recover the funds lent.

For more information on how these loans are secured, check out our FAQs at the bottom of this piece and questions like “What is a bridging loan secured against?”

How quickly can you get a bridging loan?

Although bridging loans are much quicker than mortgages, they are not instant.

The average bridging loan takes 4-6 weeks from application to completion. However, if a valuation completes quickly and solicitors are instructed from the outset, this can potentially be reduced to as little as 7 days.

Bridging loan interest rates and costs

As noted above (see “what is a bridging loan?”), there are two ways of paying interest on a bridging loan.

Interest is accrued and repaid at the end of the loan period. This is called a retained interest bridging loan.

Or, interest can be paid on a serviced basis, with a standard monthly payment. This typically would allow you to borrow more, because you are not deducting the interest from the gross loan amount.

Whichever option you choose, bridging loan rates are charged/ accrued on a monthly basis as opposed to annually, as with a traditional mortgage. This is why they tend to be more expensive than a mortgage and why they are only for use over months and not years, as you would with a mortgage.

The typical interest rate

The shorter the loan term, the less you will pay. Any unused interest is not charged. For example, if you apply for a 12-month bridge, but repay the bridge after 6 months, you will only be charged 6 months of interest and typically a redemption/exit fee.

Use our bridging loan calculator to calculate your expected monthly payments.

The types of fees to expect

When taking out a bridging loan, you may be charged the following fees:

• Arrangement fee: A standard fee charged by most lenders. It is often around 2% of the total loan amount.
• Admin fee: A small fee also known as a “loan drawdown fee”.
• Redemption fee: Charged when your loan is repaid.
• Exit fee: Some lenders charge an “exit fee” upon redemption of the loan. It can be charged as either a percentage of the borrowing, typically 1%, or as a fixed fee, such as one month’s interest. Some lenders do not charge an exit fee at all.
• Survey costs: The lender will conduct a valuation of the property against which the loan is being secured. This can vary based on the security property (residential, buy-to-let or commercial) and the level of survey required.

You may also be charged legal fees and broker fees.

How to apply for a bridging loan

The overall process of applying for a bridging loan is:

1. Find a suitable loan
2. Get heads of terms from the lender
3. Apply for the loan
4. A valuation will be conducted by the lender
5. Legal work is done
6. The loan process completes and you are paid the money

Finding a suitable loan

The first step in applying for a bridging loan is finding the right deal for your needs and ensuring you use a reputable lender. With so many deals available in the market this can be tricky.

Comparison websites may display available products, in which case you have no idea whether your particular scenario fits the criteria of the lenders you are being presented with, or they may simply capture your data in order to pass you through to a broker who can help you.

If in the first example you find some lenders who, on the surface of the summary information you have, are offering the sum of money you want at a rate you are prepared to pay, you will have to speak to each one of them to ensure they will accept your case. You will then have to compare all the terms of each loan to establish which one offers you the best option.

Some bridging lenders do not offer deals direct to consumers, instead requiring a case to be prepared and submitted to them by an intermediary/broker. So, you may be missing a number of potential options.

So, from the perspective of:

1) Ensuring you get the best deal possible for your needs and circumstances
2) Saving yourself a significant amount of time

Using a broker may be very advantageous. What’s more, a reputable broker will only recommend lenders they know to be reputable.

It will be far quicker to conduct due diligence on a few brokers, than on all the bridging loan lenders available to you.

Get ‘Heads of terms’

Regardless of your choice, the next step is to approach a lender with your case details and get ‘heads of terms’.

This document says that, if when you come to apply, your case is as previously described, the lender is likely to lend you the money you need.

It is important to note, it is not a guarantee of lending.

The value of the heads of terms is (if you are buying property) to demonstrate to the person selling that you have a lender willing to fund the purchase, and know for yourself that you can get the funds you need.

Be prepared though that if an issue with the property is uncovered during the valuation, or further along the underwriting process (underwriting being the checks a lender does on getting an application to make absolutely sure they are happy to lend), a lender could still change their mind about lending you money.

This is why it is critical to be completely upfront about all the details of your case with your broker or lender.

Make an application

If you have received heads of terms from a lender and you are ready to go ahead with your borrowing, the next step will be to submit an application with the lender. This may be via the lenders website as a first step, or by calling them.

You will have to speak to the lender if you have gone direct rather than use a broker (either in person or on the phone), as the lender has various obligations to establish your identity and ensure you fully understand what borrowing from them entails.

If you are working with a broker, the broker does all of this due diligence is done with you.

Different lenders have different timescales they work to, to process your application. It depends on how much work they have on, versus the number of staff available as to how quickly your case will go through.

Where time is of the essence another benefit of a broker is that they will know the service levels of different lenders, and can place your case accordingly.

A property valuation will be conducted

Your lender will conduct a valuation on the property, to establish whether the asset your loan is secured against is worth what you have stated it is. This reduces the risk of the lender issuing a loan, where they might not recoup the debt, if a repossession became necessary.

If any issues with the property become evident during the valuation, the lender could ask you to solve those problems before they will move forward with the lending, or they may refuse to lend.

In most cases, the deal will progress through all other checks and pass into the hands of solicitors.

The legal work

Where you are taking a bridging loan in order to renovate a property that you already own, the legal work should be less than if you are buying the property, which requires a transfer of ownership to be done.

Choosing a solicitor who specialises in property investment can be hugely influential on the speed of the work.

A broker may be able to help in this respect too – as they often have relationships with legal firms they know are familiar with the work required, and can recommend them to you.

The loan process completes and you are paid the money

Once all the legal work is finished, for both you and the lender, the lender will release the funds and the case is complete.

Advantages and disadvantages of a bridging loan

Bridging loans can be very helpful, but as with all types of financing, there are fees, interest rates, and obligations to consider. They’re not for everyone and may not be right for you. It is vitally important that if you do use a bridging loan, you have pre-planned a way to repay it, as being ‘stuck’ on a bridging loan can be very costly.

Check out this list of advantages of disadvantages to help you with your decision.

Advantages

• Fast funding: They are processed much quicker than traditional mortgages
• Multi-purpose: Bridging loans can be used for many personal and business reasons
• Deferred payments: You can choose to pay interest monthly, but if you need to defer payment, there are also options for paying interest at the end of the loan term.

Disadvantages

• Interest rates: The interest rate for a bridging loan is applied monthly, rather than annually, which means that although the rate is lower than a traditional mortgage monthly payments can be expensive.
• Loan fees: Many lenders charge arrangement fees and other fees that add to the total cost of the loan
• Property risk: Your property is at risk and may be repossessed if you don’t repay the loan.

Summary: What is a bridging loan and how can you get one?

How do you get a bridging loan? It’s easy—just contact us and let us do the work for you.

Our bridging loan experts will guide you through the process and help you find the best solution. We can tell you if a bridging loan is right for your property and circumstances and then find a loan with the terms you need and at the most competitive rate possible.

Speak with one of our brokers now for expert help.

FAQs