A bridging loan is a type of property loan that’s only designed to be a short-term answer. It’s name is a clue here ‒ it helps you ‘bridge’ toward a more long-term solution, whether that’s a loan, mortgage or freeing up some cash that’s tied up.
For example, let’s say that you have agreed to buy a new home, but the sale of your existing property hasn’t gone through yet. You could use a bridging loan to buy a home, and move to a normal mortgage once you complete the sale of your old house.
Bridging loans are also popular with property investors. You could use a bridging loan for property development, using the bridging loan to buy a property at an auction before doing it up and selling it on for a profit, Homes Under The Hammer style.
How does a bridging loan work?
Now we’re getting into the nitty gritty. Let’s say you applied for a bridging loan, how would it work? And what do you need to consider before applying for one?
The first thing to bear in mind is that bridging loans come in two main forms: regulated and unregulated.
The difference comes down to whether there is a set date for when your bridging loan needs to be repaid (a regulated bridging loan) or whether there is no formal end date (an unregulated bridging loan).
How does a regulated bridging loan work?
Let’s say that you’ve agreed a deal to sell your existing home, but it hasn’t quite completed and you need to go through with the purchase of your new home.
Basically you know you have the money coming into your bank account, it just hasn’t arrived yet. In these circumstances you might prefer to go for a regulated bridging loan as you’ll know when you’ll be able to pay the loan back in full within the 12-month term.
How does an unregulated bridging loan work?
Unregulated bridging loans are a little different.
Let’s say you need to go through with purchasing your new property, but the sale of your existing home is in much earlier stages. Perhaps you haven’t found a buyer yet, or there’s no set date for completing on your sale. Essentially you don’t know when you’re going to have the money coming in.
The lack of a formal end date with an unregulated bridging loan may make it a more attractive idea ‒ you simply pay it off when you can afford to.That doesn’t mean the loan will run forever though, as unregulated bridging loans have a maximum term of 24 months. (However, you can make smaller repayments during that time. With a regulated bridging loan, you have to pay it off in one chunk.)
How much does a bridging loan cost?
Now you know how a bridging loan works, it’s time to get into the juicy bits ‒ how much is it going to cost you?
Bridging loan interest rates
The interest rates on bridging loans might look pretty small at first glance, starting at around 0.4% at the time of writing.
But it’s important to remember that interest is priced on a monthly basis, rather than an annual basis as you’ll see with normal mortgages, which means that a bridging loan can end up being a pretty expensive way to borrow, particularly if you don’t pay it off quickly.
For example, let’s say you borrow £200,000 at a rate of 1% over a nine-month term. That might not seem like a steep rate, but you will have to pay around £18,000 in interest, the equivalent of around £2,000 a month for the term of the bridging loan.
How do I pay interest on a bridging loan?
There are three main ways in which you may be charged interest on your bridging loan.
With monthly interest, the interest is paid… well, monthly. You saw that coming didn’t you?
Then there is deferred or rolled up interest. Here you don’t make monthly interest payments, but the interest continues to be charged every month. Once you get to the end of the loan you pay off the lot.
Finally there’s retained interest. As with rolled up interest, there are no monthly interest payments here. Instead the lender effectively works out what the interest charges will be for the loan over the term and adds it to the loan balance from the outset.
So it might be that you need £200,000 to complete that deal, but the lender calculates it will end up charging you £18,000 in interest over the term of the loan and so sticks that to the balance from the beginning. You then borrow £218,000 overall.
Other bridging loan costs
As well as the interest rate, you also need to consider the arrangement fee. These are worked out as a small percentage of the amount you’re borrowing, so the bigger the bridging loan, the bigger the fee you’ll have to pay. Typically arrangement fees are around 2% of the loan size, so in our example above you’ll have to pay a fee of £4,000.
There may be other fees and charges included with your bridging loan too. Some lenders charge an exit fee, should you pay the loan off early, for example. You may also have to pay legal and valuation fees.
However, bridging loans do have some huge upsides
While some people are a little put off by the fees and interest rates, others see them as an opportunity to save money.
Because bridging loans don’t have any early repayment charges (ERCs), don’t run in-depth affordability checks and let you get the cash you need in a hurry, they’re particularly attractive to people looking to buy property.
Why? Because getting a bridging loan before you sell your property makes you a cash buyer, takes you out of the property chain and gives you room to negotiate with sellers.
It also means that you can hold out for your asking price, rather than dropping the price of your property to let you buy your new place.
In that scenario, even spending £10,000 on fees and interest saves the buyer money on two fronts: the money they save by not reducing their asking price and the money they save on their new property with their cash buyer status.
How much can I borrow with a bridging loan?
The maximum you’ll be able to borrow through a bridging loan will vary depending on the lender you go with, and the type of bridging loan you go for. However, you can typically borrow anything from £50,000 up to £25 million.
A big factor in determining how much you can borrow is how much risk it presents to the lender.
Typically you will need to put up a deposit of at least 25% of the property’s value, but lenders will also want to go through your own credit history to get an idea of how confident they can be that you will repay the loan in full and on time.
If you have a patchy credit record ‒ because you’ve been late, or even missed payments in the past ‒ then lenders may restrict how much they are willing to lend you or charge you a higher rate of interest.
Who offers bridging loans?
There are dozens of different bridging loan providers that you can choose from.
These range from the familiar names, like high street banks, to more specialist lenders who you may not have heard of.
The actual products they offer, and the rates and fees they charge, can vary significantly so it’s important to go through the terms of the loan thoroughly before you sign on the dotted line.
How quickly can I get a bridging loan?
The big selling point of bridging loans is that you can get the money quickly.
With a normal mortgage you might have to wait a couple of months before you have the funds for your purchase.
But things are much speedier with a bridging loan, as you’ll usually have the money within a couple of weeks should your application be approved and the valuation go through without a hitch.
What is a second charge bridging loan?
You can take out a bridging loan against a property which already has a mortgage against it. This is called a second charge bridging loan, since the loan is the second ‘charge’ being placed against that property.
So when would you need one?
Let’s say you have an investment property with an outstanding buy-to-let mortgage, but now you want to do some renovations ‒ perhaps a loft conversion. You could use a second charge bridging loan to cover the cost of that work, without having to worry about remortgaging your buy-to-let loan and potentially landing yourself with a more costly rate. Result!
Alternatives to bridging loans
There are plenty of alternatives to bridging loans ‒ the right one for you ultimately depends on why you might want a bridging loan in the first place.
● For example, if you’re buying an investment property you might prefer to go straight for a buy-to-let mortgage if you’re confident the lender can provide the funds quickly enough.
● Or if you’re taking on a development project ‒ such as converting a commercial property into residential houses ‒ then a dedicated development finance loan might be a better bet..
● If you haven’t quite completed the sale of your existing home ahead of purchasing your new property, then you might prefer to take out a second mortgage rather than opt for a bridging loan. The downside here will be that you need to make two sets of repayments each month, but it still may work out cheaper overall than taking out a dedicated bridging loan.
● Finally, a remortgage is an alternative option if you want to raise funds to cover some renovations to your property.
An interest only mortgage of £225,000 payable over 12 months on a fixed rate of 0.8% per month would require 12 monthly payments of £1,944.08.
The total amount payable would be £256,891.39 made up of the loan amount plus interest of £23,328.99, a facility fee of £4,552.40, assessment fee of £295, a funds transfer fee of £35, lender’s legal fee of £540, valuation fee of £400, broker fee of £2,620, and a redemption admin fee of £120.
The overall cost for comparison is 14.2% APRC representative.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.