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Michelle Monck

Michelle Monck

Consumer Finance Expert

What is a bridging loan?

A bridging loan (also called a bridge loan) is a short-term secured loan. It is used to ‘bridge the financial gap’ when buying a new property before selling a current one. For example, a bridging loan can be used to buy a property at auction before you have sold your current home. They can also be used to fund the purchase of a property for redevelopment for sale or rent.

What are the different types of bridging loan?

The different types of bridging loans include regulated and unregulated (often used for commercial purposes), variable and fixed interest rates and first and second charge.

Regulated and an unregulated bridging loans

Bridging loans can be regulated or unregulated depending on how you intend to use the property and how long you want the loan for. A regulated bridging loan is required if the money being borrowed is for a property you or a member of your close family intends to live in or have lived in during the previous 12-months. An unregulated bridging loan can be used to buy a property as an investment or for commercial reasons.

Bridging loans can have fixed or variable interest rates

Bridging loans can come with fixed or variable rates of interest. A fixed interest rate will not change for the duration of the loan, while a variable rate may be changed. The result is that your monthly payments with a fixed rate will remain the same for the period, while a variable interest rate could see your monthly payments change.

First or second charge bridging loans

A bridging loan is secured against a property. If you already have a mortgage on your property, then the secured loan will be the second charge against it. The term second charge refers to the priority of the lender to be repaid if your property is repossessed and sold.

Get your bridging loan started

Speak to our preferred bridging loans brokers.

 

What are bridging loans used for?

A bridging loan can be used to:

  • Purchase a property at auction
  • To continue a property purchase if your sale has fallen through
  • To invest in redeveloping a property for later sale or for letting
  • To buy land for development

Find out more about the 5 ways to use a bridging loan.

How does affordability work for a bridging loan?

Regulated bridging loans will require you to pass an affordability test. This means the lender will want to know more about your income and expenditure to check that the loan is affordable.

Unregulated bridging loans do include an affordability test albeit these are usually less stringent than a regulated loan. The lender will also focus on the asset being able to act as security for the loan. The exceptions to this will be if the bridging loan interest is being paid monthly or if the borrower intends to pay off the bridging loan using a form of finance that requires an affordability test.

How much can I borrow using a bridging loan?

Data from our preferred regulated bridging loans broker, Loans Warehouse shows lenders offering bridging loans of between £50,000 and £25m. The amount you can borrow using a bridging loan will be based on your affordability (if this is required) and the value of the property. Lenders offering unregulated bridging loans may use a 90-day sale fixed valuation. This valuation is often up to 20% lower than open market value and the lender will then offer bridging loans of between 60% and 90% of the 90-day value. For example, a property with an open market value of £500,000 might be valued at £450,000 using the 90-day valuation. The lender would then have a potential loan value of between £270,000 and £405,000. This will also depend on the value of any existing loans secured against the property and if the lender thinks your property may be harder to sell due to its commercial status or location.

What terms are available for a bridging loan?

You can take a bridging loan over a term from as short as one day and for some the loan is open ended, but in most cases, lenders offer terms up to 24 months, with a few lenders offering 36 months terms.

How long does it take to get a bridging loan?

It is possible to obtain a bridging loan in a matter of a few hours and receive funds within a matter of days. The standard amount of time however is usually a couple of weeks.

How much does a bridging loan cost?

The costs of a bridging loan include an arrangement fee and the interest costs of the loan. There may also be a fee for using a broker to organise your bridging loan. Arrangement fees are usually around 2% and monthly interest rates start from 0.40% up to 1.50%.

How to get the best bridging loan

Here are three things to consider when looking for the best bridging loan:

1. The amount you want to borrow and for how long

Lenders will consider bridging loans starting from £50,000 up to £25m. Terms range from one month up to three years.

2. The value of you’re the property you want to buy

The valuation of your property will also determine the maximum amount a bridging lender will offer. This may not be the market valuation but lower in order to give the lender some protection in case you default on the loan.

3. If you already have a mortgage on the property

In some cases, you may want to use a bridging loan on a property that you already have a mortgage on, for example a buy-to-let property that you want to renovate in order to sell or increase future rental income. In this case the bridging loan would be a second charge and this may reduce the number of lenders available to you.

A broker can help you to get the best bridging loan

Specialist brokers understand the strengths and weaknesses of different bridging lenders and can use this knowledge to help you find the best bridging loan.

Why use a bridging loan?

A bridging loan can help you to make a property purchase quickly, however you will need to be sure that you have a clear strategy to repay the debt in a short amount of time, usually less than two years, but a few lenders will consider three year terms.

What is a commercial bridging loan?

A commercial bridging loan is a short-term loan, secured on a commercial property, development land or agricultural land. They are available to businesses and individuals that need access to funding quickly.

Speak to our preferred bridging loans broker for businesses.

Can I get a bridging loan to buy a house?

Yes, you can use a bridging to buy a house, but it should only be used to secure the purchase of a property. It should be used for a short period of time, usually no more than two years and then refinanced using a mortgage, buy-to-let mortgage or repaid through the sale of the property.

Should I take a bridging loan or remortgage?

If you want to buy a new property you could choose to either remortgage a current property and use the equity as a deposit or to make your purchase, or take out a bridging loan on your new property. The amount you could borrow using a bridging loan may be lower than a remortgage, but a bridging loan will be quicker if speed is important. A bridging loan is also likely to have a higher interest rate and will therefore be more expensive than funds released from a remortgage.

Can you get a bridging loan with bad credit?

Yes, it is possible to get a bridging loan when you have poor credit. This is because the lender’s focus is on ensuring the property you use as security for the loan will sufficiently cover them in case you default. In addition, if you plan to sell a property to pay off the bridging loan, then the bridging lender is less likely to be concerned about a bad credit history. However, if you plan to remortgage then they may judge that your credit score will inhibit from you doing this successfully.
The types of bad credit issues that shouldn’t affect your ability to exit your bridging loan include:

  • No credit history
  • Low credit score
  • CCJs
  • IVAs
  • Late and missed payments
  • Debt management schemes

In the majority of cases the lender will judge the severity and age of any credit issues in relation to how this might impact your ability to pay off the bridging loan in full when required. For example, a late payment for a digital entertainment package from ten years ago versus a declaration of bankruptcy in the past six months.

Find out how to check your credit score.

How to use a bridging loan for property development

You can use a bridging loan to buy and renovate a property or to develop land for a housing or commercial development. You will need to find a property that you can add value to, this will give the lender headroom and confidence that their debt will be repaid when the development is completed, sold or refinanced. Developing property does involve risks, you will need to be confident that you can develop your property quickly enough and will add enough value to cover your development, interest costs and other fees.

What are the alternatives to bridging loans?

Prior to considering a bridging loan, you should establish if a remortgage or secured loan against the properties you already own might fund your new purchase instead. If you are using a bridging loan for business then a commercial mortgage could also be an alternative. Other alternatives to raise capital include refinancing of existing debts to improve cashflow or invoice factoring where you sell on your invoices at a discount rate to a third party and gain an immediate flow of cash as result. If you are developing a new build or completing a significant refurbishment then a property development loan may be a better solution for a longer-term loan.

Bridging loans FAQ

Are bridging loans expensive?

Bridging loans come with interest rates and arrangement fees that are higher compared to other types of property finance such as a high LTV mortgage.

Do I need to make monthly repayments?

Bridging lenders may not require a monthly repayment, instead allowing you to add the interest to the bridging loan and then paying this all at the end of the term. The downside of this is that the interest costs can mount up, especially in this is compounded monthly.

Are bridging loans a good idea?

Bridging loans help those that need to borrow larger sums of money quickly, for a short period of time. They are usually more expensive than other forms of secured borrowing, so it is important to check the costs are affordable and to have a contingency plan if you need to borrow for longer than expected.

What are the risks of a bridging loan?

A bridging loan is secured on a property you currently own or have equity in. This means you now own your new property and your current one and will need to pay any existing mortgage plus any repayments for the bridging loan. If you plan to repay your bridging loan through the sale of a property then you will need to be sure you can sell it in time or you may need to accept a lower sale value.

What to do when your bridging loan ends?

You can choose to repay your bridging loan either by using the proceeds from the sale of your original property or switching to a lower rate mortgage or buy-to-let mortgage.

Do banks offer bridging loans?

The traditional high street banks do not offer bridging loans, it is usually more specialist banks and lenders that provide these. Here is a list of banks and lenders that offer bridging loans:
However, not all bridging lenders are authorised by the FCA, there are at least 300 unregulated bridging lenders at present in the UK.

Can a bridging loan be extended?

Yes, it is possible to extend a bridging loan, both in terms of the amount borrowed and the term. If it is a regulated bridging loan you will need to meet the affordability requirements of the lender.

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