What we cover in this guide
- What is a bridging loan?
- What can I use a bridging loan for?
- How do bridging loans work?
- What are the types of bridging loans?
- When is it best to use a bridging loan?
- Is there a scenario in which they are not appropriate?
- Are there any alternatives to bridging loans?
- What are ‘first charge’ and ‘second charge’ bridging loans?
- Bridging loan mortgage brokers
- Frequently asked questions
What is a Bridging Loan?
They are a short-term finance solution that helps you purchase or refinance a property while waiting for long-term funding to come through. The term of a bridging loan is typically 12 months. However, in some cases, this may stretch to 24 months, depending on the purchase circumstances..
For example, there may be a delay in your mortgage application or the sale of your existing house. Therefore, a bridging loan would support your purchase to cover the delay. Similarly, they are also used when buying properties at auction. During the period when the building’s condition is deemed inadequate for a standard mortgage, support would be provided by the loan.
The most important thing to remember when applying for a bridging loan is that you need to have a solid exit strategy. Take a close look at your finances and be realistic about how long you will need it for and how much it will cost.
What are the types of bridging loans?
Open bridging loans
This type of loan has no set repayment date. Borrowers might use them when uncertain about the timing of their long-term finance availability. This allows flexibility and ensures the borrower doesn’t face penalties because they can’t meet a payment date.
However, this does come with a cost, typically they are more expensive. This is because of the perceived risk by the lender. Therefore, they set higher interest rates to make up for this. Due to this additional risk, they can also be more difficult to find.
Closed bridging loans
Closed loans have a set repayment date. It will be set between you and the lender, to a date you know you will have the funds available. This may be the completion date if you are moving.
Lenders will be more likely to approve this type of loan due to the lower risk. This also means that interest rates are likely to be more competitive.
When is it best to use a bridging loan?
When your property is taking longer than expected to sell
If your property is taking longer than expected to sell, you may be looking to move quickly. This is where a bridging loan can come into play.
It will provide you with the capital you need to secure a new property, and it can then be paid off once you sell your old home.
When organising your mortgage is taking a while
You may find yourself in a position where your mortgage application is taking a while, for whatever reason. If you want to move urgently before the deal is complete, a bridging loan could be a suitable option for you.
Although it’s not ideal to take on quick bridging loans without your mortgage application being approved. If you want to secure your dream home before it sells, a bridging loan may be your quick access to the required capital.
When bidding on properties at auction
When buying a property at auction the entire process happens very quickly. Making a bridging loan the ideal method.
At auction, you are typically required to pay 10% of the value upfront. Then, the remaining amount must be paid within 28 days.
Is there a scenario in which they are not appropriate?
They are not always the most suitable option and can sometimes be risky. It’s best to avoid them if:
- You don’t know when or how you’ll be able to make the payments.
- You are not confident that your mortgage application will be approved.
- You don’t understand the fees involved when applying for the loan.
Frequently asked questions
- What deposit do I need for a Bridging Loan?
- Are 100% bridging loans available?
- What documents will I need?
- How is a bridging loan settled?
- How much can I borrow with a bridging loan?
If you do not hold any assets other than the proposed, then you will typically need a deposit between 20%–25% of the property price.
Yes, they are. If you have several assets that the lender can take security over, the lender may advance 100% finance.
The lender may ask for many different documents, which can include the following:
- Assets and liabilities statement
- Income and expenditure
- 3 months’ worth of personal bank statements
- Your exit strategy
Your bridging loan broker will advise you through this, as required documents can be lender specific.
There are various settlement methods available for them. One way is by selling the asset to clear the loan. Another is refinancing the asset onto longer-term finance – such as a mortgage or commercial finance.
There is no set amount you can borrow based on your income. This is because a lender will consider each application on a case-by-case basis.
Lenders will typically assess a variety of factors. Some things they consider are your property’s value, your financial circumstances, your property’s value, and your credit history.
It’s crucial to have a clear understanding of your property’s value and financial circumstances before applying. If you are unsure, get in touch with us and we can pair you with one of our experts.