Bridging Loans
Bridging loans are an excellent source of short-term finance. They can help you purchase or refinance a property, while waiting for long-term funding to come through.
Get in touch for a free initial, no-obligation discussion about your mortgage situation.
- 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.
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What can I use a bridging loan for?
Property investors, landlords, and homeowners commonly use them. A bridging loan can be used for various purposes, including:
- Purchasing a property at an auction, requiring quick funding.
- Renovating a property.
- Buying a property to live in while your current residence is being sold.
- Renovating a rundown property.
- Been turned down by a lender.
How do bridging loans work?
Bridging loans are short-term finance, and the loan itself is normally conducted on an interest-only basis. Many lenders will accept ‘roll-up’ interest. This is where monthly interest is added onto the loan in advance, as opposed to you having to pay on a monthly basis.
The loan itself is secured by the asset, or number of assets – which could increase the amount it costs to borrow.
Bridging loan interest rates
Many factors affect bridging loan rates. This can include credit history, how much equity or deposit is available and more. The rates are not cheap, but they serve a purpose that other finance options are not able to offer.
Bridging Loan Lenders
There are many lenders available, so it’s important that your broker can source a variety of lenders. Ensuring you get the best bridging loan deal.
What are the types of 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 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?
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.
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 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.
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.
Are there any alternatives to bridging loans?
As mentioned above it is not always the right choice to use a bridging loan. So, what are some alternatives that can be used? Some of the more common methods are:
- Remortgaging
- Secured loan
- Personal loan
- Let-to-buy mortgage
What are ‘first charge’ and ‘second charge’ bridging loans?
‘First charge’ and ‘second charge’ bridging loans refer to their repayment priority.
A first charge takes priority over other debts, offering more security to lenders. In case of default, this loan is repaid first.
A second charge ranks lower in repayment priority. Therefore, making it riskier for lenders and borrowers.
Borrowers use first charge loans for greater security, considering second charge bridging loans when additional funds are needed, understanding the increased risks involved.
Bridging loan mortgage broker
As an expert broker, we are looking at the market every day. So, we know exactly when interest rates change, new products become available or new incentives go online. Our extensive knowledge and experience as brokers put us in a strong position to find you the best loan, while staying up to date with market changes.
We’ll go over the whole process from start to finish, reviewing all the costs of a bridging loan. Ensuring you can comply with all the evidence, paperwork, and terms of the loan. Yes, there are hoops to jump through, but when you know what to expect, it all becomes a lot smoother.
Frequently asked questions
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
- Identification
- 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.
Phil Scott
Director
About the author
Phil has worked in the financial services industry since 1992, having started with a large insurance company. He went self employed in 1996 as an Independent Financial Adviser before setting up his first company, Needham Market Home Financial in 1999.
After four years, he decided to concentrate solely on mortgages and related insurances, and The Mortgage Centres was born. Since then, Phil has been influential in the opening of several new offices as the business continues to grow.
Qualifications
Financial Planning Certificate: 1, 2 & 3 | Year Attained: 1992
Certificate in Mortgage Advice and Practice (CEMAP) | Year Attained: 2001
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