Bridging loans are sometimes called "bridge loans" and span a gap in your finances. This is usually when you need to pay for something but are still waiting for funds to become available from the sale of something else.
Typically, they're used by people buying a new property while waiting for the sale of their existing home to go through. A mortgage bridging loan allows them to borrow the money required for a short time.
Like mortgages, most bridge loans are a form of secured borrowing. This means you have to have a high-value asset to get one, such as property or land.
These have no set repayment period, which means you can decide how much to pay off and when you’ll pay it.
The loan can be repaid whenever your funds become available, for instance, when your house sells or your inheritance probate clears. These tend to charge higher interest rates because they are riskier for the lender.
These have a fixed cut-off based on a date when you know you will have the funds required to pay back what you owe.
Closed bridge loans are usually short-term, lasting just a few weeks or months. You’ll usually have to pay a penalty fee if you miss the deadline.
These loans are typically cheaper than open bridging loans because they present less risk to the lender.
These have no set repayment period, which means you can decide how much to pay off and when you’ll pay it.
The loan can be repaid whenever your funds become available, for instance, when your house sells or your inheritance probate clears. These tend to charge higher interest rates because they are riskier for the lender.
These have a fixed cut-off based on a date when you know you will have the funds required to pay back what you owe.
Closed bridge loans are usually short-term, lasting just a few weeks or months. You’ll usually have to pay a penalty fee if you miss the deadline.
These loans are typically cheaper than open bridging loans because they present less risk to the lender.
Bridge loan financing can be used in lots of ways. These include:
Buying a property
Property development
Buy-to-let investments
Business ventures
Paying a tax bill
Divorce settlements
Source:
A mortgage bridging loan is an example of a closed bridging loan. It can be used if you have exchanged contracts on a property but are waiting for your property sale to complete.
Open bridging loans are usually more expensive than closed bridging loans because they're more flexible. Whichever kind you choose, you need to find a way to repay your bridging finance.
Compare bridging loans for house purchases
Bridging loans can be used when people are moving house as they're useful when you need a mortgage to buy a new property, but are waiting for the sale of your previous home to go through.
They are also used by property developers at auction. This is because developers often need to pay a deposit to secure their purchase at short notice.
If you have a business and need financing to move to a new office location, you might be interested in business bridging loans.
When you apply for bridging finance, the lender adds a "charge" to the property you're using as collateral. These charges determine which debts are prioritised if you can't repay a loan. If a property is seized and sold to pay off outstanding debts, a first-charge loan is settled ahead of a second-charge loan.
A first-charge loan is the first or only borrowing secured against a property. Mortgages are typically first-charge loans. But if you have no mortgage or outstanding borrowing on your property, a different kind of loan – like a bridge loan – can be set up as a first-charge loan.
Second-charge loans are used when there's already a loan or mortgage secured against the property. Second-charge lenders usually need permission from the first-charge lender before they can use the property as collateral.
There's no limit to the number of charges that can be registered against a property.
The following steps guide you through the process of tracking down the best rates for bridging loans and the application process.
Determine the amount you wish to borrow, and for how long
Work out the value of your property and the amount of equity you have in it
Compare bridge loans using the comparison table above
Choose between applying online or speaking to a broker
Apply for the bridge loan deal you’ve chosen. Be sure to understand all the fees and additional costs by reading the small print
Bridging loans interest rates tend to be high – often between 0.4% to 2% – and are typically calculated on a monthly rather than an annual basis. This makes bridging loans an expensive way to borrow money.
What's more, because bridge loans typically charge monthly interest, a small change in the interest rate can have a significant impact on your overall cost of borrowing.
That said, interest is not always charged monthly. There are three different ways interest may be charged:
Monthly: you pay the interest monthly; it's not added to the original sum borrowed
Deferred or rolled-up: you pay the interest at the end of the loan; there are no monthly interest payments
Retained: you borrow the interest for an agreed period, and pay it all back at the end
Some lenders let you combine these options. For example, you could choose retained interest for the first six months and then switch to monthly interest.
Don't forget there are lots of other fees and charges that you have to pay on top of the interest. Check the costs carefully before you go ahead.
Bridging finance comes with several additional fees on top of the interest you’ll have to pay.
These are:
Set-up fee: This is typically 1 to 2% of the bridge loan amount and covers the costs of setting it up. It’s also known as a facility or arrangement fee.
Exit fees: If you pay back the bridge loan early, you may have to pay an exit fee – typically around 1% of the bridging finance total. Some lenders may waive this charge.
Administration or repayment fees: This fee is paid at the end of your bridging loan to complete the necessary paperwork.
Legal fees: This is usually fixed at a set rate and covers the lender’s legal fees.
Valuation fees: The cost of having your property valued by a surveyor.
Broker fees: Payable if you hire a broker to compare bridging loans on your behalf.
Other fees may also be charged, so make sure you know what these are before deciding whether to take out a bridging loan.
A bridge loan is a special type of credit that enables you to borrow a large amount of money for a short period of time. They can be useful in the right circumstances, but it's also worth considering whether another type of financing might better serve your needs. Alternatives to bridge loans include:
Second mortgage: You could look into getting a second mortgage.
Remortgage: You could remortgage your current home to free up some money.
Secured loan: Here's how secured loans work.
Personal loan: You could check if a personal loan could work for your needs.
Let to buy: If you want to buy a property and the sale of your first property falls through, a let to buy mortgage could be worth considering.
It depends on your credit rating and the value of the property you're using as collateral. There's technically no upper limit, but most banks won't lend more than £50 million, although some specialist providers may offer even more. The lower end of the range is around £5,000.
No, you don't have to be a homeowner to get a bridge loan, but because they are secured loans you need an asset to use as security. For example, some lenders consider land as security for a loan.
In terms of how long it takes for a bridging loan to be approved, in many cases you’ll discover within around 24 hours. If successful, you may find the money is transferred to your account within five to 21 days.
Yes, you do need a deposit for a bridging loan. Most lenders generally require a deposit or equity in the property you're purchasing. How much that is varies from lender to lender. Typically, this can range from 20% to 40% of the value of the property.
Yes, some lenders will still consider your application even if you have bad credit, although your loan could be more expensive.
If you have a mortgage or loan on your property you need a second charge loan. If there is no borrowing outstanding you can look at first charge loans.
Yes and no. Bridging loans are charged on a monthly basis, with rates between 0.5% and 2% common. Mortgages charge interest annually - with the best deals on the market significantly cheaper than that in terms of pure interest.
However, mortgage terms are far, far longer. Meaning while the APR might be lower, over the course of the loan you'll pay a lot more in interest.
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