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What are bridging loans? A bridging loan is a short-term form of borrowing used in property transactions, typically up to 18 months, although some stretch to 24 months. Most often, this sort of finance is used to bridge a gap between buying a new home and selling your old one, for instance if someone wants to break their chain and be a cash buyer. They are also sometimes used when people are buying a house at auction, and need to have funds available quickly if their bid wins. Another reason for a bridging loan might be to renovate a property or make it habitable before moving in or letting it out. Bridging loans can be arranged quickly, but typically have high interest rates – typically 0.5% to 2% per month up to 27% annually. The higher interest rate reflects the greater risk of the borrower not being able to meet their repayment requirements within the short loan term. That means they are usually more expensive than regular loans and mortgages and should therefore only be used as a last resort or for specific, short-term scenarios. Bridging loans for personal residential properties are regulated by the Financial Conduct Authority. This covers homeowners, who need a short-term cash injection, typically because their funds have been delayed. To get one of these products, at least of 40% of the property will need to be lived in by the homeowner or an immediate family member (either now or in the very near future). Commercial or investment bridging loans are known as unregulated bridging loans. This is because the FCA does not offer protection for bridging loans that are used for investment property, buy-to-let, or commercial real estate. How do bridging loans work? Typically, a bridging loan lets you borrow between £5,000 and £25 million or more. The loan is secured against an asset, most often a property you own (or several properties). If you don’t pay the money back, you could lose the asset. That means it’s important to have a back-up plan to pay what you owe. Some bridging loans have a set repayment date – for instance when you plan to complete on the sale of an existing property. Others are open-ended, but usually with a maximum term of one year to 18 months. At that point, you repay what you’ve borrowed, usually with either cash from your house sale, or with traditional mortgage financing. Your bridging loan provider will expect you to have a clear exit strategy, which you will need to share with them. The maximum loan, including interest, is normally 80% loan to value. That means if you were buying a property worth £450,000, you’d need £90,000 up front. Unlike with standard residential mortgages, the bridging loan amount is not linked back to your monthly income. Interest rates are high, and can be either rolled up or charged monthly. Rolling up means that you don’t make monthly payments and instead pay off the full loan plus interest at the end of your term. With monthly payments you pay some of the interest each month, meaning there will be less to pay overall. Bridging loan applications are much quicker than with a normal mortgage, meaning you could have an agreement and even access your funds in a matter of days. Mostly available through alternative lenders, you might want to use a specialist broker to help you find the best deal. The process is similar to when you apply for a traditional mortgage. You’ll need to apply for your loan and detail your exit strategy. The lender may offer an agreement in principle first, but several providers skip this step. If you’re approved, you’ll be given a conditional offer – subject to a full valuation. Next, conveyancers will carry out all the necessary legal checks, and once that’s done, you’ll get to completion and your funds will be released. There are several factors to consider, including what kind of bridging loan is right for you, the interest rate and set up fees. It is best to speak to a broker, who can recommend a suitable bridging loan for you. How to apply Work out how much you need to borrow, and for how long. Find out the current value of your property and how much equity you have Compare bridge loans using our checker. 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. Types of bridging loans There are two main types of bridging loans, often referred to as 'open' and 'closed'. Closed bridging loan With a closed bridging loan, you will be given a fixed date to repay the loan. If you are waiting for a sale to be completed and will be able to pay the loan back as soon as the house sale money comes through then this might be an option for you. Open bridging loan With an open bridging loan, there is a bit more flexibility, as this lets you repay the debt at a later date. This can be useful if you are not certain when you’ll get the cash, for instance if you don’t know when a sale will go through or if probate is delayed. However, you would still usually be expected to repay the debt within a year or 18 months. Your bridging loan will also be either first or second charge, depending on whether you own the property it is secured against outright or if you still have a mortgage on it. This charge is used to define which of your creditors is repaid first if you can’t afford to pay what you owe. For example, if you already had a mortgage on the property, this would be repaid before the bridging loan. This makes it riskier for the lender, which is why second charge bridging loans tend to be more expensive. First charge bridging loans You’ll get a first charge bridging loan if you own your existing property outright, with no mortgage on it. This means that if you miss your repayments and the property is sold, the money will go to pay off the bridging loan first. Second charge bridging loans If you still have a mortgage on your current home, your bridging loan will be a second-charge bridging loan. That means that in the event you can’t pay and the asset is sold, the money will go to pay your existing mortgage off first, with the remainder going towards your bridging loan. The other thing to consider is the way in which interest is charged on the property. There are three main options. Within these options you also have to choose between fixed and variable interest rates. Fixed is when the interest is defined at the outset of the loan and won’t change for a set period. This means you’ll know what your payments will be each month or how much you’ll owe at the end. Variable interest can change from month to month at the discretion of the lender. Often, it’s pegged to a financial indicator such as the Bank of England’s base rate. Fixed rates tend to be more expensive at the outset, but variable rates could rise sharply. However, variable rates can also decrease and end up far cheaper than a fix. Monthly interest You make monthly interest payments, meaning that at the end you only need to repay the balance of the loan. This should work out cheaper, but may not be feasible if you’re cash poor until you realise your exit strategy. Rolled up interest You don’t make any monthly payments. Instead, at the end of the loan you pay off the total cash sum borrowed as well as all the interest from the term. This might be suitable if you’re still paying the mortgage on your current property and can’t afford extra repayments until you sell. Retained interest You borrow more money than you need for the property, to cover the interest and charges. You’ll know from the outset what you owe, based on how long you need the mortgage for. You’ll pay the total amount off at the end. If you pay the loan back early, unused interest is returned to you. Bridging loan eligibility criteria Each lender will have different eligibility criteria. However, you generally need a good loan to value rate, a big enough deposit, a clear and solid exit strategy, and a property or asset to secure the loan against. As the loan is secured against property, you may still be able to access bridging finance with a low credit rating, but this is likely to affect the interest rate offered. Your bridging loan application will move faster if you have all your documentation ready at the beginning. Here are the main eligibility criteria and documentation you’ll need. Applicants must be at least 18 years old A clear repayment plan (usually either a property sale, inheritance, savings or bonds that are due to become available, or a mortgage agreement in principle). You may also need to show proof of intent to sell your property and how you plan to do this. Evidence of the property you plan to buy with the loan and the price you are expecting to pay for it. Assets to secure the loan against, for instance your current home. You’ll need to show its value. The lender is likely to look at things like location, what type of build it is, and anything that might put buyers off. A deposit worth at least 20% of the property A good credit rating. The better your credit report, the better the deals you’ll be offered. People with poor credit scores may find lenders are not prepared to offer them a bridging loan at all. A backup plan in case the sale falls through. Bridging loans can be quite expensive so you should have a backup plan ready in case you cannot afford to repay the debt. For example, if your house sale falls through after you have taken out the loan, how would you repay the bridging loan company? Bridging loans comparison to alternative loans If you are struggling to get enough money together to bridge the gap between selling your current home and buying a new home, there are alternatives to bridging loans that are worth considering. Weigh up the costs and the risks of each before deciding what’s best for you. Buy-to-let mortgage A buy-to-let mortgage lets you borrow money to purchase a residential property that you’re planning to rent out, rather than one you intend to live in. Buy-to-let mortgages often have higher interest rates and fees, and require bigger deposits than residential mortgages. Consider factors such as how you would cover a void period until tenants can be found, and what might happen if interest rates change. Remortgaging You could remortgage your current home to access some of the equity to put towards the new property you want to buy. You’ll have to pass affordability checks based on your income, and you’ll need a substantial amount of equity in your home. Peer-to-peer loans Peer-to-peer lending is also known as P2P or crowdfunding. It matches savers wanting to earn a high rate of interest with borrowers (either individuals or businesses) needing money. Borrowers must pass a series of checks before they're approved by a peer-to-peer provider, such as a hard credit check, an affordability assessment, and an identity check. Second home mortgage A second-home mortgage is a loan you take out to buy a second property. You’ll need to meet strict affordability criteria. If you’re still paying off your first mortgage, you’ll need to show you can afford the new repayments on top of your existing ones. Interest rates tend to be higher than standard mortgages. Personal loans You could try a personal loan if you need money to improve or do up a property. However, a lender is unlikely to let you use the cash as a deposit for a home, and many have rules banning this. Personal loans are typically only for small amounts up to £50,000, so wouldn’t normally be enough for a house purchase. Porting your existing mortgage Another option is to port your mortgage, which is essentially moving your current mortgage deal over to your new property. You would need to check the terms of your agreement on your current mortgage. Even if this is a possibility, you would still need to re-apply for the mortgage. Mortgage lending rules have become more stringent, so you may not qualify with the same circumstances you initially did. More importantly, if you need to borrow more than what remains on your current mortgage, you may need an additional mortgage at a different rate. Pros and cons of bridging loans Pros You can usually get approved far more quickly than for a traditional mortgage You can choose the repayment terms that best suit you and borrow large sums if needed These loans can help you break out of the mortgage chain, making you a more attractive buyer You can use a bridging loan to secure your dream house, even if your existing property hasn’t sold yet Cons Bridging loans have very high interest rates so they’re an expensive way to finance a new home The loan will be secured against an asset, usually your current home, so you could lose it if you can’t repay You need a back-up option to pay the lender if your exit strategy falls through Fees and charges, such as a set-up fee, make borrowing even more expensive Best bridge loans available If you’re considering a bridging loan, it’s best to scour the market to find the best possible option for your circumstances. Using a comparison site can help you look at all the different options, and you may want to speak to a broker to help you choose the right deal. Things to consider: How much you want to borrow – different lenders will have different minimum and maximum loan amounts How much equity you have – this will impact what interest rates you’re offered How long do you need the money – usually loans are offered from as little as a month to as much as a year or two Do you want an open or closed loan – this will depend on your exit strategy Do you want fixed or variable interest – variable is often cheaper initially, but less certain What are the total costs of the loan – look at interest rates but also arrangement and set up fees How much does a bridging loan cost? Generally, when choosing a loan you want to go for the absolutely cheapest borrowing you can find. Here are the main costs to consider: Interest rates: Usually between 0.5% to 2% – charged on a monthly basis, or up to 27% annually. Look at the equivalent annual percentage rate to get a true sense of costs. Set-up or arrangement fees: Usually around 1% to 2% of the bridge loan amount. Also known as a facility or arrangement fee. Exit fees: Usually around 1% of the total bridging loan, charged when you pay it back. Not all providers include this. Administration or repayment fees: Paid at the end of your bridging loan. Legal fees: Usually a fixed rate for due diligence and conveyancing, for example £750, plus disbursements. Valuation fees: Charge for having your property valued by a surveyor. Costs vary depending on location and type of loan but can be as much as £1,000 or more. Most are considerably lower so shop around. Broker fees: Not all brokers will charge fees. Among those that do, some will charge a flat fee e.g. £500, while others will charge a percentage of the total loan e.g. 1% Bridging loans for different types of property transactions Bridging loans can be useful in several situations, such as: If you want to buy a new property before you have sold your existing house, this can help you break the chain and secure your dream home without waiting for your current property to sell If you are a landlord, or considering becoming one, and you want to invest in a new buy to let property. This can allow you to purchase the property, perhaps bridging the gap until a buy-to-let mortgage is approved. To buy a commercial property – though these may need a specialist lender and may be unregulated. If you have completed a property development project and you don’t want to wait to sell one project before beginning another If you are buying property at auction and need a deposit immediately, a bridging loan can plug the gap until either your mortgage comes through, or an existing property is sold If you need to pay a tax bill, such as an inheritance tax bill, and don’t have capital until a property is sold or the inheritance is released To pay stamp duty on a second home, with the exit fee funded by the sale of your current home. If you’re getting divorced, a bridging loan could help you to secure a new home whilst waiting for the family home to be sold or for your ex to buy you out. Bridging loans FAQs How much do bridging loans cost? Typically bridging loans have interest rates of up to 2% charged monthly. This can work out as an effective annual percentage rate (EAPR) of more than 20%, far higher than a normal residential mortgage. This makes them an extremely expensive way to borrow money. There are also other fees to consider, such as legal fees, arrangement fees and even exit fees. What are typical rates for a bridging loan? Monthly interest rates usually vary from 0.5% to 2%. How much you’ll be charged depends on your loan-to-value and your credit score. The quicker you can pay the loan back, the less interest you’ll pay overall, so ideally you only want a bridging loan for a very short time. Are bridging loan rates the same as typical mortgage rates? No. Bridging loan rates are typically higher than for a standard mortgage. It’s worth exploring all your options, including second home mortgages, before taking out a bridging loan.

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Loans

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