What is a bridging Loan?

A bridging loan, or “bridge finance” is a bespoke form of short-term property lending.

That means it’s a more flexible type of finance than an off-the-shelf mortgage from a high-street bank.

• It can be arranged more quickly than a mortgage, and the terms of the loan will depend on what you need it for.
• Unlike a mortgage, where lenders are focused on your income and financial commitments, bridge finance is secured primarily against the value of the property you’re buying (and possibly against one you already own as well).
• That means lenders may be willing to consider borrowers who don’t have perfect credit records.
• And because this is short-term finance, they may also be more flexible about the condition of the property.

Everyone who borrows on a bridging loan needs an “exit plan” for how they will repay it.

What might you need a bridging loan for?

• You’re being pushed to complete on the house you want to buy, but you haven’t yet sold your current home.
• You’re intending to “flip” a property (buy, do some quick improvements, and sell it on). So arranging a 25-year mortgage isn’t suitable.
• You’re buying at auction and will need time to set up a mortgage.
• You want to buy yourself some time to do some improvements before you move in, and you don’t want the inconvenience of doing a “double move”: staying in rental accommodation after you’ve sold your current house.
• The property you’ve bought needs substantial work before it will be mortgageable.

How much can I borrow?

• From £25,000 up to £50M
• Up to 80% of the loan-to-value (LTV) ratio = on a property valued at £100,000 you could borrow £80,000. You’ll need a deposit of £20,000.
• The maximum for a regulated loan (secured against a family property) is 75% LTV.

How much will it cost?

The total cost of a bridging loan is made up of the interest you need to pay and some other costs and charges.

Interest costs

• Interest rates are quoted per month, rather than annually, because you can repay in a matter of months
• After the first month minimum, interest is calculated daily

You can opt to repay interest in a couple of ways on a loan for an investment property (any property that isn’t your home).

1 “Servicing” the interest

You arrange to pay the set-up fees upfront and make an interest payment monthly – just as with a mortgage.

• Cost-effective if you’ve got the cash flow to cover the monthly payments because it means you’re not paying compound interest
• Allows you to borrow up to the maximum of your LTV

2 Arranging for the interest (and most of the fees) to be “rolled up”

That means they’re added on to the total loan, and repaid at the end (apart from legal fees and the cost of valuation, which need to be paid at the outset).

• You don’t have to worry about servicing the loan along the way – your exit plan pays the interest
• You can use all your available cash on the project
• You do end up paying compound interest
• And the maximum of your loan plus the interest costs needs to fall within your allowed LTV

If you’re looking for finance on your own home your bridging loan will be a regulated loan, which means that the interest charges must be rolled-up. (This is to help protect your home, taking into account that you will have mortgage costs that you need to keep up with.)

Set-up fees

In addition to the interest rates on a bridging loan there are a range of set-up costs that need to be paid. They’re similar to the fees for longer-term mortgages, but they can seem more of a burden for a loan lasting for months rather than years.

Fees include the usual search fees and land registration fees, the lender’s valuation fee (which you need to pay) and both your legal fees and the lender’s (which you may be able to minimise by using the lender’s solicitor to do your own legal work as well).

Then there’s the lender’s arrangement or facility fee of around 2%. And your broker’s fee (which will be least of all the professional fees).

Use a bridging loan calculator

to see how much you can borrow and the costs involved.

How long can you have a bridging loan for?

• Bridging loans on residential property are usually offered for a maximum of 12 months
• Non-regulated loans (on investment properties) may extend for 18 months or even longer (possibly up to 36 months)
• For longer terms you would want to be looking at a less expensive type of finance, such as a development loan
• Most bridging loans are repaid within six to seven months
• After the first month, you can repay at any time, usually without any exit fees

How will you pay off your bridging loan?

When you set up a bridging loan, you agree on your exit strategy with your lender: how you will repay it. You might be planning to:

• Sell the property after renovations are complete
• Sell the home you’re moving out of to pay for this new home
• Arrange a long-term mortgage on the new property (either a residential mortgage or a buy-to-let mortgage)
• Sell another property to pay off the loan

When the loan is set up, the lender takes a “charge” against your property, registered with the land registry. If that property doesn’t have a mortgage on it, your bridging loan will be the “first charge.” (Interest rates on first charge bridging loans are lower).

If the charge is on a property you already have a mortgage on (for example, the house you’re currently living in, or an investment property you already own), this bridging loan will be the “second charge” loan.

Interest rates on second charge bridging loans are higher because this loan is second in the queue to be repaid if for any reason you default on the loan.

The charge against your property means that ultimately the lender can repossess it if you’re not managing to repay the loan.

It’s not good business for lenders to have to repossess properties to get their money back. As the term date for your loan approaches, they’ll be in contact to make sure you’re on track for repayment.

If things are looking uncertain, they may offer advice, for example, on marketing a property for sale. You should have a fall-back plan for if things go wrong: for example, a bottom-dollar price you can sell a property at and still break even.

What if I need to extend the loan?

Building plans could be delayed by bad weather. There could be a holdup on a replacement mortgage approval. Or the property market may have slowed and you can’t find a buyer within your planned time-frame.

For all these reasons it’s useful to arrange the borrowing facility for longer than you may think you need, to allow for unforeseen circumstances.

If you need a bit more time to achieve your exit, your lender may be willing to extend the term, but this could start to get expensive so it’s best avoided.

Can I repay bridge finance early?

• Yes. Unlike a mortgage which is structured to run for around 25 years, this is designed to be short-term finance.
• After the first month you can repay at any time, usually without incurring any early-repayment penalty fees.
• And after the first month interest is calculated on a daily basis.

Our bridging loan service provides:

• “Packaging” of your application to suit lenders’ requirements
• Quotes from the leading lenders in the market, from 0.44% pm
• Up to 80% LTV available on 1st charge loans; 75% on a 2nd charge loans
• Loans available in England, Wales, Scotland and Northern Ireland (non-regulated only)
• Fast completion: anything from 5 days depending on the bridging lender and their process