Bridging loans explained
When you are in the process of buying one property whilst selling another it can be tricky to tie up the dates so both transactions complete on the same day. Or maybe you are buying at auction and you can’t get the funds ready on time. Although a risky option, this is where a bridging loan can help. We explain bridging loans, when they are used, pros & cons, costs and how to apply.
What are bridging loans?
Bridging loans are a way to borrow money in the short term. They can be used to ‘bridge the gap’ if you need to buy one property before selling another. Unlike mortgages, bridging loans can be arranged quickly if speed is important.
Here are some examples of when you may consider using a bridging loan:
- You are in a property chain that has collapsed and you don’t want to lose your dream home.
- You are buying an auction property and need to raise funds quickly.
- When buying a property that is unmortgageable. Your plan is to make it habitable or lettable so a traditional mortgage can be arranged.
Bridging loans are a secured loan, meaning that you have to secure an asset against them, usually a property or properties. As there is a risk of losing your asset, bridging loans are sometimes known as the loan of last resort.
How do bridging loans work?
You can borrow between £50,000 and £10 million with a bridging loan. The amount depends on how much equity you have available. The maximum loan, including interest, is normally limited to 75% loan to value. The loan is then secured on the property or it can be across multiple properties to raise the required funds. A bridging loan, unlike a mortgage, is not directly linked to your income.
The bridging loan is repaid either by the sale of the property or by raising finance through a traditional mortgage route.
What are the pros and cons of a bridging loan?
Make sure you balance up the pros and cons before you apply for a bridging loan.
Pros of bridging loans
- You can quickly borrow the money to keep your property transaction on track.
- It is possible to borrow very large sums of money.
- The repayment terms can be flexible to fit in with your plans.
- It is possible to secure lending on properties where high street lenders may not.
Cons of bridging loans
- Bridging loans are a secured form of borrowing, so you’ll need to put up an asset against the loan. This means you risk losing that asset, for example a property, if you can’t repay the bridging loan.
- You pay for the convenience of fast, flexible finance with a higher interest rate.
- Bridging loans can come with a range of fees that add to their expense.
Bridging loan interest rates
Interest rates tend to be higher on bridging loans as you are paying for the privilege of borrowing a lot of money quickly. Because bridging loans tend to be short term, interest is charged daily rather than annually. You can expect to pay anything from 6%APR up to 20%APR depending on the loan. This is far higher than the mortgage interest you will pay with the best mortgage deals on the market now.
Unlike a traditional mortgage there are 3 ways that the interest on a bridging loan is charged;
- Monthly – Similar to an interest-only mortgage where you pay the interest payments each month and they are not added to the loan.
- Rolled up – Interest payments are added to the loan and paid when the bridging loan is cleared.
- Retained – You borrow the interest upfront for an agreed period and then when the loan is paid back, any unused interest is returned to you.
Cost of bridging loans
Alongside the interest rate, there are other bridging loan fees you may have to pay. These include:
- Arrangement fee paid to the lender – typically 2% of the loan and added to the loan.
- Administration fee – can be payable upfront.
- Legal fees – part payable upfront to your conveyancing solicitor and the rest on completion.
- Valuation fees – range from £900 – £2000 depending on the lender and how fast you need the funds.
- Broker fees – payable on receipt of the mortgage offer – from £500 flat fee to a % of the loan.
How do I get a bridging loan?
You can apply to a specialised broker or direct to the lender for a bridging loan. There are several things lenders will assess when deciding whether or not to approve your application.
The lender will usually require at least one property to be used as security against the loan. This will likely need to be another property to the one you are selling, so you may need to own more than one property to secure a bridging loan.
The lender will also want your exit plan. That is how you will repay the loan and by when. If you need to take out a traditional residential or buy-to-let mortgage, for instance on the property that has been renovated or the property you are buying, you will need to show the lender proof that the mortgage will be forthcoming. They will undertake affordability checks as standard with normal mortgage lending or look at the rental income you will be generating. This is to satisfy the lender that you will be able to secure a mortgage and you can afford any repayments required on the new loan.
As there are unregulated products on offer, we advise that you go via a specialised broker, such as Chartwell Funding who can scour the market for you and advise you on all bridging loan options.
Bridging loan example
Here is an example of how a bridging loan works. You want to purchase a property for £500,000 before you can sell your existing property of £450,000 with a £50,000 mortgage secured against it. This means borrowing the full £500,000 and a 12-month bridging loan to give you enough time to sell. And, arranging a mortgage on your new property to cover the shortfall.
|Monthly Interest Rate:||0.64% (Annual APR – 9%)|
|Interest Amount:||£40,602.01 (Assumes full term of 12-months, calculated daily)|
|Gross Loan Amount:||£550,922.01|
|Net Loan Amount:||£500,000.00|
|Loan Term (Months):||12|
|Loan to Value:||63.25%|
|Valuation Fee (Inc. VAT):||£860.00|
|Arrangement fee Fee:||£10,000.00 (Added to loan)|
|Telegraphic Transfer Fee:||£25.00 (Added to loan)|
|Administration Fee:||£295.00 (Added to loan)|
Bridging loan calculator
How much you can borrow with a bridging loan will depend on the value of your properties and your personal finances. The maximum loan, including any retained or rolled up interest is normally limited to 75% loan to value (this can be over multiple properties).
The bridging loan may also be limited depending on the condition of the property, your credit history, any essential works required at the property or the level of finance available to refinance.
What are first and second charge bridging loans?
Because it is a secured loan, a charge will be placed against your property when you take out a bridging loan. If you own the property outright this will be a first charge loan – meaning the lender will be the first to be repaid when the property is sold.
If you have a mortgage or existing loan on the property that will be the first charge loan and the bridging loan will be a second charge loan. With a second charge bridging loan you will need permission from the first charge lender before you can take out the bridging loan. These are typically more expensive than first charge bridging loans.
Who offers bridging loans?
Prior to the 2008 financial crisis bridging loans were a more common lending product offered by the high street banks such as Nationwide, Halifax and Santander. At this time, bridging loans were used by people not wanting to lose out on their dream home.
However, many stopped offering them after the credit crunch. Currently, only Lloyds Bank offers bridging loans to its private banking customers. Nowadays professional or experienced investors take advantage of this facility.
These days bridging loans tend to be offered by alternative lenders rather than the high street banks such as United Trust Bank, Precise mortgages, MT Finance or some regional building societies such as Harpenden.
A bridging loan is specialist finance, and you should seek independent advice as they are considered a loan of last resort. You need to establish if more suitable alternatives are available and specialist brokers (such as Chartwell Funding) are experienced in helping to arrange these loans if and when required.
Alternatives to a bridging loan
There are a number of other options you can consider instead of a bridging loan to fund your property purchase. You could take out a secured homeowner loan or personal loan or look at remortgaging a property or taking out a second mortgage on your home.
Another option could be a let to buy mortgage. This is where you remortgage your property to release enough cash to pay the deposit on your new home. You then rent out your current home and use the rental income to cover the mortgage so you can get another mortgage for your new home. You can find out more in our guide to let to buy mortgages.
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