What is a bridging loan and how does it work? UK

What is a bridging loan and how does it work?

Bridging loans are short-term loans typically secured against the property or land the loan will be used to purchase. They offer a swift and flexible financing option for individuals and investors. The processing time for a bridging loan can be as little as 48 hours – significantly less than a standard mortgage application.

What can I use bridging finance for?

Bridging loans can be useful in a variety of ways to help bridge the finance gap when you don’t have immediate access to funds.

Amend a broken property chain

Perhaps the most common use for bridging finance in the residential market.

Navigating the purchase of a new property while simultaneously selling your current home can be an inherently stressful experience. When faced with delays or issues in the buying or selling process, borrowers can utilise bridging finance to bridge the gap in funding, ensuring the smooth progression of the property chain.

A buyer pulling out last minute is a classic example. A bridging loan can be used to fund the ‘gap’, giving you more time and less pressure to sell your current property.

Quick access to funds at a property auction

If you place a winning bid, you will need to pay a non-refundable deposit of generally 10% of the purchase price on the day and full payment is usually due within 28 days to complete the purchase.

Naturally, a traditional mortgage is ill-suited for auctions as the process to arrange the finance isn’t fast enough for these timescales. If you do not have the money readily available to meet the 28-day deadline, you will lose the deposit, the property and possibly be liable for additional costs too. Attempting to sort your mortgage out in the short timeline could be extremely stressful or not fruitful at all.

Renovating a property

Bridging finance can be used by developers as a short-term funding option. Many bridging lenders offer renovation mortgages where they lend for both the purchase and the works you plan to do, similar to a development loan. Developers can use this funding for a variety of purposes, including purchasing land, property, or funding certain parts of the build.

A bridge-to-let mortgage offers a flexible financing solution, bridging the gap between purchasing a property and securing a long-term buy-to-let mortgage, empowering investors to capitalize on property investment opportunities and potentially releasing money for their next project when refinancing as a buy to let.

Buying an unmortgageable property

Mortgage lenders are unwilling to lend on certain properties considered as too risky or unconventional to offer a standard mortgage on, thus leaving limited financial options for potential buyers.

Bridging lenders offer a solution by being less selective about property types they are willing to lend on. Borrowers can then make the necessary renovations to make the property mortgageable, paving the way to obtain a standard mortgage and ultimately repay the bridging loan entirely.

Commercial bridging loans

Commercial bridging loans can be a valuable tool for businesses in need of short-term financing for property acquisitions, refurbishments, or urgent cash flow requirements. This temporary funding solution allows you to bridge the gap between the purchase of a new commercial property and the long-term financing that will be secured, such as a commercial mortgage.

Why use a bridging loan?

Bridging loans have traditionally been perceived as high-risk and costly, however nowadays they can provide valuable opportunities for property investors and homebuyers alike. A few examples of how individuals, landlords and developers can use bridging finance include:

Bridging finance for individuals

• Save a property sale & break a property chain.
• Complete a property transaction quicker.
• Take advantage of opportunities by purchasing property below market value.

Bridging finance for landlords

• Invest in under-valued property for renovations to increase rental price and property value.
• Upgrade an EPC rating for rental property.

Bridging finance for developers

• Short-term funding option to purchase land, property, or fund certain parts of a build.
• Flexible bridge to let mortgages to bridge the gap between purchasing and securing a long term buy-to-let mortgage. Potentially release money for the next project when refinancing.

How do bridging loans differ from standard mortgages?

Bridging loans differs from a standard residential mortgage in several important ways:

• Income – Typically, when borrowing on a standard mortgage, lenders will perform a full affordability assessment and cap the loan size to between 4 and 5 times the borrower’s income. For a standard bridging loan, you just need to show you have sufficient income or savings to justify your own expenditures during the loan and the lenders are much more focused on the assets themselves.
• Repayment strategies – Bridging loans paid back on an interest-only basis. The borrower has some leeway with regards to when interest payments are made: they can either opt for a rolled-up interest repayment strategy, whereby they repay the entirety of the loan plus all of the accrued monthly interest at the end of the loan term; or they can opt for a serviced interest repayment strategy, whereby they pay interest on the loan each month and then simply pay off the principle and any added fees at the end of the term.
• Rates – Rates are typically higher than a traditional mortgage because they last for just a short period and are typically higher risk transactions so demand a premium. A mortgage broker can advise on the best current rates available.
• Property – Lenders are far less selective about which properties they are willing to offer bridging loans on compared to those on which they’re willing to offer standard mortgages. This flexibility makes it particularly useful to certain kinds of borrowers such as those redeveloping properties, changing use of a property, or buying uninhabitable properties.
• Speed – It’s often possible to arrange bridging loans far more quickly than standard mortgages. In some cases, mortgages can take months to complete whereas in some cases it’s possible to arrange bridging finance in as little as 24 hours (a good broker should be able to push the loan through to completion more quickly).

What are the advantages and disadvantages of using bridging finance?

Like all forms of finance, bridging loans come with a unique list of pros and cons which makes them suitable for some situations and not for others.

Advantages of bridging loans

• Quick access to funds: Bridging loans can be processed much faster than traditional mortgages, allowing borrowers to secure funds promptly. This speed is particularly beneficial in time-sensitive situations such as property auctions or broken property chains.
• Flexible repayment options: Most bridging loans do not require monthly repayments. Borrower has some leeway with regards to when interest payments are made: they can either opt for a rolled-up interest repayment strategy, whereby they repay the entirety of the loan plus all of the accrued monthly interest at the end of the loan term; or they can opt for a serviced interest repayment strategy, whereby they pay interest on the loan each month and then simply pay off the principle and any added fees at the end of the term. This provides a flexible solution to manage cash flow.
• Property flexibility: Bridging lenders are more lenient regarding property types and conditions compared to traditional mortgage lenders. This makes bridging loans a viable option for properties that may be deemed unmortgageable by standard lenders, such as properties in need of renovation.
• Bridge financing gaps: Bridging loans can bridge the financial gap between the purchase of a new property and the sale of an existing property. This allows borrowers to complete a property purchase without being constrained by the timing of selling their current property.
• You only pay for what you use: Bridging loans typically have shorter terms, often ranging from a few months to a year. So although the interest costs are higher than some other finance routes, you only pay interest for the period you have the loan outstanding.

Disadvantages of bridging loans

• Higher interest rate: Bridging loans come with higher interest rates compared to standard mortgages. These rates reflect the short-term nature of the loan and the speed at which funds are made available. Borrowers should carefully consider the potential costs of the loan, including interest payments and administration fees.
• Short-term nature: Bridging loans typically have shorter terms, often ranging from a few months to a year (with longer term bridges only available on investment properties or to high-net-worth individuals). While this can be advantageous for immediate financing needs, it also means borrowers must have a clear exit strategy in place to repay the loan within the agreed-upon term.
• Additional fees: In addition to higher interest rates, bridging loans may involve additional fees, such as arrangement fees, valuation fees, and legal fees. Borrowers should thoroughly understand the fee structure before proceeding.
• Risk from property sale delays: If the borrower’s planned exit route is to sell their property and that sale is delayed or falls through, they may face challenges in repaying the bridging loan on time. This can lead to potential penalties or the need to seek alternative financing options, adding further complexity to the borrower’s financial situation.

It’s important for borrowers to carefully evaluate their individual circumstances, financial goals, and risk tolerance before opting for a bridging loan. If you believe bridging finance is suitable for you and would like to find out more, our consultants will explain everything you should consider before taking out a bridging loan so you can make an informed decision.

How much do bridging loans cost?

Bridging loans come with various costs that borrowers should consider when evaluating this type of financing. Often, many of these fees can be added to the loan amount to reduce the upfront costs of bridging finance.

Some of the common costs associated with bridging loans are:

• Administration fees: Lenders will often charge a fee for their costs around underwriting and funding a loan.
• Arrangement/product fees: Lenders often charge an arrangement or product fee for setting up the loan. This ensures the deal will be profitable and, in most cases, allows them to pay the broker for their part. Most brokers will charge a fee independent of this too.
• Legal fees: Borrowers will need to engage a solicitor to handle the legal aspects of the bridging loan transaction. Usually, a borrower needs to pay for both their own solicitors and separately the bridging lender’s legals.
• Valuation fees: Lenders typically require a valuation of the property used as security for the bridging loan.
• Exit fees: Some bridging loans may come with exit fees, which are charged when the borrower repays the loan. This is not as common as it used to be and a broker will take into account all costs associated with the loan to recommend the best structure.

What is the interest rate on a bridging loan?

Bridging loan fees and rates are comparatively higher compared to a traditional mortgage due to their short term nature.

Interest rates will vary by lender and can change daily. This rate is also dependent on your circumstances. We monitor these rates closely and can talk you through all the costs involved so you can make an informed decision.

What are the alternatives to bridging loans?

Bridging finance can be an extremely useful tool, however as a higher cost solution, it should only be used when appropriate to your circumstances. It’s worth exploring alternative financing options to see if there is a more suitable solution for you.

Here are some alternative finance options to consider:

• Remortgage – Remortgaging a property you already own allows you to access additional funds based on the equity you may have built up in your property. Though this means entering into a new long-term mortgage commitment and you should consider carefully if this is the right option for you.
• Secured Loan – A secured loan on background assets will allow you to borrow a larger amount than a personal loan and can charge a lower interest rate than a bridging loan. However, the loan is secured against assets.
• Personal loan – If you require a relatively small bridging loan, it may be worth considering a personal loan instead. This loan isn’t secured against your property and the repayments are likely to be smaller as the interest is charged annually and not monthly.
• Savings – If background savings you hold are not needed within the timescale you plan to need the bridging loan, and they are not outperforming the costs related to a bridging loan, it could be worth considering using personal savings or liquidating existing assets (such as stocks, bonds, or other investments). This eliminates the need for borrowing and interest payments.

Using other assets and income to minimise the bridging loan

Reducing the size of the bridging loan will reduce costs proportionately. For homebuyers, this means we will often look at income and other assets to see if any lower cost finance is available alongside or instead of a bridging loan.

Lombard loans are a type of secured loan that allows individuals or businesses to borrow funds by using their existing financial assets as collateral. This could include an investment portfolio, stocks and shares or other securities. This is an option which could be used in conjunction with bridging finance.

Loans against other secure assets should cost less than bridging. This normally excludes the likes of boats and jewellery, but can include other properties, bonds, blue chip shares and savings policies. Reducing the amount of ‘standard bridging’ by borrowing against other assets or income almost always creates greater flexibility on timing and other terms.

It’s important to consider any taxes payable when liquidating assets such as capital gains tax, and the availability and cost to re-purchase these assets once the required cash is available again.

Applying for a bridging loan

Applying for bridging finance can be a complex endeavour. If you believe a bridging loan is for you, contact one of our expert consultants and we will help you through the application process.

1. Initial enquiry to see if bridging finance is for you

We will help you evaluate if bridging finance is for you discussing the property details, the purpose of the loan and your financial situation.

2. Provide Necessary Documentation

After the initial meeting, we will request specific documentation to support your bridging finance application. This may include identification documents, bank statements, tax returns, proof of income, property valuations, and any other relevant financial information.

3. Application Submission

Once all the required documents have been received, we will compile your application and submit it to suitable lenders on your behalf. Your consultant will negotiate with lenders to secure competitive interest rates and terms that align with your needs. Throughout this process, we will keep you informed of the progress, ensuring transparency and clear communication.

4. Completion and release of funds

The solicitors will carry out their legal checks and conveyancing process. Completion can happen relatively quickly with the right help!

Your home may be repossessed if you do not keep up repayments on your mortgage.