Bridging loans?

What are bridging loans?

Bridging loans are short-term secured borrowing to bridge a financial gap when you need to buy one thing but haven’t freed up the funds from selling something else.

How do bridging loans work?

Bridging loans work like a short-term secured loan but usually without the monthly payments. You will usually repay the money plus interest at the end of the term.

Bridge finance terms can be anything from a week to 12 months (or longer with some lenders). You have access to a lump sum of money while waiting for cash from somewhere else. Normally this is used when buying property.

Because bridging finance is secured against an asset that you own, they are risky for borrowers – if you don’t repay the loan, your asset could be repossessed. But they are less risky for lenders as they have security for the loan.

What are they used for?

Bridging loans are commonly used for buying property when a buyer needs to move into their new home but has not yet sold their existing home.

Other uses include:

• Preventing a property chain from collapsing
• Auction finance
• Property development/renovation
• Buying an unmortgageable property
• Time-sensitive property transactions

Sometimes bridging loans are used for non-property reasons including:

• Paying off debts
• Paying a tax bill
• To solve short-term business cashflow problems
• Divorce payments

What is the eligibility criteria?

Eligibility criteria for bridging finance varies from lender to lender.

In general, to get a bridging loan in the UK, you must:

• Be aged 18 or older
• Have a registered UK address
• Own an asset – normally a property – to use as collateral for the loan.

You can apply for a bridging loan as an individual or a business (such as a partnership or limited company).

Bridging lenders are less concerned about income or credit history than for other forms of borrowing. This is because they have security for the loan and there is normally an ‘exit plan’ in place to ensure the loan will be repaid.

What is a bridging loan exit plan?

A bridging loan exit plan or ‘exit strategy’ is the method by which you will pay back the bridging loan.

Some bridging loans require you to have an exit plan in place when you take out the loan.

Common exit strategies include:

• Selling a property
• Remortgaging to a traditional or buy-to-let mortgage
• Selling a business or business asset
• Money from an inheritance, business deal or divorce

How much does bridging finance cost?

Bridging finance typically costs between 0.4% to 2% of the loan amount per month. Interest rates are normally expressed as a monthly rate rather than an annual rate.

There are three ways bridging loans are repaid:

1. Rolled up: The borrower pays nothing each month. The interest each month is added to the amount borrowed before the next month’s interest is calculated. This is called compound interest. The total amount repaid will be larger.
2. Retained interest. The lender retains the amount of interest that will be paid, subtracting it from the loan amount paid to the borrower. Because this is taken up front it is simple interest. The borrower receives less but repays the full amount. If you repay early the lender will repay some of retained interest
3. Serviced: The borrower pays the interest monthly – like an interest-only mortgage. Then the loan capital is repaid at the end of the term.

For a £100,000 bridging loan over six months the difference in interest rates using each type of loan would be:

Most borrowers do not pay monthly as they already have a mortgage to pay.

Bridging loans may also have other fees, such as:

• Set-up or arrangement fees (normally between 1% to 2% of the loan amount)
• Early repayment fees
• Administration fee for the cost of paperwork and other admin tasks
• Legal fees – you’ll need to pay the lender’s legal fees as well as your own
• Valuation fee – the charge for valuing the asset you use as security
• Broker fee (if you use a broker to find a bridging loan for you)

How much could I borrow?

You can usually borrow a minimum of £5,000 on a bridging loan, and up to £10m (maybe more).

The exact amount you can borrow will depend on the value of the property (or other asset) you put up as security.

Each lender will also have a maximum loan-to-value (LTV). This caps how much you can borrow relative to the asset’s value.

What are the different types of bridging loans?

Residential bridging loans

A residential bridging loan is used to finance a residential home purchase or development. Borrowers usually use these loans when moving house and waiting for the sale of a previous home to complete.

Residential bridging loans may be regulated by the Financial Conduct Authority or unregulated. If you or your family live in the property you are offering as security and occupy at least 40% of it, the loan is regulated. If you don’t live at the property, or more of it is let out or unoccupied, the bridge loan is unregulated.

Commercial bridging loans

Commercial bridging loans are designed property development or buying commercial real estate.

Commercial bridging loans can be secured against commercial properties and land and are normally taken out by businesses.

Open vs closed bridging loans

Open bridging loans don’t have a set repayment date and are more flexible. Closed bridging loans require you to have an exit plan and a set repayment date when you take out the loan.

Due to their flexibility, open bridging loans are quick to set up, but they are usually more expensive.

Fixed vs variable interest bridging loans

Like other types of loans, bridging loans can have either fixed or variable interest rates.

A fixed rate will provide more security, with a set rate for a specified term, meaning you know exactly how much your repayment will be.

A variable rate may offer a lower initial monthly cost, but the interest rate can vary over the term. For example, it may increase if the Bank of England raises the base rate.

First charge vs second charge bridging loans

When you put up an asset (normally property) as security for a bridging loan, this will be registered with the Land Registry as first or second charge.

The charge states the order in which lenders are repaid in the event the property is repossessed to pay the debt.

A first charge is used when the property is unencumbered (there are no other loans or mortgages secured against it). Second (and third) charges are used when there are existing debts secured on the property.

Regulated vs non-regulated bridging loans

Some bridging loans are regulated by the Financial Conduct Authority (FCA). Bridging Loan regulation means that consumers are protected from incorrect advice or mis-selling from lenders or brokers.

The bridging loan must be sold as a regulated loan if at least 40% of the property used as security for the loan is the borrower’s home or is occupied by members of the borrower’s immediate family.

A bridging loan taken out in a company’s (not individual’s) name will be unregulated. This means it’s treated as a business transaction and the borrower has less protection.

What are the pros and cons of bridging loans?

Key considerations

Comparing interest rates and fees

Always compare interest rates and fees charges on bridging loans. Interest rates are normally stated monthly on bridging loans, not annually. The lower the interest rate, the cheaper the loan.

But always factor in fees for administration, legal work and valuations into any price comparison calculations.

It’s best to use a specialist broker to help you compare bridging loans. This can help you to find the best deal.

Interest payments

You don’t normally make monthly repayments to repay a bridging loan – the money borrowed, plus interest payments, is repaid at the end of the term.

Interest is often rolled up – called compound interest. This is interest charged on top or previous interest. The difference between simple and compound interest on a £100,000 loan at 2% is:

Comparing repayment terms

Repayment terms on bridging loans can range from a few weeks to a year or two. The longer the repayment term, the more interest you will pay in total.

The repayment term you choose is likely to depend on when you plan to sell the asset (such as a property) that you will use to repay the loan.

Alternatives to bridging loans

Equity release

Equity release is a type of loan aimed at people aged over 55 who either own their home outright or have a large amount of equity. You make no monthly payments but the debt grows as interest increases. This is paid off when you sell your home.

Remortgaging

If you have equity in a property you own, you can remortgage for a higher amount than your current mortgage, using the excess cash in place of a bridging loan.

Second charge mortgages

A second charge mortgage involves borrowing against equity in a property you own. Second charge mortgages are sometimes called ‘homeowner loans’.

Personal loans

An unsecured personal loan doesn’t require anything to be put up as collateral. This means it is less risky for a borrower than a secured loan.

Common questions about bridging loans

How quickly will I receive funds?

You will receive bridging loan funds very quickly, normally within a few days to a couple of weeks.

Do I need to provide a personal guarantee?

In some circumstances, the directors of a business taking out a bridging loan will need to provide a personal guarantee.

Will taking a bridging loan affect my credit score?

For the whole time you have a bridging loan this will show on your credit file, making it harder to borrow elsewhere.

Repaying a bridging loan on time can have a positive effect on your credit score.

But failing to repay it as agreed can have a negative effect on your credit score.

Can taking out a bridging loan affect my mortgage?

A bridging loan won’t affect any existing mortgage. But having a bridging loan can impact your ability to get a new mortgage as lenders will look at your outstanding debts.

Can I apply for a bridging loan if I have bad credit?

You can apply for a bridging loan if you have bad credit. Bridging lenders are less concerned about credit history than other types of borrowing. This is because the loan is secured.

If your exit strategy is to sell the property, the lender won’t be too worried about your credit history if there is a strong likelihood the property can be sold.

However, if your planned exit strategy is to remortgage (for example, to a residential or buy-to-let mortgage), your credit history will be more important.

Can I get a bridging loan if I’m unemployed?

Whether you can get a bridging loan while unemployed depends on the lender. It will also depend on your planned exit strategy, and the asset you put up as security.

Can I get a bridging loan if my property is old / low value?

You may be able to get a bridging loan on an old or low-value property – it depends on the lender. Many bridging lenders will lend on properties that are in a poor state of repair, uninhabitable, or are unsuitable as security for a mainstream mortgage.

What happens if I can’t pay back a bridging loan on time?

You should talk to your lender if you can’t repay your bridging loan on time. It may extend the loan or offer an alternative solution.

But, ultimately, the property (or other asset) you put up as security for the bridging loan may be repossessed if you don’t repay the bridging loan.

Can I make early loan repayments on a bridging loan?

You can normally pay off a bridging loan early, but you may incur early repayment charges for doing so.

What is the Association of Short Term Lenders?

The Association of Short Term Lenders (ASTL) represents the interests of lenders that offer short-term mortgages and bridging loans.

Summary: Bridging loans

Bridging loans offer quick access to money, which can enable time-sensitive property purchases to go ahead or stop property chains from collapsing.

Bridge loans can also be a good option where a property is unmortgageable for any reason – such as being uninhabitable or having a short lease.

But bridging loans can be very expensive. It’s important to understand that if you secure a bridging loan on your home and then can’t repay the loan, your home could be repossessed.