Bridging loans are a very expensive form of short-term credit facility. It is like borrowing on a credit card with a lot of additional fees attached.
Used by property developers, cash house-buying companies and sellers in a chain, they can quickly eat into a profit.
Bridging loans can be a great option for many different situations. For instance, if your property chain collapses, you want to downsize but need to purchase a home before you can sell your current one, or you have bought the property at auction but can’t get the funds ready in time.
In this article, we explain what bridging loans are, when they are used, their pros and cons, their costs, and how to apply for one.
Table of Contents
What is a bridging loan?
A bridging loan is a type of short-term loan used to bridge the gap when you want to purchase something but you’re waiting for the funds from the sale of another item to become available. It helps you move forward without delay.
What can I use a bridging loan for?
Bridging loans are a popular choice for those who want to purchase a new home before selling their existing one. Landlords, homeowners and property investors can take advantage of them to:
- Purchase property;
- Participate in property development;
- Invest in buy-to-let opportunities;
- Pay taxes.
Types of bridging loan
There are two main types of bridging loan: open and closed.
- Open bridging loans do not have fixed repayment dates and must usually be repaid within a year, though some lenders may offer longer repayment terms.
- Closed bridging loans have fixed repayment dates, usually determined by when you are expecting your funds to become available (e.g. if you are selling a property). As there is less flexibility around repayment, closed bridging loans are usually cheaper than open bridging loans.
No matter which type of loan you opt for, lenders will need to see an ‘exit plan’ which outlines how you plan to repay it (e.g. through the sale of a property).
How much does a bridging loan cost?
So, how exactly does a bridging loan work? You can borrow between £50,000 and £10 million. The loan amount depends on the amount of equity you have available. The maximum loan, including interest, is limited to 75% of the loan to value.
The loan is usually secured against the property, or it could be across multiple properties to raise the required funds. Bridging loans, unlike mortgages, are not directly linked to your income.
For instance, let’s say you want to buy a house for £300,000 and need to put down a £100,000 deposit and borrow the rest in the form of a mortgage. However, your current house is yet to be sold, and you only have £25,000 in savings.
To ‘bridge the gap’, you can take out a £75,000 bridging loan for the remaining deposit. When your current house is sold, you can use the money raised to pay back the £75,000 bridging loan.
What are the pros and cons of bridging loans?
Bridging loans can give you sleepless nights. Here are the pros and cons to help you make an informed decision:
Pros of Bridging Loans
- Speed: Borrowing money quickly can help keep your property transaction on track.
- Bigger Loans: It’s possible to get very large sums of money.
- Flexibility: Repayment terms can be tailored to fit your plans.
- Extra Options: It may be possible to secure lending where high street lenders won’t.
Cons of Bridging Loans
- Bridging companies often get bad reviews as allegations are made that they take advantage of vulnerable borrowers. Borrowers often complain of various delays, punitive charges and penalty interest rates resulting in a repossession.
- Secured Against Property: Bridging loans are a secured form of borrowing, meaning you must put up an asset against the loan. If you cannot repay the loan, you risk losing that asset, such as a property.
- Higher Rates: Higher interest rates come with the convenience of fast, flexible finance.
- Fees: Bridging loans can come with a range of fees that add to their cost.
Bridging loan interest rates
Interest rates are typically higher for bridging loans as you are paying for the privilege of obtaining a large amount of money quickly. Since bridging loans are usually short-term, interest is charged daily rather than annually.
Expect to pay between 1%-2% interest rate PER MONTH compounded if rolled up.
There are three ways that interest can be charged for a bridging loan:
- Monthly: Like an interest-only mortgage, you will pay the interest payments each month, and they will not be added to the loan balance.
- Rolled up: Interest payments are added to the loan and paid when the bridging loan is settled.
- Retained: You will borrow the interest at the beginning for an agreed period, and then, when the loan is repaid, any unused interest will be refunded.
- Penalty interest rate: If you exceed your bridging term then interest rates usually doubles and there’s addition fee added to the loan.
How much does a bridging loan cost?
On top of the interest rate, there are other fees you may have to pay for a bridging loan:
- Arrangement fee – 2% of the borrowed sum
- Administrative fee – 1%
- Legal fees for the bridging company, which are usually extortionate
- Valuation fee – payable upfront, typically £1,000 or more.
- Exit fee when you redeem your loan – 1%
- Penalty fee if you exceed the timeframe to repay your loan.
- Your own legal fees, including signing a personal guarantee, meaning the bridging company can repossess your car and home.
How to get a bridging loan?
If you’re wondering how to secure a bridging loan in the UK, it’s best to speak to a specialist broker. They can research the market for you and may even be able to negotiate a better rate.
The lender will require at least one property to be used as collateral against the loan, and they’ll also want to know your exit plan – how and when you plan to repay the loan.
If you need to take out a traditional residential or Buy-to-let mortgage, such as on the renovated property or the one you’re buying, you must show the lender proof that the mortgage will be available.
As standard, they’ll carry out affordability checks or assess the rental income you generate to ensure you can secure the loan and make the repayments.
You will end up signing a personal guarantee, meaning that if you default on your bridging loan, you could lose your home!
Bridging loan example
Say you currently own a property worth £600,000 and want to take out a bridging loan for 12 months so you can downsize to a £400,000 property before selling your current home. How does that work?
Net Loan Amount:
£400,000
Monthly Interest Rate:
0.7%
Interest Amount:
£35,623 (Assumes full term of 12-months, calculated daily)
Arrangement fee:
£8,000 (Added to loan)
Gross Loan Amount:
£443,623
Costs
Valuation Fee (Inc. VAT):
£522
Telegraphic Transfer Fee:
£35 (Added to loan)
Administration Fee:
£145 (Added to loan)
Estimated legal costs:
£900
Redemption Administration Fee:
£40
How long does it take to get a bridging loan?
Bridging loans are typically approved quickly, often taking 5-21 days. In some cases, approval is even faster.
However, from approval to drawing down funds requires you to jump through several hoops.
Who offers bridging loans?
Before the 2008 financial crisis, bridging loans were popular among high-street banks like Nationwide, Halifax, and Santander. People used them to avoid missing out on their ideal home. However, these banks largely stopped offering them during the credit crunch.
Nowadays, Lloyds Bank is the only high street bank that offers bridging loans to private banking customers. Experienced investors are the ones who tend to take advantage of this facility.
Alternative lenders such as United Trust Bank, Precise Mortgages, MT Finance, and some regional building societies are the ones that now provide bridging loans. Bridging loans are a type of specialist finance and should be considered as a last resort.
What are the alternatives to a bridging loan?
There are a few other options to think about instead of taking out a bridging loan. Remortgaging your home could release some extra money, but make sure you take independent financial advice first.
Alternatively, you could get a Let to Buy mortgage if you haven’t found a buyer for your current house.
This is basically two mortgages: one for your current property and one for the one you want to buy. Taking out a secured homeowner loan is another option, but remember that your home is at risk if you don’t make the repayments.
Finally, if the amount you want to borrow is small, a personal loan may be a cheaper option than a bridging loan.
If you’re having difficulty selling your home, have you considered using a cash house buyer such as Property Saviour? We can buy properties within seven days. For a no-obligation cash offer, get in touch with us today.
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