Bridging loans can be used for the purchase of a property. It’s no secret that mortgage applications can be time-consuming and can take a while to approve which isn’t helpful when you have any time constraints.
This is where bridging loans come in. As it’s flexible and quick to secure these types of loans can be the only option when time isn’t on your side.
As one of the most misunderstood forms of finance, we want to give you a breakdown of what they are, how to use them and when to use them.
Bridging Loans Explained
You must understand that bridging loans are not long term solutions to financing a property. They are a means to temporarily ‘bridge the gap’ between the purchase of a property and securing funds for it.
For this reason, they are popular with property buyers or developers.
Bridging loans are packaged in various ways but can come in the form of:
- First Charge Loans
- Second Charge Loans
- Closed Bridge Loans
- Open Bridge Loans
Doing research and planning will be important in deciding which type of loan you require.
Whilst these types of loan share some similarities to a mortgage i.e. the loan amount being determined by the property value, it’s in the differences that bridging loans come into their own:
- They are short term
- They take less time to secure
- They aren’t assessed on income
- They’re available on all types of property
When used effectively they work well, however, they do come with risks.
How does a bridging loan work?
Bridging loans are quick, flexible products and perfect for those who are on a restricted timeframe. They’re also available on a range of properties.
As we’ve said these types of loans come packaged in a few different ways so depending on which one you choose will depend on how they work.
Open Bridging Loan: These are set up with no fixed repayment date but usually have an expected pay off within 12-24 months depending on the terms of the lender.
Closed Bridging Loan: This type of bridging loan will mean you are working towards an agreed fixed repayment end date.
First Charge Loan: Your lender will secure your property against the loan. It also means that there are no other charges on the property i.e. you own your property outright, thereby making this loan the first charge. So, if you fail to repay your loans and your house is sold this lender will be prioritised first to be repaid.
Second Charge Loan: As with a first charge loan, your property will be secured against the loan. However, the lender will not be prioritised first should you have any repayment issues, your first charge i.e. your mortgage would be paid first.
How do I get a bridging loan?
Bridging loans aren’t generally offered by high street lenders anymore and those that do offer them will have strict criteria as to who they will lend to. The most effective way to find a lender would be to speak to an independent broker who has access to the wider market and an understanding of this type of loan.
To qualify for bridging finance you’ll mainly be assessed on the value of the property. Depending on the lender this could be based on the actual price you paid or on its true market value. In cases where the property needs significant development, seeking a lender who will lend based on its true market value (once renovations have been completed) will be of significant worth.
The other imperative part of your application will be the exit strategy or repayment vehicle, how you will pay the loan off at the end of the term? It might be that you secure a remortgage or sell the property. It needs to be a sound strategy as without one it can be near impossible to secure finance.
Other things you’ll need to be aware of:
- You’ll need a larger deposit usually over 25%, which is higher than a mortgage will be.
- Typically, you’ll only be allowed to borrow a loan to value (LTV) maximum of 75%.
- Due to the high risk involved and short term, interest rates tend to be higher than on a mortgage, between 0.5 – 1.5% per month.
- There are no monthly payments unless you choose to make them. You’ll pay a bridging loan back at the end of your terms. However, as well as paying off the initial loan you’ll pay the monthly interest that rolls up.
- There are additional fees you will need to consider that will vary depending on the lender.
Once you’ve spoken to a broker and you’re provided with options best suited to your circumstances you will need to apply. From there the process may look as follows:
- Valuation of the property
- Assessment of your application and credit checks
- Loan approval
- Solicitors will be placed to deal with conveyancing and charging the property
- Funds will be released once the solicitors are satisfied
Although it seems like a lengthy process, the reality is that this could all be completed within a week.
Are bridging loans a good idea?
As bridging loans are a short-term finance choice, they may not be for everyone. They do also carry a certain level of risk because of the extra costs so you will need to weigh up what you will get out of opting for this type of loan.
So, when is a bridge loan a good idea?
Bridging loans can be a good idea if:
- You want to buy a property quickly but haven’t yet sold your current property.
- Your buyer has dropped out, but you don’t want your new property purchase to fall through.
- The property you want to purchase is currently inhabitable or un-mortgageable.
- You’re planning development or a self-build.
- You’re buying at auction (see also our auction finance article).
- You need short term funds without the monthly interest payments.
There are alternatives though, you could check for remortgaging options, or if you can’t sell you could convert to a let-to-buy.
Speaking to a specialist advisor about potential bridging finance can be vital. As we’ve said, these loans do come with risk and an experienced advisor will know the market inside out and can find you the best deals possible or alternative options based on your individual circumstances.