Take a look at our bridging finance guide where we dig deeper into how bridging loans work and if it’s the right loan for you.
What are bridging loans?
On most occasions, bridging loans for homes are a short-term financial aid that “bridges the gap” between buying a new property and selling the one you currently have. This allows you to purchase your new property. Once the property you are selling is sold, the bridging loan is paid back using the equity of the sale or remortgaging the new property.
For example, if you are planning to buy a property at auction. To be able to make the purchase, you would need the funds up front. But if you haven’t yet sold your current property, a bridging loan can help you make a bid.
At auction you are given 28 days to pay the full amount of the purchase price. A bridging loan can help you move at this pace more conveniently, as many bridging lenders specialise in auction purchases, with the resources to ensure that funds are provided in time.
Mortgages can often take time and there’s no guarantee you can get one in place within an auction time frame.
Property investors tend to use bridging loans to purchase investment properties. Many investors opt to purchase properties that may be un-mortgageable and require work to bring them to a good standard for sale. A bridging loan gives them the opportunity to maximise the return on their investment.
How do bridging loans work?
Bridging loans offer short-term access to money which can have higher rates of interest than a high street mortgage, and can in some scenarios prove more expensive than other finance options. If you’re in a hurry to conclude a transaction to secure a property, or simply have not had the time to arrange alternative funding, their flexibility and short-term availability can be invaluable.
Say you want to buy a new house, priced at £500,000. You want to have £100,000 to go towards a deposit, and plan to borrow the rest through a mortgage.
Of that £100,000, you have £20,000 saved, but need £80,000 more for the deposit.
At the same time, you’re waiting for your current home to sell – that’s valued at £250,000.
You know you can obtain the £80,000 once your home sells, so in the meantime you would take out a bridging loan for that amount to ‘bridge the gap’ - ready to repay it once you sell your home.
First and second-charge bridging loans
When you take out a bridging loan, a ‘charge’ will be placed on your property. This legal agreement prioritises which lenders will be repaid first, should you fail to repay your loans. Both a first and second charge bridging loan take your property as security in case you default on repayments.
Typically, if you still have a mortgage on your property, the bridging loan will be a second charge loan, meaning that if you failed to meet repayments and your home was sold to pay off your debts, your mortgage would be paid off first. But if you owned your property outright, or you were taking out a bridging loan to repay your mortgage in full, you would take out a first charge bridging loan. This means that the bridging loan would be repaid first if you fell behind with repayments.
How much does a bridging loan cost?
Bridging loans tend to have monthly interest rates ranging from 0.5% to 1.50%, as opposed to an annual rate. Because bridging loans are designed as a short-term loan, they are priced monthly. When redeeming a bridging loan, you only repay the months’ interest that you have had the loan for.
Other fees you will encounter if you take a bridging loan are:
A lender arrangement fee - Typically 2% of the loan amount.
Legal fees - Just like mortgages, bridging loans also have legal requirements. These can sometimes be incorporated in the lender’s arrangement fee.
An exit fee - The lender may charge an exit fee when repaying your loan. In most instances there are no exit fees charged, but there would be a minimum one month of interest due if you settle the loan within the first month.
Valuation cost - The lender will want to have your property valued in order to ensure that it holds the value suggested. This fee is usually paid to the surveyor. More and more lenders are switching to desktop valuations which do not come with a cost, although these are generally for a low equity bridging loan.
Bridging loans allow you to choose between the options of rolled or retained interest. You can also take the option of repaying the interest on a monthly basis, though this is only available for unregulated bridging loans.
Regulated vs unregulated bridging loans
Bridging loans secured against your residential home or a property you are purchasing to live in are termed as regulated bridging loans, and are regulated by the Financial Conduct Authority (FCA).
Bridging Loans secured on a buy-to-let or commercial property are unregulated. These have more flexibility when it comes to who lenders will lend to, and may also have terms exceeding 12 months.
Who can benefit from bridging loans?
Primarily designed for property buyers, bridging loans are aimed at landlords and investors, although more and more people are using them for purchasing their residential homes. They can be used for a variety of reasons, including:
- Auction Purchases
- Renovation / Refurbishment / Development
- Below Market Value Purchases
- Business ventures
- Un-mortgageable properties
- Change of Use
- Broken Sale Chain
How much can I borrow for a bridging loan?
Bridging loans are available from £5,000, and can stretch to £5 million and beyond.
How long can you have a bridging loan for?
Regulated bridging loans carry a maximum term of 12 months as per FCA regulation. Unregulated bridging loans on the other hand can be (dependent on lender) taken over 18-24 months. Most borrowers will opt for a 12-month bridging loan.
Find out more about the bridging loans available from our panel of lenders.