What is a Bridging Loan?
A bridging loan is a short-term borrowing option that can be arranged quickly, enabling you to buy a property when you’re waiting for other funds to become available.
Bridging loans are used for:
- Covering the cost of purchasing an auction property
- Purchasing a property requiring renovation, prior to securing a buy-to-let mortgage
- Buying your dream home before your current property sells
- Downsizing your current home and purchasing a new property before it sells.
It’s common for landlords, homeowners, and property investors to use bridging loans to help buy property, develop property, and cover tax payments.
How do Bridging Loans work?
As a bridging loan is a secured type of finance, you secure an asset against the loan. Typically, this is your property or multiple properties. Failing to repay the bridging loan may put your asset at risk.
But unlike a traditional mortgage, bridging loans are not directly related to your income.
A bridging loan enables you to ‘bridge’ any financial hurdles you come up against when selling your current property.
For example, your house is on the market and you’ve found a dream property you’d like to buy. However, the housing market is competitive and if you don’t act quickly, your dream home is likely to be bought by someone else.
By taking out a bridging loan in this situation, you will have the funds to buy the new property without worrying if your current home will sell in time. You then repay the loan as soon as you have the money.
Types of Bridging Loan
There are several types of bridging loans:
- Open bridging loans with no fixed repayment date
- Closed bridging loans with a fixed repayment date (normally the day you expect funds to be available)
- First charge bridging loans where failure to repay allows the lender to take repayment directly from the sale of your property
- Second charge bridging loans where the lender receives repayment in the event of debt after your mortgage provider has received its payment.
Like mortgages, there are fixed or variable interest rate options. A fixed rate means you’ll pay a set interest rate for the loan term.
A variable rate means the rate you pay may go up or down in line with the Bank of England.
Finding the best Bridging Loan for you
Every loan applicant is unique, so the best bridging loan for you depends on your circumstances.
To get the right bridging loan, figure out how much you need to borrow and for how long. Bridging loans are expensive as they are a short-term option, so the shorter the loan term, the less it will cost you altogether.
When you speak to a bridging loan adviser, you’ll be asked about your current situation, including questions like:
- How much is your property worth?
- Do you owe any sum on your mortgage?
- How much equity do you have?
- What is your monthly income and expenditure?
These questions will help your adviser find the right loan for you. By working with a bridging loan adviser, you can compare the bridging loan options available.
An adviser can research the market on your behalf and find you a bridging loan offering the highest chance of approval. Not only that, an expert adviser can access exclusive rates and deals.
Get in touch with our team today for more advice and support on bridging loans.
Get in touch
Tell us about your loan requirements and one of our specialist advisors will be in touch within 24 hours.
FAQs
Your borrowing eligibility depends on your financial situation and credit history, as well as lender criteria and the loan-to-value ratio (LTV). You can borrow anything between £5,000 and £1 million—some lenders even offer higher sums. In most cases, you’ll find you’re offered up to 75% of the value of your property.
To find out how much you might be eligible for, it’s best to speak to a bridging loan adviser who can assess your finances and your eligibility.
All loans come with additional charges. A bridging loan may include:
- Arrangement fees
- Exit fees if you repay the loan early
- Administration / repayment charge
- Legal fees
- Valuation fees.
Bridging loans are charged monthly, rather than annual percentage rates (APR). This can have a significant impact on the overall loan cost. For example, a 1% monthly interest rate equals around 12.7% APR, while a 2% monthly rate equals 26.8% APR.
A bridging loan broker will make sure you’re aware of the potential costs.
There are companies that do offer bridging loans to applicants with poor credit. However, you will be viewed as high risk to the lender, so you may pay more for a bridging loan. But we can help find a lender for your circumstances.
Have a look at your credit report before applying for a bridging loan, though. You could make some easy fixes to improve your score, such as ensuring you’re on the electoral register.