What are bridging loans?

A bridging loan (or ‘bridge loan’) can be useful if you need to borrow money for a short period. It can help to ‘bridge the gap’ if you want to buy a new home before selling your old one. Or if you need to release cash for business purposes secured against u residential or commercial property.

How does a bridging loan work?

There are two types of bridging loan: ‘closed’ and ‘open’.

Closed bridging loans

With a closed loan, there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.

Open bridging loans

With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one year. Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage. They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it, as well as proof of what you are doing to sell your current property if relevant. You should also have a back-up plan in place in case your repayment strategy fails.

First and second-charge bridging loans?

When you take out a bridging loan, a ‘charge’ will be placed on your property. This is a legal agreement that prioritizes 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 do bridging loans cost?

Bridging loans are priced monthly, rather than annually, because people tend to take them out for a short period. One of the major downsides of a bridging loan is that they are quite expensive: you could face fees of between 0.5% and 1.5% per month. That makes them much pricier than a normal residential mortgage. The equivalent annual percentage rate (APR) on a bridging loan is between 6.1% and 19.6% – far higher than many mortgages. There are also set-up fees to consider, usually around 2% of the loan you want to take out, so it is advisable to only take a bridging loan out if you are confident that you won’t need it for a long period of time.

How much can you borrow with a bridging loan?

In cash terms, bridging loan providers might lend anything between £25,000 and over £30m. But you’ll usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property. If you are taking out a first-charge loan, you’ll typically be able to borrow more than if you were taking out a second charge loan. There are private lenders out in the market than can offer up to GBP200m for bridging loan purposes.

How do bridging loans compare to regular term loans?

In theory, they differ because they are for a specific short term purpose, whereas term loans often have more general commercial purposes. In reality, the speed of getting the cash in your account is the main difference. It can take weeks for some lenders to complete a term loan, but a bridging loan can be ready in 24-48 hours.

What can I use bridging finance for?

Lenders that offer bridging loans usually do so for the purchase and renovation of property – it’s a form of property development finance They can be both commercial and residential, and the works can be ground-up property developments or just adding a bathroom to a flat.

You can use bridging finance for other short term commercial purposes, as long as you have a clear exit in place – although it depends on what appetite the lender has for your plans.

What is a bridge loan ‘exit’?

Exits are what lenders say when they mean how you are going to either clear the bridging loan in full (with the interest costs) or move it onto a more permanent type of finance, like a term mortgage.

You might hear us speak of closed bridging loans and open bridging loans. Closed loans are a line of credit with a fixed exit date in place.

For example, the sale of the property to pay back the loan is already in place at the time of taking the loan. Open loans are given without the exit yet fixed, so you are given “up to” a certain period.

What bridging loan interest rates like?

Given the specialist nature of the loan – i.e. it’s for a specific short term purpose – the interest rates can be higher than traditional term loans.

You can sometimes choose to have the interest payments ‘rolled up’, which means you pay a lump sum at the end of the agreed term. This can make it a useful finance type for those without the required funding at the early stages of receiving the loan.

How can I use a bridging loan to finance developments?

Bridging loans form the crux of what property developers use to fund their projects. Let’s say a developer owns a site and has planning permission from the council to build a small apartment block. A good solution for this property development, to spread the costs for the company, maybe to get a bridging loan for 3-6 months, which gives them the funds to complete the work.

This loan is fully paid off after the period either by the sale of the apartment block or individual apartments or by moving the bridging loan onto a longer-term finance product like a commercial mortgage.

Bridging loans can sometimes be used in other commercial areas where a short term temporary loan may be required. This is providing there is a clear ‘exit’ from the loan with other financing or cash to clear the bridging finance.

What about bridging loans for property refurbishment?

It’s a good product for renovations and refurbishments because you get funds really quickly to allow you to start the works immediately.

In fact, bridging loans are often used to convert properties into a state where a lender can provide a commercial mortgage. Not all properties are eligible for certain types of mortgages – you can use bridging finance to get the work done and get the property into a state where you can exit into a full-term mortgage.

Am I eligible for a bridging loan?

The lender will take various factors into account before making a decision as to whether or not you’re eligible for a bridging loan. The property will usually be required as security and depending on the terms of the loan, you may need to provide proof of income. If you’re taking a bridging loan out for commercial purposes, you may also have to show evidence of a business plan.

What do bridge loan rates tend to be?

Like the majority of loans, bridge loan interest rates can be either fixed or variable. If the interest rate is fixed, it remains the same for the duration of the loan term, so monthly payments will be consistent. If variable, the interest rate can fluctuate. Usually, the lender will set the variable rate in line with the Bank of England base rate.

Bridge loans usually have higher interest rates than other types of loan. Also, individuals who are yet to pay off their mortgage can end up having to make both a mortgage payment and a bridge loan payment until their previous home is sold. The interest rate is the main cost of bridging finance, however, there are other fees to consider, including:

  • Arrangement fees – usually between 1-2% of the amount you borrow

  • Broker fees (if you use a broker to find bridging finance)

  • Exit fees – some lenders will charge an exit fee of ~1% of the loan amount