A bridging loan is perhaps one of the most misunderstood forms of finance there is. A lot of businesses and people we speak to, tend to shy away from using bridging loans simply because they don’t completely understand them.
Having said that, the use of bridging loans has increased over the years. Since the Mortgage Market Review (MMR) in 2014, mortgage applications have generally taken longer to reach approval. When time is of the essence, bridging finance may be the only option.
Using a bridging loan can be considered as either too risky or too expensive, but that isn’t always the case. When used correctly, a bridging loan can be a powerful form of finance. Understanding bridging finance is at least something to have in your locker, as sometimes a bridging loan may be your only option in terms of securing a great deal.
In this article, you’ll find detailed information on the below:
- What is a bridging loan?
- How do mortgages and bridging compare?
- Types of bridging loans
- When to use bridging loans
- Qualifying for a bridging loan
- Exit strategy
- How to get a bridging loan
- Bridging loan fees
- Is bridging finance the right option?
- Risk with bridging
What is a bridging loan?
A bridging loan is a short-term loan designed for property buyers and developers. Think of a bridging loan as either a temporary loan or even a short-term mortgage. Bridging loans can be used in a variety of circumstances and provide short-term finance until a more permanent form of finance can be arranged or the loan balance can be cleared.
The term ‘bridge’ is often used, as that’s exactly what a bridging loan is designed for. Finance to get you from A to B. You may need to ‘bridge the gap’ due to monetary or time constraints (or both). Bridging loans can be useful, as funds are provided very fast in comparison to a mortgage. A word of caution, bridging loans usually come with high interest rates and fees and for this reason, are generally used as a last resort. Nonetheless, bridging loans can make financial sense when used correctly.
How do mortgages and bridging compare?
Bridging loans do share similarities with mortgages. For instance, interest is paid on the term of the loan until the loan is repaid in full. Bridging lenders will place charges on assets and the value of the bridging loan is determined by the property value. Lenders that offer mortgages will do exactly the same. Bridging loans are also offered on variable and fixed rates, exactly like mortgages. Bridging finance is regulated by the FCA, however there are unregulated products on the market.
Differences between a mortgage and bridging loan
The main difference between mortgages and bridging is that bridging is very short-term in comparison. Mortgages are usually taken out on 25-35 year terms. Bridging loans are generally offered for 1 year or less. Bridging also takes less time to obtain than a mortgage. A mortgage is a lot more intricate and can take weeks if not months for funds to be released. Bridging can take as little as 48 hours once an application has been approved!
Bridging interest rates are higher than mortgage interest rates. Most mortgages can be obtained with rates between 3-5%, even lower with higher deposits and great credit. Bridging finance tends to start at a whopping 8% with rates on average being between 10-20%!
On a positive note, bridging lenders won’t assess income and generally aren’t interested in rental income if it involves buy to let finance. Bridging finance is also available on any type of property, whereas mortgage lenders tend to lend on specific properties such as traditional brick built or habitable homes. For this reason, bridging is popular with auction buyers to secure rundown properties that won’t qualify for mortgages.
Mortgages are usually repaid on a monthly basis. Bridging loans can be ‘rolled up’ and paid as a lump sum once the term expires. This can be practical for when you’re cash-strapped and are awaiting funds either from a new mortgage or a property sale.
Types of bridging loans
As with almost every form of finance, it comes packaged in different shapes and sizes!
If you have a mortgage on your home, the chances are that your lender has a ‘first charge’ against your property. When purchasing a property via a mortgage, the lender will secure the loan against your home, in the form of a charge. Charges are then registered with the land registry and are legally binding.
Bridging loans are also secured against properties as charges. If a bridging lender secured the first charge, it would indicate that they’ll have first priority of repayment in the case you defaulted on your loan.
If you’re in the process of selling your home and haven’t yet sold, but took a bridging loan to secure your new property, the loan would be secured on your new property as a first charge. This is because there aren’t any other charges on your new home.
Bridging loans can be used to pay off mortgages when moving house. In this case, your bridging loan would pay your lender the mortgage balance, clearing their charge on the property and the bridging loan would be secured as a first charge.
A ‘second charge’ would indicate that the bridging lender has access to any funds remaining after the lender with the first charge has recouped their loan.
A bridging lender may want to place a charge on your current home, which already has a mortgage. In that case, this would be classed as a second charge, as the first charge is with your mortgage lender. If your current home was repossessed, then your mortgage lender would recoup their loan first. If there were any funds remaining, the bridging lender with a second charge would be entitled to this.
Lenders that have the first charge will usually need to provide consent for any additional lenders securing charges on the property. A second charge places more risk on a lender when compared to a first charge, for the reasons mentioned above. Second charges often have higher rates and fees as a result.
It’s worth noting that charges can be placed on multiple properties, however there’s a lot more risk involved in doing this. This enables bridging lenders to access to more than one property, should something go wrong. If a bridging lender only has a charge on one property, they can only recoup their funds from that specific asset.
If you need to raise finance fast but want a loan with lower rates over a longer-term, a second charge mortgage may be better than a second charge bridging loan.
Closed-bridge loans are for when there is a dated exit strategy in place. For example, you may have a buyer for your home who has exchanged contracts but not yet completed the purchase. Once completion takes place and you receive funds from the property sale, you can then repay the bridging lender. As the bridging lender has a date for completion and there is a clear exit strategy, this would be classed as a closed-bridge loan.
Open-bridge loans have more risk attached from the viewpoint of a bridging lender. This is because there is no fixed date for when the loan is to be repaid, however bridging lenders will often request the loan to be paid back within 12 months.
Open-bridge loans are often used by home-movers that haven’t yet agreed on a sale for their existing property. A property dealer may use an open-bridge to fund a ‘property-flip’, in which they’re buying to then renovate and sell on.
Regardless of the type of loan, bridging lenders will request to see evidence of an exit strategy, such as taking out a mortgage or using funds from a property sale. Open-bridge and closed-bridge loans can be secured at both first and second charges, depending on the nature of your bridging loan.
When to use bridging loans
Bridging loans can be used for a number of situations and can be utilised for both residential and commercial reasons. You may want to start a property development from the ground up or simply buy and sell a property. As bridging finance is often more expensive than traditional routes of finance, such as mortgages, why would anyone want to use them? Let’s find out.
Bridging loans are often used by homeowners between selling their home and buying a new one. Perhaps you’ve found the perfect home but haven’t yet found a buyer for your existing property. A bridging loan may be your only option to avoid losing your dream home.
Bridging finance could be used to secure a deposit on your new home and can be repaid once your existing house is sold. If you’re part of a chain and it’s on the verge of collapsing because a buyer has pulled out, a bridging loan could be the only option to bridge the gap.
Landlords and investors also use bridging finance where they need to fund a new deal or bridge gaps in their existing deals. Investors sometimes use bridging loans to secure auction properties, where time is of the essence. Auction houses will usually insist that buyers complete within 28 days, so sometimes a bridging loan may be the only viable route. Read more about auction finance here.
You may have found a great property deal, but the vendor needs a quick sale and is prepared to offer the property at a discount. A bridging loan could be ideal in this instance as funds are released a lot faster in comparison to mortgages.
Property investors may want to buy, renovate and sell a property. As mortgages are generally long-term, bridging finance could be a more viable option. Landlords may want to buy, renovate and then let the property to tenants. In this case, a bridge could be used to purchase an unmortgageable property and even fund the renovation. Landlords can then remortgage the property once it’s mortgageable and repay the bridging lender, whilst cashing in on any surplus funds.
Bridging loans can also be used by property developers and often are! For instance, a developer may have secured planning permission to build 5 dwellings. With the cost of buying land on which to build and the forthcoming cost of labourers and builders, the developer may look at bridging finance to leverage the cost of the development.
Once the development is complete, the developer could either remortgage, move to a commercial mortgage, or sell/rent the development and repay the bridging lender.
The key things to remember are that bridging finance is fast and short-term, the property can be of any standard and funds can be used to purchase, renovate and build. If you’re looking to develop on a much larger scale, development finance may be better suited.
Qualifying for a bridging loan
There’s a lot of variables to consider, as reasons for using bridging loans vary. As a result, there isn’t one answer for all, however we’ll do our best to explain how assessments of bridging loans are typically carried out.
Bridging is largely assessed on the value of the property. The good news is, bridging lenders don’t make assessments on personal income whereas mortgage lenders do. The bad news is, lenders assess property value in varied ways, but this can be a good thing as it gives you more options.
As with standard mortgages, your property will be subject to a survey. Bridging lenders will carry out a survey to ensure that their loan is safe and isn’t deemed too high risk. A qualified surveyor will attend the property to inspect the values involved.
We often see homeowners overvaluing their properties and sometimes don’t achieve the top value they’re aiming for. Surveyors will normally provide valuations which can sometimes be considered as undervaluing. It’s not that surveyors are undervaluing, it’s simply because they need to assess worst-case scenarios for the lender.
If you strongly disagree with a surveyors valuation, then you can sometimes request for the valuation to be revised. Bear in mind, there’s often a cost to getting a revised valuation.
Loan to value (LTV)
A loan to value is simply the size of the loan in comparison with the property value. An 80% LTV on a £100k property would indicate a £80k loan with a £20k deposit. In terms of a mortgage, a lender would only offer you £80k, as the property is worth £100k (on an 80% LTV). Even if you managed to secure the property cheaper at around £70k, a mortgage lender will only consider the purchase value. An 80% LTV on a £70k property would result in a loan amount of £56k.
Some bridging lenders will follow suit and use the exact same principles of a mortgage lender. Other bridging lenders may disregard the actual price you paid for the property and will consider its true market value. This can be practical for when you need to borrow more than a mortgage lender will allow.
Gross Development Value (GDV)
Bridging lenders can offer loans based on the Gross Development Value (GDV). The GDV is calculated on what the property or development would be worth once the works are completed. This can be very useful for when you need to finance more than just a purchase, but also need to finance the renovations or build of a property.
See example below: (based on an £80k purchase of £100k property using an 80% LTV)
Traditional mortgage lender = £68k loan
Bridging loan lender considering market value = £80k loan
Bridging loan lender considering GDV (once developed/renovated) = £96k loan (if property value was increased to £120k)
As you can see, the difference is quite staggering. It’s important to note, that the more you borrow, the higher the rates tend to be which you’ll also need to consider. The bridge is also secured on a property, so you will have to repay the loan or face repossession. It’s vital to at least have a back up in the event you run into financial difficulty.
An exit strategy is a term used for how you’re aiming to clear the balance of the bridging loan. If your aim is to remortgage once a property has been renovated, then the exit would be to remortgage. If you’re awaiting funds from a property sale, then your exit would be selling a property.
Exit strategies are not to be overlooked. An exit strategy is an imperative part of bridging. Without an exit strategy, it’s near enough impossible to secure bridging finance. A clear and concise exit strategy helps your application but also helps you to plan your projects. Anyone applying for bridging finance needs to have a planned exit. Remember, bridging finance is short-term, so the quicker you can exit the better.
Bridging lender discretion
Although a valuation is the main factor in deciding how much you can borrow via bridging, a lender may consider other factors. Even though your income isn’t assessed, lenders may consider other areas of your proposition. For instance, if it’s a development or some sort of property venture, bridging lenders may assess your experience in this field. Bridging lenders may also assess the quality of the project, is the property saleable? will the funds be enough to cover the project?
If your exit strategy is to remortgage, a lender may assess the likelihood and the projected value of the remortgage. Bridging lenders can assess whether or not the loan period is sufficient for the loan to be repaid. If you’re wanting to repay the loan on a monthly basis, then a lender has the discretion to check your income. That being said, bridging finance is usually paid in one lump sum at the end of the term. Some bridging lenders will just check on whether the loan can be secured against an asset and that’s simply enough security for them.
Bridging is a lot faster to obtain than a mortgage, however bridging lenders will still carry out their own checks. Bridging lenders each have varied assessment criteria, so this doesn’t apply to every bridging lender. Similar to a mortgage, you may undergo credit checks and current financial commitments, such as additional mortgages that you may have.
How to get a bridging loan
Bridging loans aren’t available from high street lenders and will often require an advisor to broker a deal. Again, the process of when and how to get a bridging loan really depends on your own reason for the loan. For instance, if you’re aiming to purchase a property via auction, it’s best advised to get everything in place beforehand. Bridging loan applications can take up to a week and even longer at times. The good news is, funds can be transferred within 48 hours of agreement!
- Speak to an advisor who has experience with bridging finance and access to bridging lenders.
- Your advisor will make enquiries with bridging lenders based on your circumstances and reasons for a bridge.
- An application is made to a bridging lender.
- The bridging lender will organise a valuation of any properties involved.
- An assessment of the applicant is carried out by the bridging lender (other mortgages, credit check, experience, etc).
- The loan is either approved or declined. If declined, it can either be reapplied for with the same or different lender. Bridging loans aren’t declined but just offered with even higher rates for very risky proposals.
- Solicitors are allocated to handle the conveyancing involved and placing the charge on the property.
- Bridging funds are released.
- If you’re using a bridge to purchase a new property, then solicitors will carry out searches, enquiries, etc and liaise with the lender’s solicitor.
- Once the lender’s solicitor is satisfied, they will approve the loan to be released.
Although it sounds like a lot, this can often be wrapped up in as fast as a week.
Getting a fast bridging loan
The speed of the process largely depends on:
- The speed of the valuation.
- How fast your solicitor responds to any requests for information from the lender’s solicitors.
- How much the bridging lender probes into your application.
- If using a second charge loan, how fast the primary lender takes to approve (if they approve).
- The bridging lender in general (typically, the quicker you need the funds, the higher rates you’ll have to pay).
Bridging loan fees
Bridging lenders and their products do vary quite considerably. Some lenders will charge additional fees, whereas other lenders won’t. We’ve outlined all fees imaginable, just so you’re prepared!
It’s important to remember that bridging loans do have much higher interest rates when compared to traditional mortgages. If a bridging loan is advertised at 1.5%, it would equate to a mighty 18% APR. Rates are usually based on a monthly basis, as the type of finance is short-term.
Monthly interest is often referred to as ‘rolled up’ interest. Rolled up interest isn’t repaid on a monthly basis and is paid when the term ends. If you wish to pay interest on a monthly basis, some lenders can facilitate this.
If interest is cleared earlier than anticipated, there’s usually no redemption charges. That said, most bridging lenders have 1-month minimum terms. If the loan was repaid within 10 days for example, you’d probably still be charged for the entire month. If the term was for 12 months, but you paid the loan back after 3 months, then you should only be charged 3 months interest. Bridging finance can be offered on either fixed or variable rates.
Admin fees for bridging finance can also pack a hefty punch. There may be arrangement fees which usually start at 1% of the loan amount. There can also be exit fees which again, start from 1% of the loan amount. Rates on fees are often higher and remember, this doesn’t factor in the interest rate on which the loan is charged. In addition, there can also be broker and valuation fees.
Lenders that charge fees at the lower end of the spectrum, tend to have stricter criteria. Lenders that charge higher fees, tend to lend on riskier proposals. If you need finance really quick, then again, you may be charged higher fees.
Is bridging finance the right option?
Before you decide to use a bridging loan, consider all your options. We’ve outlined important things to consider before applying.
Risk with bridging
Using bridging finance can be very risky. You’re able to calculate the risk depending on the quality of your proposal. That’s why bridging lenders may assess your experience and will carry out valuations, to ensure the proposal is of quality.
Our specialists would advise bridging loans as a last resort. If you’re unable to remortgage or withdraw funds elsewhere, then a bridging loan may be your only option. The advice is based on the fact that bridging finance has very high rates. In the worst-case scenario, if your plan didn’t go as expected, you could be left with ever-increasing debt.
Bridging finance can be a powerful tool if used correctly. We’ve had many clients, especially developers and landlords who repeatedly use them and have generated great profits as a result. Certain property deals wouldn’t be possible without the aid of bridging, so they can be great when a deal comes off. Proceed with caution and do have a backup plan in the event that things don’t work out as you would’ve wished.
Alternative options to bridging
Check with your advisor to see if a remortgage is possible to withdraw funds from equity. If speed is key in securing your property deal, then bridging finance or a personal loan may be the only options. Read more about how a remortgage can release equity here.
Let to buy is also another option to consider. Let to buy is where you can remortgage your current home from a residential mortgage and switch it to a buy to let. The equity released can then be used to fund the purchase of your new home. Remortgaging takes longer than bridging, so again, assess your options.
Speak to a specialist bridging advisor
Always speak to a specialist broker. Regardless of whether it’s bridging finance or a standard mortgage, a broker can save you time and money. As bridging is considered to be high risk, using the expertise of a broker is further vital.
Bridging lenders have so many different fees for example, a specialist advisor will do their best to find you the best deal with as little fees as possible. Some bridging lenders may only deal with brokers, so using a broker ensures you have access to the whole market.
An advisor may also provide you with other alternatives to finance, that you may not have thought possible. Our advisors are experienced in bridging finance and can make an assessment of your financial circumstances to decide whether bridging is a viable option for you. You can make an enquiry below.