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What’s in this guide?

  • Bridging loans explained
  • Types of bridging loan
  • How much can I borrow?
  • Bridging finance costs
  • What are the pros and cons of bridging loans?
  • How to get your application approved
  • Bridging loan guides
  • FAQs
  • Case studies

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Everything You Need To Know About Bridging Loans

From calculators to guides, criteria, faqs and jargon busters, at ABC Finance we have everything you need to know about bridging loans.

Bridging loans explained

What is a bridging loan?

They are a short-term, property-backed loan, which is used to ‘bridge a gap’, or provide funding while waiting for another event to occur. For example, to fund a quick property purchase, while waiting for another property to sell.

What are they used for?

Popular uses include:

How do bridging loans work?

These facilities allow you to borrow money, usually for a term of 1-24 months from either a bank or other financial services company. The interest is usually charged by the month and can be a much more flexible alternative to mortgages.

Types of bridging loan

Open and closed bridging loans

In theory, there are two options – open and closed bridging loans. Open loans have no fixed term and as such interest can’t be deducted, as it is an unknown amount. Closed loans, however, have a set loan term and as such, it is easy to calculate the total interest cost and deduct it upfront.

Open options are usually more expensive, and you will need to prove that you can afford the monthly interest costs. As such, the underwriting process tends to be more complex, with the lender requiring more information. This may result in the process taking longer to complete.

Closed options represent a much lower risk as there are no monthly repayments to be made and, therefore, are usually the better option.

As always when looking to borrow money, you must compare all options to ensure you get the best deal. Financial products can be complex, so it may be a good idea to have a conversation with an expert. You can compare the latest products using our online tool, it is very user-friendly and will show you the best deal based on an analysis of your circumstances.

Regardless of the type of finance chosen, a solid repayment strategy is vitally important to reduce the risk taken.

Fixed and variable rate

Much like mortgages, these loans can be either fixed or variable rate.

The key difference is the interest rate type isn’t usually advertised. It’s a good idea to check whether a product is fixed or variable rate – if you’re concerned about potential rate movements during the term of your loan.

Regulated and unregulated

When secured lending is taken against your own home, it is regulated by the financial conduct authority in almost all cases. The exception being when the borrowing is a second charge (or lower) taken exclusively for business purposes.

This is relevant for the bridging market as these loans can also be regulated, or unregulated depending on your circumstances.

First and second charge

When you take out bridging finance, a charge is placed on your property. This charge is placed on the title of your property and means that the lender must be repaid, and gives them rights should you default on repayment.

If you don’t have a mortgage on your property, then the loan with be a first charge loan.

Where you have a mortgage, and this will remain in place alongside your new borrowing, your loan would be a second charge. In the event of default, the first charge lender is given priority, as such second charge loans tend to pay slightly higher interest and a lower LTV to reflect the higher risk to the lender.

How much can I borrow?

What loan to value (LTV) can you offer?

The maximum loan to value available depends on the type of security offer. Bridging loans secured against residential property are available up to 80% LTV, or 75% for regulated applications.

Lending against commercial and semi-commercial property is usually available up to a maximum of 75% LTV.

Loans against land are usually restricted to a maximum of 55-65% depending on the location and whether it has planning permission.

How is my maximum loan calculated?

The main consideration made by lenders during the underwriting process is how the loan will be repaid, and the risk of that going wrong.

This means that your exit strategy is key to achieving the LTV that you require. Higher loan to values are usually reserved for applications with a robust exit strategy.

Bridging finance costs

What rate can I expect to pay?

The interest with short term finance tends to be higher when compared to standard mortgages and can differ widely depending on the lender chosen. To give an accurate picture, they must be broken down by the type of property that you’re looking to secure the loan against.

Residential properties tend to benefit from much lower rates than those offered for loans against commercial property or land.

Interest rates start from 0.43% per month for residential property on loans up to 50% loan to value (LTV). Rates tend to increase as the LTV increases, especially at the top end. For example, at 70% LTV, rates start at 0.55% per month, but at 75%, the lowest bridging loan interest rate is currently 0.65% per month.

Where the application is considered higher risk, you may find your choice of lenders to be more limited. This can see rates climb quite quickly, with 0.8-9% quite common and 1.25% per month is not considered to be unusually high – although it is at the upper end.

Semi-commercial properties can be funded at 70% LTV with rates starting at 0.55% per month.

Commercial rates tend to start at 0.65% per month and land at 1.25%.

Where you repay the loan before the end of the term, interest is only usually charged for the time the funds have been borrowed, rather than the full term.

What fees can I expect?

In addition to the interest charged, there are a number of fees that must be paid when setting up a new loan. The main costs can be broken down as follows:

  • Lender arrangement fee – Fees tend to range between 1% – 3% of the loan amount however most lenders charge a 2% arrangement fee when the loan is set up. This fee can usually be added to the loan. The fee is sometimes reduced for larger loans.
  • Valuation fee – This fee is payable where a valuation is required. The fee generally covers a basic survey of the property. Where heavy refurbishment works are being undertaken, the lender may insist on a more detailed report. Some lenders do offer desktop or automated valuations (AVM), there is usually no charge for this.
  • Legal fees – In most cases you have to pay the lender’s legal fees in addition to your own. These fees vary depending on the size of the loan, the number of properties that you’ll be securing against and the type of property itself.
  • Broker fees – Some brokers charge fees for their services, either a fixed cost or a percentage of the loan amount, some also charge upfront fees. In a majority of cases we don’t charge a fee for our services, however occasionally we may have to and if so, we’ll disclose this upfront.
  • Exit fees – Some lenders charge an additional fee when the loan is repaid, usually 1-2% of the loan amount. Where possible, we avoid using lenders who charge exit fees.

How do I compare bridging loans?

With so many new bridging finance lenders entering the market, it can be difficult to find the best deal, particularly due to the differences in pricing and fees. That’s why we’ve built an easy-to-use comparison tool. Just input your requirements, such as your desired loan amount and how long you would like to borrow the money for and the tool will get to work.

This will help you easily read through the latest market-leading products, using our calculator to work out your likely costs.

Remember that you shouldn’t base your decision on rate alone, all fees must be considered too. It can be cheaper to choose a product with a higher monthly interest rate if the fees are lower.

Whether you want to compare rates online and calculate your costs or talk through your circumstances with an experienced advisor, we’ve got you covered.

How can I save money on my loan?

We’re passionate about saving money for our clients, which means offering access to the best possible products. There are some further steps that you can take to help secure a cheaper loan:

  • Increase the deposit you’re paying to reduce the loan to value.
  • Offer additional security to the lender.
  • Consider the property that you’re borrowing against, rates for residential property tend to be lower than those for commercial property.
  • The term chosen may influence the product availability, many lenders offer terms up to 12 months.

What are the pros and cons of bridging loans?

As with all financial products, before taking out bridging finance, you should always be aware of both the pros and cons.

Pros

  • Speed – They can be arranged very quickly, with applications usually completing in 5-14 days. Some even complete on the day of application.
  • Rates are falling – he finance market is currently in a price war. Rates realistically start from 0.43%, with 0.37% available for select applications. The main drawback has historically been cost, although this is now becoming an advantage.
  • Flexibility – – Bridge finance can be used for almost any legal purpose.
  • No monthly payments – Where interest is rolled up or deducted, there are no monthly payments to make. This can be a major help to cashflow during a refurbishment or marketing period.
  • They allow lending against unmortgageable properties – Loans can be used to purchase properties that you would otherwise be unable to borrow against.

Cons

  • They add cost to a property transaction – No matter how cheap your loan option is, it will still cost something. This will add a cost to your property transaction that must be considered.
  • Added fees and charges – Comparing quotes from lenders or brokers can be difficult. On top of the lender arrangement fee and interest charged, some lenders will charge additional ‘fund management’, ‘application’, ‘inspection’ or other fees. These can add up and mean that the lowest rate isn’t always the best option. You must consider the total cost rather than just the headline figures when comparing products. We’ll happily assess this for you.
  • Problems with exit route – If you have problems with your method of repaying, this can cause major issues as the end of the loan approaches. If you are unable to repay the loan at the end of the term, you will have to refinance or service the loan. Although there is no guarantee your lender would allow you to do either. This can put your property and credit profile at serious risk.

How to get your application approved

How to give your application the best chance of success

There are 3 major factors which are key to the success of a loan application. They are the profile of the applicant, the property offered as security and the chosen exit strategy. To give your application the greatest chance of success, you will generally need to provide the following:

  • Details of your planned exit – if you plan to remortgage the property to repay the loan, the lender will want to confirm that this is realistic.
  • Confirmation that the term sufficient – whether you’ll be refurbishing the property, selling or refinancing, the lender will want to ensure that the term requested gives you enough time to do so comfortably.
  • Where there is doubt about your chosen exit strategy, the lender will want to ensure you have a back-up plan, should your preferred option fail.

Will I qualify?

We can arrange finance for most applicant profiles, including private individuals, partnerships, limited companies, pension funds and offshore companies.

Where there have previously been issues with your credit file, we can usually still offer you a loan.

Dealing with questions and requests

You will speed up your application by responding quickly and thoroughly when asked for information or documents. That said, for unregulated applications, there is some flexibility in the underwriting process and you may be able to ‘push back’ on certain points.

There is a real skill to this however, and it’s important that you supply enough information and don’t challenge unnecessarily.

Are there different types?

The bridging loans that we offer all work in similar ways, but can be broken down into different types, including:

How long do applications take?

Each lender will work to individual timescales. We have seen applications complete on the day of the application under extreme circumstances. In general, a term of 5-14 days is generally realistic for completion of an application.

What are the reasons to get a bridging loan?

Although they come with a cost, they can be a benefit to you overall. When used to buy property undervalue or refurbish, your profits can far exceed the cost of taking out the loan.

When using bridging finance to keep your place in a chain or purchase a property quickly, they can be used to avoid losing out on a property that you’re keen to secure. The cost of the loan may then pale into insignificance if you then go on to enjoy many years in the home.

Would a bridging loan be right for me?

They can be used for a wide variety of reasons and can really save the day. Whether you’re looking to save a chain, exit a property development, downsize in retirement, or any of the other dozens of uses, we’ve got you covered.

There are four major reasons why these loans may be right for you:

  • The property that you wish to raise money against is not mortgageable in its current condition
  • Refurbishment is required on the property and traditional lenders will not accept it
  • The funds are needed quicker than a traditional lender can provide them
  • You are unable to raise money using a traditional mortgage

Whatever your goal, the key is to ensure you are taking out the loan for the right reason and your exit is viable. Taking a loan with no viable exit will generally result in nothing but an expensive delay of the inevitable.

Are your products fixed or variable rate?

Bridging finance products can be either fixed or variable rate, just like standard mortgages. A fixed rate gives you certainty over the total interest charged, whereas variable rates can change from month to month.

In reality, as these loans are only in place for a matter of months, the risk of large swings in your monthly interest rate are low, but choosing a fixed rate can offer certainty.

Where can I apply?

The main choices here are between specialist lenders and banks. High street banks don’t tend to offer bridging finance, but some challenger banks do. From there, a decision must be made whether you work directly with a lender, or through a broker.

Of course, we allow you to apply online instantly using our comparison tool.

Do I need to make monthly payments?

In most cases, you’re able to choose to either pay the interest each month, or add it to the loan, depending on which option works best for you. Paying monthly may offer you a higher net loan, but will require further affordability checks during the application process.

Can a bridging loan be extended?

At the end of your term, some lenders will consider extending your loan where required. Regulated loans can’t be formally extended, so should you fail to repay, you would need to apply elsewhere for a rebridging loan.

What are the conditions of bridge loans?

Lending will usually only be approved subject to certain conditions required by the lender to release funds. Each lender will have conditions which must be satisfied.

Where you’re looking for a lender who will undertake minimal checks, you may find that you pay far higher costs to borrow the money due to the increased risk to the lender.

How can I minimise the risks?

The biggest risk is your exit route – the proposed method of repayment. As the interest payments are usually rolled into the loan, even if the interest is high, this often doesn’t cause an immediate problem.

Where monthly payments are rolled into the loan, the only real danger of default lies at the end of the term.

Ensuring the funds are in place to repay is crucial. Where repaying through refinancing, this involves ensuring your new lender is happy to lend in principle and that a viable backup plan is in place.

Where the sale of the property is the proposed exit, always check with local agents to ensure you fully understand the market. An understanding of not only the likely sale price, but also the likely timescales for achieving such a price, and marketing periods of similar sold properties in the area.

By taking these additional steps, you will remove a large amount of the risk.

How can I repay the loan at the end of the term?

Bridging loans are issued on an interest-only basis. They work in much the same way as an interest-only mortgage, in that they must be repaid in a lump sum at the end of the term.

As the term ends, the lender will contact you to ensure your repayment method is on track and the loan will be repaid.

What are the alternatives?

Generally, these loans are used for a reason, but there are alternatives. They won’t always be suitable, but in some cases may be and could save you money.

  • Mortgages – Mortgages or remortgages can be used to raise funds against a property. They do take longer to complete and generally can’t be used for properties in need of heavy refurbishment.
  • Secured loans – These are ideal for raising money to pay a bill or fund further property investment. Secured loans are a longer-term form of borrowing and will generally work out cheaper, although they won’t always be suitable.
  • Personal loans – also known as Unsecured loans are fast to arrange and benefit from a simple application process. Personal loans may be more difficult to get for those with poor credit and the maximum available loan is usually only £25,000.

Are there products available for people with bad credit?

Yes. Numerous lenders are willing to offer finance to those with adverse credit including defaults, CCJs and even current mortgage arrears. Our bad-credit bridging loan page has further detail on the options available for those with a poor credit history.

Where can I apply?

The main choices here are between specialist lenders and banks. High street banks don’t tend to offer bridging finance, but some challenger banks do. From there, a decision must be made whether you work directly with a lender, or through a broker. Of course, we allow you to apply online instantly using our comparison tool.

Do I need to make monthly payments?

In most cases, you’re able to choose to either pay the interest each month, or add it to the loan, depending on which option works best for you. Paying monthly may offer you a higher net loan, but will require further affordability checks during the application process.

Can a bridging loan be extended?

At the end of your term, some lenders will consider extending your loan where required. Regulated loans can’t be formally extended, so should you fail to repay, you would need to apply elsewhere for a rebridging loan .

How much deposit do I need for a bridging loan?

This really depends on the situation itself. Regulated loans require a minimum deposit of 75% less fees and interest, unless the loan is serviced monthly. Most unregulated loans also require a deposit of 75% less fees and interest, again unless the loan is serviced monthly. Some unregulated lenders will offer loans of 85% – 90% however you will see a sharp increase in costs.

Can I buy a new house before I sell mine?

Yes, as long as there is enough equity. If you are looking buy a new property before your existing one sells, this type of funding is ideal. We see many transactions whereby people are looking to downsize and needs to act quickly.

Do I need proof of income?

Not necessarily, it really depends on the exit route. If you are looking to remortgage to repay the loan, it may be asked for. If the property will be sold, it’s less likely they will ask for proof of income.

Generally, funders are both understanding and flexible with regards to proving income, especially on unregulated loans.

Is there an age limit?

Almost all lenders require the applicant to be at least 18 years old with some having no maximum age. We often arrange loans for pensioners either looking to downsize or arrange a bridging loan for care home fees.

How do I use the bridging loan calculator?

Our bridging loan calculator is designed to make the process of finding out the likely costs of taking out the loan. There are countless lenders out there, all of whom will charge different interest rates and arrangement fees.

To use the calculator, fill in each box as accurately as possible and press calculate to receive your results instantly.

  • Property Value – This is the value of the property to be used as security for the loan.
  • Outstanding Mortgage – This box only needs to be completed if the mortgage is not going to be repaid by the loan. If there is a mortgage outstanding that will be repaid in full, please leave the figure as ‘0’.
  • Loan Amount Required – This is the net loan required – the amount you need to receive before any fees or interest are added.
  • Interest Rate – This is the interest rate charged. The calculator is based on a monthly interest rate.
  • Lender Arrangement Fee – This is the fee charged by the lender for arranging the facility. Input the percentage charged by the lender.
  • Lender Exit Fee – Some lenders charge ‘exit fees’ on their facility. Again, this is calculated from a percentage, so please input the percentage charged.

Why Should I Work With ABC Finance?

Since our inception in 2000, we have gained vast experience in securing the best possible terms for thousands of clients. We save you time and money by speaking with bridging loan lenders on a regular basis and keeping fully up to date, enabling you to access the whole market and best bridging loan rates through one enquiry. We also never charge upfront fees. Whether you’re a veteran or taking your first steps into the world of property, we believe we are an ideal partner in raising short term finance. Talk to an expert or choose your own product online.

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about-the-author-gary-hemming

About The Author

This content was produced by our Commercial Lending Director, Gary Hemming. Gary has over 15 years’ experience in financial services and specialises in bridging loans, commercial mortgages, development finance and business loans. He is widely respected in his field and regularly provides expert commentary for specialist trade publications, specialist business press as well as local and national press.

Gary Hemming CeMAP CeFA CeRGI CSP  -  
Commercial Lending Director