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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 a mortgage to complete.

Popular uses include:

How do bridging loans work?

These facilities allow you to borrow money, usually for a term of 1-18 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. They allow you to:

  • Raise money against your home or other property
  • Use the funds for 1 month, or as long as is needed before the facility is repaid using a remortgage, other financial product, or through sale of the property.
  • They are more flexible compared to most financial services products, meaning you’re not as limited in what the funds can be used for.
  • For those banking on a quick completion, they are often the best route to borrowing money.
  • Interest can either be paid monthly, or ‘rolled up’ and paid off when the loan is repaid.

How to get a bridging loan

There are 3 major factors which are key to the success of a bridging loan application. They are the profile of the applicant, the property offered as security and the chosen exit strategy. To give your application the best 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.

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.

How much does bridging finance cost?

The main costs associated with bridging finance can be broken down into 2 main areas, the interest and set-up fees.

A guide to interest rates

The rates charged tend to be higher than those on 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.

Rates start from 0.48% 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 best rate is currently 0.75% 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 rates of 0.8-9% 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 0.75%.

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.

The likely fees

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 – 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.
  • Legal fees – You are usually liable for the lender’s legal fees in addition to your own. These fees vary depending on the size of the loan and the number of properties that you’ll be securing against.
  • Broker fees – Some brokers charge fees for their services, either a fixed cost or a percentage of the loan amount. We don’t charge a fee for our services.
  • 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.

What is the difference between open and closed bridging?

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 maximum total interest cost and deduct 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 consumer-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.

The pros and cons of bridging loans

They are a borrowing tool that is growing in popularity. 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 – The bridging finance market is currently in a rate war. Rates now start from 0.44%, with a rate of 0.37% available for select applications. The main drawback has historically been cost, although this is now becoming an advantage
  • Flexibility – Bridging finance can be repaid early without penalty. When the loans are repaid early, any unused interest is usually rebated, saving you money.
  • 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.
  • Hidden charges – Comparing quotes from bridging loan lenders or brokers can be difficult. On top of the lender arrangement fee and interest rate, many 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.
  • 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.

Who would qualify for a bridging loan?

We can fund borrowers for most applicants, 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.

What is the difference between first and second charge loans?

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 bridging 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 have slightly higher interest rates to reflect the higher risk to the lender.

Should I borrow money using bridging finance or a mortgage when buying a home?

Each customer is different and should conduct an analysis based on their own circumstances, plans and needs. Generally speaking, a mortgage would cost much less per month than a bridging loan and is the best option in most cases.

Using a mortgage calculator to compare the costs, will allow you to find the best option and can save you money.

How can I save money on my loan?

We’re all 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 rate charged, many lenders offer terms up to 12 months.

How do I compare bridging loans?

With so many new bridging finance lenders entering the market, it’s becoming more difficult to find the best deal. Particularly due to the differences in their pricing and fees. That’s why we’ve built an easy-to-use comparison tool. Just input your details, 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. It’s often 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.

Compare the latest products instantly

We’re the only company that offer an instant comparison of the leading lenders with no need for a call back to provide figures. Our tool is designed to save you time and money. Once you input your details you will can:

  • Get quotes from across the leading lenders
  • Compare the latest products from banks and other financial services companies
  • Amend your figures to see how changes affect the rates offered
  • Find out the maximum loan available to you
  • Apply online instantly for your preferred product

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.

How much can I borrow?

We can fund up to 80% of the property value and up to 100% of the purchase price. All lenders take a different approach and as a result, the terms offered can vary. If you’re looking to borrow more than this, you may be able to do so by offering additional security – in the form of another, or even multiple properties.

The figure of 80% is based on the gross loan. If you’re looking to deduct the interest from the loan, the amount you receive will be 80% of the property value, minus the interest and fees that you’ve chosen to deduct.

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.

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?

There are many lenders and, therefore, understanding all of their lending criteria can be time-consuming. 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 finance companies on a regular basis and keeping fully up to date, enabling you to access the whole market and best rates through one enquiry. We also never charge upfront fees. Whether you’re a veteran or taking your first steps into the world of bridging, we believe we are an ideal partner in raising bridging 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