How Does a Bridge Loan Work?
Bridging loans are arranged for a set term, usually between 1-18 months. It is then repayable in full at the end of the term. The full interest is often deducted upfront, meaning there are often no monthly payments to make during the term of the loan.
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.
Regardless of the type of finance options, a solid repayment strategy is vitally important to reduce the risk taken.
Reasons to Get a Bridging Loan
Bridging loans can allow you to complete an urgent transaction which you would otherwise be able to undertake. They are usually a tool that allows you to undertake a beneficial transaction or avoid missing out on a transaction.
While they don’t directly benefit you – much like a mortgage – they do allow you to complete a transaction that would otherwise be out of reach.
Read on below to find out the common uses for bridging loans and how they could benefit you.
What Can I Use a Bridging Loan For?
They can be used in several situations. The most common uses are:
- To fund a property purchase or refinance quickly
- To purchase a property at auction
- To purchase an otherwise unmortgageable property
- To buy a property before your existing property has sold
- To buy an undervalue property without putting down a deposit
- To fund a property refurbishment project
- To finance property or land while undertaking an application for planning permission
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.
- 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.
- 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?
There is fierce competition between bridging loan lenders, with more lenders opening their doors every day. As such, there is a lender for almost every situation. Poor credit history is usually not a barrier, your income isn’t always important.
If you own a property or land, have a realistic way of repaying the loan and have sufficient equity, then there is a very good chance that you will be eligible.
How Much Does a Bridging Loan Cost?
The costs are largely made up of the interest charges and arrangement fees. Monthly interest rates start at 0.43% per month but can be as high as 1.5% per month. The rate charged will depend on your circumstances and what you’re looking to do.
Lenders tend to charge an arrangement fee, usually 2% of the loan. For some larger loans, the arrangement fee may be reduced and can come in as low as 1% in some cases.
On top of the interest and fees, there may be other charges, such as asset management fees, exit fees, legal fees, valuation fees. Some brokers will also charge broker fees, although we do not.
Some lenders also charge administration fees, usually £295.
If you’re able to repay your loan before the end of the term, you will usually have any unused interest deducted from your redemption figure. This means that you only pay for the interest used.
Details of likely costs can be found on our bridging loan rates and fees page.
Are There Any Hidden Costs?
Although we always use reputable lenders, some lenders will add in additional fees. This can make comparing the costs of two lenders difficult. As such, you should always look at the total cost of borrowing when comparing two lenders, rather than just the arrangement fee and interest rates.
Another key hidden cost is the default interest rate. If the loan is not repaid on time, it is considered to be in default. Most lenders charge a responsible and fair interest rate in the event of default. Some see this as an opportunity to cash in, charging high default rates of 2-3% per month, with some charging it back to the start of the loan. You must check and compare default interest rates when comparing different loan offers.
Bridging Loan Interest Rates
The rates start at 0.43% per month and are usually under 1% per month in most cases. The rates are far lower than they were even a few years ago for most situations.
The interest payments are usually retained or deducted upfront and repaid with the loan at the end of the term, or before if your exit strategy comes to fruition sooner.
What are 100% bridging loans?
100% bridging finance is short-term finance against a property with no cash deposit used towards the purchase. There are two main types of funding: using another property or asset as extra security or buying undervalue, at say, 70%, of the open market value (OMV).
If a portfolio of repossessed properties valued on the open market at £1m were available to buy at £700,000, 100% of the purchase price (£700,000) would be available, in theory. Alternatively, if a client wanted to buy a property for £50,000 to renovate and sell and has no available cash deposit, he could, for example, use his own house or a buy to let property. This is classed as extra security for the loan, assuming there is enough equity.
100% bridging loans usually work out at 70 – 75% of the open market value of a property. Although called this, you can’t borrow 100% of the open market value unless there is another asset to use as extra security. This could be another property or a luxury asset such as a classic car.
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. 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. ABC Finance Ltd. can help you through the entire process from start to finish, making the process as simple as can be.
Are There Different Types?
The bridging loans that we offer all work in similar ways, but can be broken down into different types, including:
- Property refurbishment loans
- Specialist larger loans
- Re-bridging loans
- Planning gain finance
- Second charge bridging loans
- Auction finance
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.