Bridging Loan For An Extension
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in bridging loans
If you’re looking to build an extension on either your home or an investment property, financing it with a bridging loan could be an excellent option.
It’s important that you fully understand your finance options before committing, so with this in mind, we’ve put together this handy guide to break things down.
We’ll run through what a bridging loan for an extension is, how it works, the costs and how to get one.
What is a bridging loan for an extension?
A bridging loan for an extension is a form of short-term loan that is secured against a property and can be used to fund an extension project. They’re also known as property refurbishment finance.
Due to the level of building work required when adding an extension, the project would be classed as heavy refurbishment.
As bridging finance is a fast, specialist and short-term option, it can be arranged quickly, often with no monthly payments to make.
How do they work?
As mentioned above, bridging loans are arranged for a short period of time, usually for only the time required to fund the extension. Once works are complete, the property can then normally be refinanced onto a residential mortgage or buy to let mortgage. This is known as an exit strategy.
In addition, the interest can often be rolled up into the loan, meaning you have no monthly payments to make. Instead, the interest is paid at the end of the loan, when it is repaid.
This can make it easier to manage cash flow during the construction project.
How can I get bridging finance to fund my extension project?
The best way to get bridging finance to fund an extension is to use a bridging loan broker. Not every lender will fund a heavy refurbishment project and as such, a broker may be the fastest way to find an appropriate option.
When choosing a broker, some may charge you fees for arranging the loan. It’s best to find a fee-free broker (like ourselves) as this can save you a lot of money.
That said, it is possible to apply directly with a lender, but as mentioned above, finding the best one for your circumstances may be tricky, especially if you’ll be taking out a regulated bridging loan.
Are there different types?
Yes, there are different types, including regulated or unregulated bridging loans, commercial bridging loans, bridging loans for house renovations and even specialist bridging loans for property developers.
As mentioned above, if you’re unsure which product is right for you, consider using a broker, who will be able to explain the options available and how much each one may cost.
What else should I consider?
Before jumping in, you there are some important things to consider. They are:
Is bridging finance the most suitable option?
Not every extension project requires a bridging loan. In some cases, a secured loan, remortgage or even personal loan may be a better option. Of course, if you have enough savings to cover the cost of the build, then this could work out better for you.
A good broker will be able to run through the options and compare the costs of different products to help you make the right decision.
Consideration should be given to both the short-term costs, longer-term implications, any exit fees involved in taking out certain products and any associated risks.
Should I roll up the interest?
In most cases, borrowers choose to roll up the interest, as it can remove a significant strain on finances that comes with having to meet a monthly interest payment during an already complex financial period.
That said, some borrowers do choose to pay interest monthly as this can increase your net loan (meaning you can borrow more upfront).
The decision will ultimately be a personal one, but if you’re in any doubt, talk to an expert and they’ll be able to advise you.
Frequently Asked Questions
How long can I borrow the money for?
Most lenders will consider a term of 1-18 months, although in some cases, you may be able to borrow funds for longer.
When borrowing against your own home, your loan term will be restricted to a maximum of 12 months, due to Financial Conduct Authority (FCA) rules.
How much can I borrow?
Loan sizes tend to start at £10,000 with no maximum loan size. Each lender has their own minimum loan size, although most projects will be higher than these. Some lenders even offer specialist large bridging loans with better terms, such as lower interest rates and fees.
The exception being some second charge bridging loans, which sit behind your existing mortgage.
How much will it cost?
You can expect an interest rate between 0.8-1.1% depending on your circumstances, the loan to value (LTV) required and the level of work being undertaken.
There may be other fees to consider including valuation fees, legal fees, lender arrangement fees and in some cases, exit fees.
How can I find the best deal?
As mentioned above, the key choice is whether you choose to use a broker, or approach lenders directly.
Whichever way you choose to go, always ensure that they company you’re using is reputable and experienced in this type of lending. When using a broker, a fee-free broker like ABC Finance can generally save you a lot of money in broker fees.
Bridging loan case studies
Second Charge Bridging Loan Secured for Buy to Let Property Refurbishment
Bridging Loan Secured for HMO conversion and refurbishment
