Bridging Loans Scotland: A Complete Guide

Get a Free Quote Talk to an Expert
FIBA Member

Rated Excellent on Reviews.co.uk

Bridging loans are a type of short-term property finance that is used to ‘bridge’ the gap between two events occurring – for example purchasing a property and selling an existing property.

The property market in Scotland is unique and has certain quirks that don’t exist elsewhere in the UK. These quirks actually increase the relevance of bridging finance in the market, especially due to the requirement to complete a purchase once an offer is accepted.

In this guide, we break down how bridging loans work in Scotland, the costs, LBTT and finding lenders for remote locations.

The Scottish Legal Difference

A property sale in Scotland is legally binding much earlier in comparison to England, Wales and Northern Ireland and prospective buyers work on a sealed bid basis. This means that if you are looking to purchase a property you may need to move fast and if you haven’t already sold your property you could miss out.

An example of how a bridging loan would work:

  1. You want to buy a house for £600,000 and you need to put down a £200,000 deposit and borrow the rest on a mortgage.
  2. Your house hasn’t sold yet and you only have £50,000 in savings.
  3. You ‘bridge’ the gap and get a bridging loan for £150,000 to cover the deposit until you sell your house.
  4. When your house sells you pay off the bridging loan with interest (accrued on a monthly basis and payable at the point of loan exit.) 

The maximum loan amount in Scotland  is normally up to 75% loan-to-value, so 75% of what the property is worth. This is a figure set by the Financial Conduct Authority (FCA).

Not all loans are regulated and whilst some lenders will provide a higher loan-to-value these are unregulated loans that do not offer the oversight and protection that the FCA provides.

What Costs Can I Expect Bridging Loans Scotland

Bridging loan interest rates in Scotland are currently between 0.35% and 0.95% for most loans.

The interest rate that you’re charged will depend on the amount of equity you have in your property, the loan to value (LTV) required and the type of property that you wish to use as collateral.

In some cases, when borrowing more than £1,000,000 using a large bridging loan, you may qualify for a slightly lower interest rate.

In most cases, the monthly interest charge can be added to the loan, leaving you with no repayments to make. This is often referred to as ‘retained’ or ‘rolled-up’ interest.

Are There Other Costs on These Loans?

Yes, on top of the interest charged, there are several fees to consider. They are:

  • Lender arrangement fee – Bridging loan fees tend to range between 1% – 3% of the loan amount; however, most lenders charge a 2% set-up 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 – Valuation fees are payable where a valuation is required by the bridging loan lender. The fee generally covers a basic survey of the property for bridging purposes. Where heavy refurbishment works are being undertaken, the lender may insist on a more detailed report. Some bridge loan lenders do offer desktop or automated valuations (AVM), there is usually no charge for this.
  • Legal fees – In most bridging 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 bridging loan brokers charge fees for their services, either a fixed cost or a percentage of the loan amount, and some even charge upfront fees. We never charge fees for loans over £100,000.
  • Exit fees – Some bridging 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.

LBTT and Bridging Finance

LBTT, which stands for Land and Buildings Transaction Tax is Scotland’s equivalent of Stamp Duty. It is payable on transactions over £145,000, regardless of how the purchase is funded (cash, mortgage or bridging loan).

In most cases, this must be funded by you as the purchaser and can’t be added on to your finance application if it takes you over the lenders maximum LTV.

For borrowers using bridging as a form of chain break finance to allow them to complete a purchase before their current property is sold, the Additional Dwelling Supplement (ADS) of 6% will be due on the purchase.

The ADS can be refunded if your existing property sells within 18 months, which almost all will, but it’s important to be aware that these funds must also be found, even if it’s only temporary.

For chain break finance applications, your bridging loan costs and LBTT should be factored into total borrowing/cash needs from the outset to avoid issues later. Some buyers underestimate total cost, so it is important to plan for both.

Lenders for Remote Scottish Locations

Lending in remote Scottish locations is less straightforward for many borrowers, due to the fact that many lenders are reluctant to lend. This is due to three key factors, access, rebuild value/ease of rebuild and marketability concerns due to lower demand in these areas.

For bridging lenders, marketability and liquidity are key factors in any lending decision, due to the short-term nature of the market. Without the ability to recoup funds quickly and reliably, the model no longer works.

Affected areas include the islands, Highlands and off-grid properties in remote locations.

While remote locations can be trickier, a strong, independent broker with experience in the Scottish market will have a wide base of lenders for most property types, in most locations. Some specialist bridging loan lenders are very active in the Scottish market and understand it well, offering flexibility over location and property type.