Bridging Loan FAQs

Home » Bridging Loans » Bridging Loan FAQs

BRIDGING LOANS MENU

ABC Finance Ltd. works with a carefully selected group of bridging loan lenders from across the marketplace to ensure you can find the right product for the best rate. Our dedicated team of experts are on-hand to provide you with all the information you need to make an informed decision.

Read on to get up to speed with the most frequently asked questions about bridging loans and for more insights visit our guides page and product comparison, or fill in the form to talk to an expert.

Ask An Expert

Fill in the form below to talk through your requirements with an expert.

  • No broker fees

  • No upfront fees

  • Expert broker service

  • Market leading rates

  • Terms in 1 hour

Or call us now on 01922 620008

Frequently Asked Questions

What is a Bridging Loan?

Bridging finance, also known as bridging loans, are a form of short-term finance and can be arranged very quickly. Bridging loans are generally secured against property or land and can be arranged in as little as 5-14 days.

Are There Different Types of Bridging Loans?

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

How Does a Bridging Loan Work?

Bridging loans are secured against a property by way of a legal charge, much like a mortgage. Loans are agreed for a set period, usually 1-18 months, with the loan being repaid on or before the end of the term.

The interest is quoted monthly, but is usually deducted from the loan upfront, or rolled up monthly, meaning there are no monthly repayments to make.

Once your bridging loan is repaid, the charge is removed from your property or land.

How Long Does it Take to Get a Bridging Loan?

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

Reasons to Get a Bridging Loan

Although bridging loans come with a cost, they can be a benefit to you overall. Where bridging loans are 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.

What Can I Use a Bridging Loan For?

Bridging finance can be used for a wide variety of reasons, the most common are:

  • To purchase a property at auction
  • To fund property refurbishment
  • To buy a property before your existing property has sold
  • To fund a property transaction that must be completed quickly
  • To fund an undervalue property purchase with no deposit

Of course, this list is not exhaustive and bridging loans can be used to ‘bridge a gap’ in any financial transaction where property or land is available as security.

Would a Bridging Loan be Right for Me?

Bridging loans can be used for a wide variety of reasons and can really save the day. Whether you’re looking to bridging loans 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 bridging finance 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 bridging loan with no viable exit will generally result in nothing but an expensive delay of the inevitable.

Our advisors work through the entire picture with you to ensure the product is right for you before proceeding. We will assess all your options and ensure a bridging loan is the most suitable product upfront.

The Pros and Cons of Bridging Loans

Bridging finance is a highly useful lending product for those looking to raise finance quickly, but there are numerous advantages and disadvantages of committing to a bridge.

Pros

  • Applications can be completed quickly, allowing you to borrow funds much quicker than you would be able to with a mortgage. You can also borrow much more than would usually be possible using a personal loan.
  • Bridging loan rates are much lower than they have been historically with rates starting from 0.43% per month.
  • They allow you to complete property transactions that would otherwise not be possible.
  • Although they come with a cost, they can prove to be financially beneficial. Examples of this are when a bridging loan is used to avoid repossession or to purchase investment properties below market value.

Cons

  • Although they come with a cost, they can prove to be financially beneficial. Examples of this are when a bridging loan is used to avoid repossession or to purchase investment properties below market value.
  • There is a cost of borrowing with every type of lending product, but compared to other property-backed loans, bridging loans are an expensive form of borrowing.

Who Would Qualify for a Bridging Loan?

Each lender will have unique criteria for considering eligibility for a bridging loan. The key factors in the decision-making process for most lenders are:

  • The property or land used as security for the loan. The lender will want sufficient equity in the property and may need the property to be habitable.
  • You will need to prove a suitable exit is in place to ensure that the loan can be repaid.
  • Where proof of income is required for your exit, you may also have to prove this to your bridging finance lender.
  • If you’re planning refurbishment during the term of the loan, you will have to provide details and may need to provide a CV.

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.

How Much Does a Bridging Loan Cost?

The cost of your bridging loan will depend on 4 factors – the amount borrowed, the term, the interested rate and the fees charged. Your costs will generally increase the larger the loan is and the longer the term selected.

To minimise the cost of taking out a bridging loan, always compare the total cost of borrowing the funds, not just the interest rate and arrangement fee.

Common fees charged in addition to the interest and arrangement fee are:

  • Exit fees – payable on repayment of the loan. Some lenders don’t charge but others can charge 1% or 1-month’s interest.
  • Valuation fees – payable for surveyor’s costs to ensure your property is suitable security. Some lenders do not require a valuation.
  • Legal fees – To pay the lenders legal costs in setting up the loan.
  • Admin fees or asset management fees – payable to handle the setup of the loan.

These additional costs can make a significant difference in the total cost of the loan.

Are There Any Hidden Costs?

By sticking to the above advice and comparing the total cost of borrowing rather than just the interest and arrangement fee you shouldn’t be caught out by hidden costs.

The key to avoiding unexpected expense at that point is to check any other fees that you could incur during the loan. The most common are high default interest charges – additional fees that are charged in the event of the loan not being repaid at the end of the term.

Some lenders will charge default interest of 2-3% per month, charged back to the start of the loan. This can represent a huge sum of money, just for being a few days late in repaying. This is not the situation with most bridging loan lenders but be mindful of this before agreeing to a loan as it can be a very expensive mistake.

What Are Typical Bridging Loan Rates?

Bridging loan rates are expressed monthly rather than annually like most forms of borrowing. This is because bridging loans are often paid off in 1-6 months, making the annual cost less important than the monthly cost.

Monthly rates start at 0.43% per month, but this doesn’t tell the whole story. There are big differences between rates depending on the circumstances of the borrower. For details of current interest rates, head over to our bridging loan comparison page.

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.

Minimising the Risk Associated with Taking Out a Bridging Loan

The biggest risk in taking out a bridging loan 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 from taking out a bridging loan.

Repaying 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 to Bridge Loans?

Generally bridging finance is 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 than bridging loans 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 than a bridging loan, 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 Bridging Loans for People With Bad Credit?

Yes. Numerous lenders are willing to offer bridging finance to those with adverse credit including defaults, CCJs and even current mortgage arrears.

Do I Qualify for a Bridging Loan?

There are a lot of lenders out there who all work to different criteria in assessing a loan. There is usually a loan available for every situation if you have a property available as security with sufficient equity in it.

Another key factor is the exit strategy, to qualify, you will need a solid and reliable exit strategy in place. This is usually either a refinance to a term loan (mortgage) or sale of the security property.

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

Want to Know More…?

Use the panels below to read more on Bridging Loans.