A Full Guide to Bridging Loans
While bridging finance is straightforward, many people may not fully understand its various applications, as well as its key features and uses.
Here we will explain:
- What are bridging loans?
- How do bridging loans work?
- What are bridging loans commonly used for?
- How much do bridging loans cost?
- How much can I borrow?
- What do banks offer bridging loans?
- How can I qualify for a bridging loan?
- How do I apply for bridging finance?
What are bridging loans?
Bridge loans are a great alternative when traditional financing is not an option. Typically lasting 12 months, they are used to finance a property. As the name implies, bridge loans "bridge the gap" between selling your current property and purchasing another through the proceeds raised. Bridge loans have several applications, but the most common is purchasing a new home while selling your existing one.
“Below, you'll find a helpful video, one in which I give you a brief breakdown on bridging loans. Delve into costs, timelines, real-life scenarios, and the path to securing one. Let's simplify Bridging Finance together.”
- Sam O'Neil, Head of Bridging
How do bridging loans work?
A bridging loan works to finance challenging scenarios when traditional finance is not an option. Generally, bridging loans are far cheaper than unsecured loans. To successfully apply for bridge finance, you must have a sufficiently valued asset (typically a property) against which the loan will be secured. Because of the security, you can borrow as much as possible without worrying about interest rates (or early-repayment fees), as interest is "rolled-up" instead of being charged monthly. The loan is then repaid through the proceeds of the property sold.
Here are some key benefits of bridging loans that you may want to consider:
- Fast financing to purchase property – Bridging the gap makes you a cash buyer, which is a more attractive option for a seller, and expedites the entire process.
- Time to find the right buyer – Capital raised from a bridging loan frees up options to improve the value of your home through home improvement and renovation.
- Applicability – Bridging loans are flexible for different types of property, including residential, commercial, building plots, land without planning permission, and any other unmortgageable property.
- Lenders are willing – With sufficient security, lenders are likely to consider borrowers that may not have a perfect credit history, and there are no stringent checks associated with traditional finance.
- No early repayment fees – A bridging loan allows you only to pay interest for the outstanding duration, incurring no similar repayment fees compared to traditional finance.
What are bridging loans commonly used for?
Bridging loans are flexible and can finance property for various purposes, but when is it the right financial option? You may be looking to downsize or upsize when purchasing residential property, or you may need to raise funds quickly for medical or care home fees for an elderly relative.
A bridging loan can help bridge any gap, and its uses span further than many think. This type of finance allows breathing room during stressful periods and capitalizing on opportunities.
Here are some of the numerous scenarios in which bridging finance can be applied:
- Purchasing your dream property – Having cash readily available in a competitive property market allows you to buy a home using a bridge loan before it slips out of reach. Bridging finance offers the speed to act in a competitive market.
- Auctioned properties – properties acquired in auctions must be paid for within 28 days. A bridging loan resolves a time-sensitive deal where traditional finance cannot.
- Unmortgageable property – any property currently at an uninhabitable standard, lacking a working bathroom or kitchen facilities, will be ineligible for a standard mortgage – a bridging loan can be the solution to financing these properties.
- Refurbishment – You can use a bridging loan to refurbish or renovate a home you're looking to sell – which can significantly improve its chances of being bought.
- Fixing a chain break – Often, parties involved can be slow to move or, worse still, pull out of a transaction. A bridging loan will fix temporary chain breaks by allowing your property more time on the market to find the right buyer.
- Investment property - Bridging loans allow landlords and property investors to raise fast cash when an opportunity arises, e.g. a house to flip on, to purchase buy-to-lets, or to buy land/development sites.
- Self-build projects – prospective builds may be unmortgageable. With a bridging loan, any property project can be financed without delays.
- Downsizing in retirement – When you have found the ideal property, a bridge loan allows you to snap that property up with enough time to sell the larger property.
- Paying for Care Home, medical or assisted living fees – Families will often have to share the brunt of financial difficulties, yet unable to afford care home fees without selling their parent's property. A bridging loan gives families the necessary funds to secure their elderly relatives when arrangements must be made on their behalf.
Explore the remarkable journey of a £330k bridge loan that swiftly turned our clients' retirement property dreams into reality in Bristol. Overcoming distinctive obstacles and harnessing collaborative representation, we accelerated their achievement in a mere span of 2 months.
How much do bridging loans cost?
Bridging loans can be expensive, with high-interest rates and additional fees. Because bridge finance is short-term, the interest rates are typically higher than a mortgage's. Yet, this can be mitigated through "Rolled-up" interest; instead of paying monthly, as you would with a mortgage, you can pay back interest at the end of the term. The Bank of England base rate, which typically ranges between 0.39% and 1.5% per month, influences bridging loan rates.
However, interest rates can also be affected by a lender's criteria and several other factors, such as;
- Your loan size and for how long it will last
- What type of loan will it be
- The Loan-to-value ratio (LTV) - you can borrow based on the lender's LTV, which is calculated by dividing the loan amount by the securities value – the security valuation will impact the interest paid monthly.
- Your credit history – adverse credit history can affect the interest rate applied if you have outstanding debts that could affect repayment. However, the process is not as stringent as securing a mortgage, and lenders are unlikely to do checks against your income or credit score.
- The valuation of your property – a lender's evaluation takes into account many factors, and what your property is valued at will affect the interest rate – the location of a property can impact valuation, for instance.
Property size can greatly impact costs - beneficially, you can secure large bridging loans which are specifically tailored to large or complex property transactions. This might be; property development on a certain scale, or it may concern purchasing an expensive property through a bridge loan.
What are the additional fees?
- Arrangement fee - typically 2% on the net or gross loan - is charged by lenders. The survey or valuation cost depends on the property type being appraised. An alternative to lenders surveying a property is a drive-by or desktop evaluation, which is faster and cheaper overall.
- Legal representation - is required, but there is no fixed rate for legal fees for these situations. However, although the cost can vary, this fee can be reduced when bridging lenders offer "dual representation".
- Valuation fee – lenders will appraise your property and determine the LTV; this can be made cheaper through a desktop/drive-by valuation if time is of the essence.
- Broker fee – Brokers require payment for services in arranging the finance and getting your case to a suitable lender.
There are always ways to mitigate these bridging loan costs by finding a suitable lender and working with a specialist bridge loan broker to guide you through the process.
A bridge loan calculator is a valuable tool to help simplify the process of calculating overall cost – it'll work out an indicative quote and support the initial stage of finding out if bridging finance is the best option for you.
How much can I borrow?
There are no upper limits to bridging finance; the limits will be determined by the security you can offer. Ultimately, the bigger the security, the more you can borrow.
Crucially, you can borrow based on the lender's loan-to-value (LTV), which is calculated by dividing your loan amount by the home's value.
Typically, bridging loans begin at £25,000 and can go as high as £250 million. The amount offered will always depend on a lender's criteria, the security provided and the property's value. Here are the key factors which may determine the borrowing amount;
- The value of the security or assets (property)
- Location of property
- The length of the loan term
- Your financial circumstances
- The LTV (Loan-to-Value) percentage - the loan amount divided by the appraised property or assets value.
Offering multiple properties as security will increase the upper limit of your borrowing potential through a higher LTV percentage. The value of the assets you plan to offer as security must be sufficient to cover the loan - taking into account interest payments or additional fees.
It is always important to remember your exit strategy, which will typically be the property the loan is secured against – it is helpful to have a solid, calculated plan before applying and to consider carefully how long the loan will last.
"How much you can borrow isn't just about numbers; it's about tailoring a solution that fits your unique needs. As the Head of Bridging, I'm here to guide you through the process and ensure you get the financing that suits you best. Let's make your property dreams a reality - don't hesitate to get in contact with our team for advice today."
- Sam O'Neil, Head of Bridging
What banks offer bridging loans?
After the 2008 credit crunch, high street banks have limited scope for bridging options. Most do not currently offer bridging finance as they used to.
Bridging loans are usually handled by separate subsidiaries of high street banks, which only brokers can access – hence why it can be difficult for the average person to go directly to high street banks such as Barclays, or HSBC, for bridging finance purposes.
There are instead many bridging loan companies, or specialised lenders (with a more accessible avenue to bridging finance). These banks accommodate bridging options for many different circumstances, unlike the limited scope of high-street banks that no longer offer finance in this manner. It is best to go through a bridging loan advisor to secure the best possible deal, with favourable rates and a bridging loan that might suit your circumstances better.
How to qualify for a bridging loan?
Lenders will have their criteria, as discussed above, regarding borrowing. All lenders fill different roles within the short-term finance market – many are keen to facilitate more niche circumstances, and others can be broader in their lending.
However, bridging finance in the general sense is made available to any borrower:
- Limited companies
- Individuals (no upper age limit)
- Sole traders
And to qualify for bridging finance, you need only fulfil the standard criteria;
- Have a form of security – properties or valuable assets.
- Use the loan for residential, commercial and development property finance.
- Be a UK resident, or have a registered UK address (bridging finance can also be secured for expats)
- Most importantly, have a solid exit strategy in place
The key points to take away are having an exit strategy and having sufficient security (typically, these go hand in hand); without both, you will likely be unsuccessful in your application, and lenders may be unwilling to consider your case.
A bridge loan advisor can help you with the necessary details and any eligibility concerns – it is best to talk first to an expert before starting the application process to weigh up your financial options and talk through the best course of action with someone with access to lenders, and knowledge of the market.
With this case study, we helped our client overcome regulatory challenges and secured an £800k loan, enabling the creation of a new residential build in Guernsey.
How do I apply for bridging finance?
If you're looking to apply for bridging finance, we can help. It is helpful to navigate the entire short-term market and pinpoint the best bridging loan available for your circumstances while avoiding the common pitfalls of this type of financing.
For the inexperienced, this can be challenging to do alone. Here's what an experienced broker can do for you when it comes to applying;
- Brokers' will give access to a market of lenders unavailable to you as an individual – they will get you comparative quotes and find a lender suitable and willing to offer a loan.
- Brokers advise on the best course of action as to whether bridging finance is an option for you, how to proceed, and answer any questions you may have.
- Brokers work to create a competitive environment for lenders, which can lower rates, making them more favourable to borrowers overall.
- Brokers know how to present their clients' situations to lenders, making borrowers a more appealing option.
- They will help you understand and guide you through the entire process – dealing with documentation, giving you an indicative quote, and dealing with lenders on your behalf.
Ultimately, brokers will work through your interests to secure the best deal.
With a bridging specialist, you can get the advice needed to point you toward suitable lenders based on your needs and avoid the challenges of going to lenders directly. We have access to the short-term loan market and have established relationships with specialist lenders. And most importantly, we can get you bridging finance at a favourable rate.
Need bridging finance advice? Get a bespoke quote on a bridging loan from our team.
Are you in need of a bridging loan? Contact our team at , 0800 368 9344 , and we can help you navigate the process quickly and without stress. Bridging loans offer speed and flexibility when it comes to time-sensitive situations. With our experience in short-term financing, we can assist you in finding the right bridge loan for your circumstances.
We have an extensive network of lenders we deal with regularly. You can secure the best loan rates from regulated or private lenders for unregulated transactions with us. Do not hesitate to contact us, and inquire about our bridging loan services.