Bridging loans

Behind all short term bridging loans there is a story to tell. Understanding the whole story will help you avoid common mistakes and find the right solution for you.

Bridging Loans – Read the whole page or click the links below to scroll to the information you need.

• What are Bridging Loans?
• How do bridging loans work?
• How long will it take to arrange a bridging loan?
• Are bridging loans a good product?
• Do you meet the eligibility criteria for bridging loans
• Bridging loan deposits and LTV requirements
• Regulated vs unregulated bridging loans
• How interest is charged for bridging loans
• How much can you borrow with bridging?
• Bridging rates
• Bridging loan term lengths

What are Bridging Loans?

Bridging loans are a type of short-term loan that is typically used to “bridge” the gap between the purchase of a new property and the sale of an existing one. The loan is secured against the existing property and is typically used to help fund the purchase of a new property before the existing one is sold. Bridging loans are often used by property developers and investors to finance the purchase and renovation of properties, as well as by homeowners who are looking to move to a new home before their existing property is sold. These loans tend to have higher interest rates than traditional mortgages and require a different application process.

Remember bridging loans are available as a second charge loan as well as a first charge mortgage. Therefore, it may not be necessary to repay the mortgage.

Security which could be accepted can includes the following: (There is a link telling you more about each one)

• Your home
• Buy to let property
• Commercial property
• Development land with planning
• Even bare land.
  Different lenders accept different security and offer different terms so having an experienced broker on side is very important.

How do bridging loans work?

There are are a number of scenarios where Bridging Loans are used

Bridging a sale and purchase

Bridging loans can provide borrowers a short-term loan to finance the purchase of a new property before the existing one is sold. The loan is secured against the selling property, the purchase property or both, which serve as collateral for the loan. The amount of security required will depend on the numbers and size of any mortgages which may need to considered. The loan is typically for a shorter period of time, usually between 6 months and 1 years, and the interest rates are usually higher than traditional mortgages.

Bridging loans to refurbish

Often property is purchased and needs work before it can be sold or rented out.
Bridging loans are available for this purpose up to 85% of the property value but there are caveats.

When buying or refinancing a property to refurbish, remember lenders can often take security on other property you own if there is plenty of equity. This can help as you don’t have to put as much cash in to the deal.

Bridging to buy and get planning consent

This is very common nowadays. You find a property with potential. You are sure you can get planning to perhaps convert or extend it. However you can’t start work or buy it on a standard mortgage until you have planning consent.

Many people use bridging to buy the property and simply own it whilst they finalise their plans, consents and costs. Then they either use their own money to do the works or a further advance on the bridging loan to carry out development work. Make sure you tell your broker the whole plan as some lenders don’t allow works to be done so your would need to refinance which incurs extra costs and hassle.

Bridging because you need it fast

This applies when buying a new house as in the first scenario above. However you might the cash fast for many other business scenarios.

• To refurbish / build another property
• To provide urgent business cash flow
• To complete on an auction purchase
• To repay pressing and urgent debt

Bridging loans to build / develop

If building a new property or making significant alterations to an existing property, the type of loan you might get may differ. Bridging is generally intended where there is only light works being carried. These are works which don’t require planning consent or building regulations.

Development finance is structured in a similar way to bridging but usually part of the fund is released as you complete works. This can work well as you only pay interest on the money as you draw it. With bridging you pay interest on the full amount from the outset

In theory you could borrow money to purchase, then a further amount when you have built the shell of an extension. Then borrow again when it is wind and water tight and the final amount after completion.

Applying for bridging loans

When applying for a bridging loan, the borrower will typically need to provide information about the existing property. This includes its value and any outstanding mortgages, as well as information about any new property, including the purchase price and any renovation costs. The lender will then assess the value of the existing property and the likelihood that it will be sold in the near future and the borrower’s creditworthiness. This information is important in determining the loan amount and interest rate.

Lenders will look particularly at your proposed exit and expect it to be a strong and reliable exit. Good examples are sale or refinance. A refinance when you have a poor credit history or insufficient income will be challenged so it’s our job to look for an exit for you too.

After approval

Once the loan is approved, the funds will be disbursed to the borrower. The total amount released can be used to purchase the new property and pay any related costs, such as lender fees, legal fees, and renovation costs. The repayments can be added to the loan to help cash flow – see below. Alternatively, the borrower will be required to make regular interest payments on the loan, until the loan is fully repaid by the agreed exit or in some other way.

Bridging loans are not always easy to obtain as they are very dependant on there being ample equity. They are typically more expensive than traditional mortgages, and are meant for short-term solution.

However they can be suitable for many people and fast; provided the right lender and right strategy is chosen

How long will it take to arrange a bridging loan?

The time it takes to arrange a bridging loan can vary depending on several factors. These include the complexity of the loan, the lender’s requirements, and the borrower’s financial situation.

Typically, a bridging loan application can take anywhere from a few days to a few weeks to be approved. However, some complex or high-value loans can take longer to process, possibly up to a few months.

The main delays in getting a bridging loan completed are the valuation and legal work. In some cases lenders use an automated valuation based on recent sales – this can save time.

Solicitors – a law unto themselves. Avoid using a solicitor to act for you who doesn’t fully understand and regularly deal with bridging. Most are not used to working at the pace required and tend to cause delays due to their inexperience. Some lenders offer dual representation which means they have two solicitors who are used to working together fast. Sometimes in the same building. One works for you and the other works for the lender and are often cheaper than using your own solicitor.

Are bridging loans a good product?

Bridging loans can be a great idea in certain situations, but they also come with some risks and drawbacks.

Some of the benefits of a bridging loan include:

• They can help you to purchase a new property before your existing one is sold. This can be particularly useful if you need to move quickly, such as in the case of a job transfer or a growing family.
• They can also help you to purchase and renovate a property, which can increase its value and make it easier to sell later.
• They can be useful for property developers and investors who need to finance multiple projects at once, as they can use the existing property as collateral for the new loan.
• They don’t need to relate to a property transaction and can be used to quickly raise cash for virtually any purpose provided it’s short term and there is a clear exit.

However, it’s important to be aware that bridging loans also come with some risks

Some downsides of bridging loans include:

• They tend to have higher interest rates than traditional mortgages, which can make them more expensive in the long run.
• They typically have shorter terms than traditional mortgages, which means you will need to pay off the loan quickly.
• If you’re unable to sell the existing property in time, you may have to extend the loan, which can be costly.
• The lender may require a higher deposit or charge higher interest rate in case of risky scenarios.

In summary, a bridging loan can be a good idea if you need to purchase a new property before your existing one is sold, or to finance a project. However, it’s important to be aware of the risks and to understand the true costs of the loan before entering into a loan agreement.

TIP

Always use a broker who is fully regulated and can compare the whole market of bridging, secured loans, buy to let and regular mortgages plus development finance. There may be other ways of reaching your goal which you have not thought of.

Do you meet the eligibility criteria for bridging loans

The eligibility criteria for a bridging loan can vary depending on the lender, but typically, borrowers will need to meet the following requirements:

Creditworthiness

The lender will check the borrower’s credit history and credit score to determine their creditworthiness. Borrowers with a good credit history and a high credit score are more likely to be approved for a loan. However bridging lenders are better at accepting a poor credit history including CCJ’s and arrears than normal mortgage lenders. This is because often they are not relying on you making repayments as the interest is added to the loan.

Income

The lender will typically require proof of income if you wish to service the loan (make monthly payments). However one of the attractions of bridging is the ability to not make monthly payments – see below.

Property value

The lender will need to assess the value of the existing property and the likelihood that it will be sold in the near future. This will typically involve an appraisal of the property by a valuer or am AVM (desktop valuation without visiting the property), which will be used to determine the equity available. This in turn affects the loan amount and interest rate offered.

Property type

Most lenders will lend on a house which is used for renting out. If you live there it will be a regulated loan with stricter rules and less lenders available. Similarly if the property is commercial, not habitable, land or unusual in any way, there will be specialist lenders and less choice.

Purpose of loan

The lender will want to know the reason for the loan to ensure it is legal and meets their policies.

Exit strategy

Lenders will want to see a solid plan on how the borrower intends to repay the loan, which is called exit strategy. This can be through the sale of the existing property, refinancing, or through other means.

It’s important to note that some lenders may have different or additional requirements, such as a higher deposit, a minimum loan amount, or specific property types. It’s important to have a good understanding of your requirements, exit and assets available. This allows your broker to research the different options available and compare the terms and conditions of each lender to find the best deal for your situation.

Bridging loan deposits and LTV requirements

Loan to value (LTV)

The deposit requirements for a bridging loan can vary depending on the lender, property and all factors above. If purchasing a property borrowers will need to provide a deposit that is a percentage of the value of that property. The “loan-to-value ratio” (LTV) and it’s used by lenders to determine the risk of the loan and is an expression of the amount of borrowing compared to the value of the property.

LTV Example

• Property value – £100,000
• Bridging loan – £70,000
• £70,000/ £100,000 = 0.7 = 70% LTV

A deposit is normally required on a purchase unless additional security is being offered. However the LTV is the critical calculation.

Deposits

The deposit is the difference between the loan amount and the value of the property. In the case of a purchase the deposit is often cash. When capital raising or remortgaging, deposits can often come from offering the lender a charge over additional security. In order to make the deal work for the lender, that cast deposit or extra security gives the lender comfort that they can recover their loan in a worst case scenario.

Maximum LTV’s

First charge loans are generally available up to 75% of the value on standard residential property. Second charges generally around 65% LTV. Occasional we can get higher than this when a property is being refurbished – up to 85% LTV

On commercial property the range is between 60% and 75%. The more unusual or difficult to the the property is, the lower the LTV.

Land with planning consent to build can potentially be up to 75% but 65% – 70% is more common.

Bare land with no building or planning consent tends to be nearer to 50% LTV

However, it’s important to note that some lenders may have different deposit requirements, depending on the specific loan and the borrower’s circumstances. For example, a lender may require a higher deposit if the borrower has a poor credit history or if the loan is for a higher risk property or renovation.

It’s also worth noting that some lenders may increase the amount they will lend with additional security. This could be a first or second charge on another property or even on land.

Regulated vs unregulated bridging loans

Bridging loans can be either regulated or unregulated. The main difference between the two is the level of protection that is provided to the borrower by the Financial Conduct Authority (FCA). However that protection is a double edged sword as it can prevent lenders giving you the terms you want. It also enforces additional checks and processes which can make the application more cumbersome and slow things down.

Regulated Bridging loans

A regulated bridging loan is one which is normally secured on property the applicants or their family lived in or intend to live in. It is subject to the rules and regulations of the FCA. This means that the lender must follow strict rules on how they conduct their business. The borrower is also protected by the FCA’s complaints and compensation scheme. Regulated loans also have certain consumer protection rights. These include the right to cancel the loan within 14 days. Also the right to receive a Key Facts Illustration (KFI) document outlining the key terms of the loan.

A big downside is the loan cannot be for longer than 12 months and lenders wont lend if that is likely. The FCA didn’t really think this through when they created the 12 month rule. It makes life difficult for people making significant changes to their property who need a guaranteed exit within 12 months.

Unregulated Bridging loans

An unregulated bridging loan is one which is secured on other property the applicant hasn’t or wont live in. It is not subject to the rules and regulations of the FCA. This means that the lender is not required to follow strict rules on how they conduct their business. Also the borrower is not protected by the FCA’s complaints and compensation scheme or certain consumer protection rights as above.

Unregulated loans can be less expensive, but they also come with a higher level of risk for the borrower, as they are not protected by the FCA’s rules and regulations.

TIP

Even if the loan is unregulated ask your broker to try to use a regulated lender if the terms are similar. This is because the lender is bound by the FCA principles to treat you fairly, even if the loan isn’t regulated.

Unregulated lenders are not and there are hundreds of them. Some have unscrupulous practices and terms which your broker can help you avoid.

How interest is charged for bridging loans

When it comes to paying interest on a bridging loan, there are three options: rolled-up, serviced and retained.

Rolled-up and retained bridging interest

With a rolled-up or retained interest, the interest on the loan is added to the loan balance and not paid off until the loan is fully repaid. This means that the borrower only pays off the interest and the principal at the end of the loan term. This option is typically slightly more expensive in the long run, as you are paying interest on the repayment. You are effectively borrowing the money to make the repayments. This forms part of the loan so it means you either have to borrow more or receive less in hand.

The difference between rolled up and retained is how the interest is charged and added to the loan. However, the difference is not significant.

Serviced bridging interest

With a serviced interest option, the borrower pays off a portion of the interest each month. Some loans are available on a part serviced / part retained basis to create a hybrid solution. This means that the interest charges do not accumulate, and the overall loan amount stays the same if fully serviced.

The benefit of this is it is slightly cheaper as you are not paying interest on interest. In addition the lender fee, which is a percentage of the loan, will be pro rata lower. The biggest benefit is where you are trying to raise the maximum amount. Because the interest doesn’t form part of the loan, or isn’t deducted from the loan, you get more in hand.

The downside is you need to evidence you have this cash flow available which can slow the process down. This will also affect your cash flow

How much can you borrow with bridging?

The amount that you can borrow on a bridging loan can vary depending on the lender and your specific circumstances, the property type etc as above.

some lenders have minimum loans and in the case of development finance this can be as high as £1 million.

However, for regular bridging there are lenders offering loans from £25,000 to £10 million

Bridging rates

The first thing to say is don’t get hung up on the rates. This is short term finance so you may not be paying it for long. Also you are only probably considering bridging because there is a project you need to make happen.

Therefore you need to look at what is the upside of using bridging to get that project or goal achieved. Then compare that to the overall costs which include rates, fees, valuations and legal costs. The term of the loan is important as the longer the term the more interest you will pay.

The rate you will pay will depend entirely on the circumstances and factors described in this page. Therefore speak to a broker as, depending on base rates, they can easily range from 0.45% to 1.5%.

Repaying a bridging loan early – the benefits

Remember, when taking out a bridging loan, you may select a term longer than you need. This gives you a safety buffer incase things take longer to happen. But in most cases, you can repay a bridging loan early without penalty. Some lenders charge a penalty if you repay within the first three months but this isn’t a common occurrence.

The most important benefit is where you have opted for retained or rolled up interest.
Let’s say you have a 12 months loan with rolled up interest over 12 months. Then you settle that loan just before 6 months. The lender has rolled up a further 6 months interest into the loan. This is in the expectation that it will be used to pay the interest on the following 6 months. As you are settling early you should get that amount back when you settle the loan. Therefore, 6 months interest should be knocked off the amount you pay back. Generally you only get a refund on each complete months interest but some lender calculate it weekly or daily.

Repaying a bridging loan late – the penalties

Going over your agreed term or not making agreed payments on a loan means you have broken the agreement. You will be considered in default and face possible additional charges. The penalties and how you will be treated with vary between lenders.

Remember, we mention above, regulated lenders are likely to treat you more fairly because they are a regulated lender. It should be in their DNA to treat you fairly. Non regulated lenders may have a less favourable approach. Beware. There will be some lenders out there which take this as an opportunity to make high / unreasonable charges.

The best lenders may simply extend the loan for a month or so so you just need to service the loan interest. Some, especially if you need a lot more time with charge a fee of 1% or 2% and give you a new loan at their prevailing rates.

However some charge high penalties and default interest rates, including a penalty rate on the preceding months. So going a couple of days over on the term or missing a payment could cost you £ thousands. Choose an FCA regulated bridging / mortgage broker every time as they also have to treat you fairly and make sure you understand the default clauses.

Bridging loan term lengths

The term length for a bridging loan can vary depending on the lender and your specific circumstances. However, typically, the term length for a bridging loan is between 6 months and 18 months. Some lenders may offer longer terms of up to 36 months, but these loans are typically more expensive and have stricter requirements. Remember, if the loan is regulated the maximum term is 12 months

For inspiration on building and renovating homes check out the National Self Build and Renovation Centre