An Easy Guide to Bridging Loans for UK Properties

Important to know

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Once considered a niche product, bridging loans have become popular in the UK. Borrowers increasingly recognise the benefits of this short-term loan option, which helps them stay ahead in the ever-changing financial landscape. 

Bridging loans offer a versatile solution, empowering borrowers to meet various needs such as supporting development and renovation projects, facilitating residential and commercial property transactions, and enabling auction purchases. 

This guide provides in-depth details of all you need to know about bridging loans. Read on. 

What is a Bridging Loan?

A bridging loan, also known as bridging finance, is a flexible short-term loan secured on a property. It serves as a financial bridge between the time of a property’s purchase and the approval of a long-term loan. 

This loan option empowers investors to release capital from their property or sell off a new one, giving them control over their financial decisions. 

A Review of the Market

The bridging loans market in the UK has witnessed a remarkable surge in recent times, indicating a significant rise in investor interest in this property financing option. 

As of 2019, bridging loan completions stood at £4 billion. This represented a 352% growth compared with the 2012 figure of £885 million.

Securing the best possible deal in the market is still challenging because of the market’s fragmented nature. However, borrowers enjoy the added benefit of having more property financing options. 

Unknown to many individuals, some lenders get their funding from mainstream banks. Many small boutique lenders get their funding from bigger lenders. This means the mainstream lenders underwrite the loan after the bridging lenders are through with the initial underwriting. 

Borrowers must conduct due diligence to understand how a bridging loan lender is funded. This is because any reversals or delays in loan approvals will have a huge cost.

What Can Bridging Loans Be Used For?

Various situations can necessitate a person taking out a bridging loan. These loans are used as a “bridge” pending when the borrower can get approval for a traditional mortgage. 

The following are common situations that will warrant the application for a bridging loan:

#1. Property Renovations

If you want to renovate your property, you can access the funds needed to complete the project by applying for a bridging loan. Lenders can approve loans ranging from small loans for minor renovations to bigger loans for major structural renovations. 

If you are buying an unmortgageable property, you can get the funds you need with bridging loans.

#2. Land Purchase

You may be looking for funds to help finance your purchase of land to build on, either for residential or commercial purposes. Applying for a bridging loan can help you start the project while waiting to secure a mortgage. 

#3. Property Purchase at Auction

If you need money urgently to purchase a property at an auction, a bridging loan can help. Getting a traditional mortgage may take longer to process for such urgent buys. 

A bridging loan, on the other hand, has a shorter processing time once an offer has been accepted for the purchase of the property at auction. It is also possible to start with the application process while still looking for a property to buy, making it possible to receive the funds once an offer is accepted. 

#4. Fixing a Broken Property Chain Sequence

A bridging loan can provide an alternative funding source when you experience a break in a property chain sequence. This will help ensure you don’t lose the new home due to lack of funds. Once you have gotten the bridging loan, you will have 12 or 24 months within which you are required to sell the old property and pay off the loan in full. 

Types of Bridging Loans

For those considering bridging loans, a wide array of options is available. Understanding the intricacies of each type can help you make a well-informed decision. 

Rest assured, there is always a suitable option for every unique financial need. Seeking advice from an experienced specialist broker can further enhance your confidence in finding the right loan. 

Here are the common types of bridging loans:

#1. Fixed and Variable Interest Loans

As with other traditional mortgages, the interest rate on bridging loans can be fixed or variable. However, getting a loan with a fixed interest rate is more common. 

A fixed interest rate means your monthly interest remains constant throughout the loan’s lifespan. On the other hand, you will need to pay varying rates for bridging loans with variable interest. In this case, a benchmark such as the London Inter-bank Offered Rates (LIBOR) determines the rate the borrower will pay.

#2. Open Bridge Loan

Open bridge loans are ideal for individuals who have yet to sell their old homes or work out a solid repayment strategy. The repayment time frame is usually within 12-24 months, although there isn’t a fixed date. 

Open bridge loans carry more risk, so fewer lenders offer them than closed ones. The interest rates are usually higher because of the risk associated with open bridge loans. 

#3. Closed Bridge Loans

Closed bridge loans offer less flexibility than open bridge loans. The repayment date is usually fixed, resulting in a lower interest rate. This type of bridge loan is more common and ideal if your repayment strategy is well-defined or you are sure of funds to repay the loan.

#4. First and Second Charge

In bridging loans, a ‘charge’ refers to the order of debt repayment in case of default. If the borrower falls behind in repaying the loan, the lender can repossess and sell any property or asset secured against the loan. The proceeds from the sale will then be used to settle the debt.

When you apply for a bridging loan, a “charge” is put on the property. If you already have an active mortgage, it will be the first charge you will be required to pay off, making the bridging loan the second “charge.” You should note that your current mortgage lender will have to approve before you can take out a bridge loan. 

Who Should Apply for a Bridge Loan?

The following individuals can apply for a bridge loan:

  • If you want to develop or renovate a property
  • Individuals who want to buy land to build on
  • If you want to buy a property at auction
  • People who are seeking to avoid their property purchase falling through because a buyer pulled out last minute
  • People who want to buy a new home quickly but are finding it difficult to sell off the old property
  • People who want to purchase an unmortgageable property and need funds
  • Individuals looking for short-term funding options that won’t require you to make monthly interest payments. 

How a Bridge Loan Works

Bridge loans are an ideal funding source for covering the gap between when an investor purchases a property and when they can secure other funds. Getting a bridge loan is quick, offers greater flexibility, and is available on many properties. 

People who cannot secure property financing within a specified timeframe find this funding option ideal. Before applying for a bridge loan, here are things you should keep in mind:

  • You will need a deposit: Lenders require you to deposit about 25%—40% of the property’s value. Several factors will determine the deposit amount, including the extent of refurbishment needed, the current state of the property, and the type of security. 
  • They are short-term: you will have 12 months to repay a regulated bridging loan. This type of loan is for the purchase of residential properties. The lifespan of a non-regulated bridge loan can stretch to 24 months. An unregulated bridge loan is suitable for commercial and buy-to-let properties. 
  • High-interest rate: Lenders charge a steeper interest rate than traditional mortgages. This is because the loan term is short and mostly secured on high-risk or unmortgageable properties. 
  • Evidence of a repayment strategy: most lenders will need you to show that you can repay the loan at the end of its term. For a borrower whose exit strategy is selling a property, the lender must ensure that the sale prices align with the market.
  • No monthly payment required: unlike a traditional mortgage, where you are required to make monthly interest payments, a bridge loan makes provision for all payments (loan + interest) to be made at the term expiration. However, the rolled-up interest rate will also attract additional interest on them. To avoid the balance increasing, you can opt for monthly interest payments. This is known as as loan servicing. 
  • Attracts extra cost: As with traditional mortgages, bridge loans attract additional costs, including product fees, valuation fees, and even solicitor’s fees. 

Different Types of Lenders for a Bridging Loan

There are different types of lenders for bridging loans. They include 

#1. Special Lenders

These lenders are best if you are looking for a quick, flexible transaction process. This is especially true if they are self-financed. Specialist lenders also work with lawyers who specialise in bridging finance. However, some specialist lenders get their funding from bigger names, which can slow down the entire process. 

#2. Individual Offices 

These lenders provide quick funds to borrowers and rarely revise funding decisions. Borrowers will also enjoy a high degree of flexibility. However, their loans are likely to come with a higher interest rate.

#3. Private Banks and Mainstream Lenders

Mainstream lenders and private banks offer relatively cheap rates. However, the process is slow, and most private banks are averse to risk. Additionally, their lawyers mostly do not specialise in bridge financing. 

#4. Challenger Banks

Challenger banks offer cheap interest rates and better leverage than mainstream banks. Conversely, the approval process is slow, and their lawyers often do not work with bridging loans, resulting in delays. 

Pros of Bridging Loans

Before you apply for a bridging loan, it is important to weigh the benefits against the downsides. The following are the benefits of a bridging loan.

  • It gives you quick access to funds to finance your property renovations pending when you can get approval for a long-term mortgage.
  • With a bridge loan, you can continue with your land and property investments, which could have stopped due to a lack of funds.
  • You can get approval for large sums with bridging finance. However, the loan-to-value (LTV) ratio is 75%.
  • Bridge loans do not have a specific repayment date. The flexibility in loan terms helps minimise the pressure resulting from having a specific repayment date.
  • If you decide to repay the loan early, you will not pay any extra charge for early repayment.
  • If your property chain breaks, a bridge loan can help you purchase your new property while still waiting to sell the old one.

Cons of Bridging Loans

Bridging loans are not without downsides, and they include:

  • Losing the property if you fail to pay the loan.
  • Compared to traditional mortgages, bridge loans come with higher interest rates. Depending on the financing agreement, you can pay as high as 18%.
  • With a bridging loan, you have personal liability. This means if you are unable to offset the loan with the proceeds from the property sale, you will have to pay out-of-pocket.
  • Bridge financing attracts other fees that can add up and make you pay more.
  • Some bridging loans are unregulated. With this type of bridge finance, you can access funds quickly and without delays. However, you will enjoy less protection as a borrower.

What Is the Cost of Bridge Loans?

Various factors work together to affect the cost of a bridge loan. Here are the things that add up to determine the total amount you pay:

  • Deposit amount: you will be required to deposit up to 25% of the property value. The larger the initial deposit you make, the lower the interest rate on the loan
  • Interest rate: you will charged a monthly interest rate within the range of 0.5% and 1.5%
  • Arrangement fee: Lenders usually charge an arrangement fee. The amount borrowers are to pay varies with the lender but is typically between 1.5% and 3% of the loan amount.
  • Term length: the standard length for a bridging loan is 12 – 24 months. The longer the term, the more costly it will be. Longer loan terms are usually common with unregulated loans, which entails lesser protection for the borrower.
  • Administrative fees: most lenders charge an administrative fee of around £500. This adds up to the total cost
  • Valuation fee: before a lender approves the loan, they will value the property and any other asset secured on the loan. The borrower will, therefore, need to pay a valuation fee that may be up to £500

It is best to consult an expert to compare several lenders and products before deciding. Our experienced specialist brokers will help you access the best products that suit your unique circumstances while saving you money and time. 

Are bridging loans expensive?

While a bridge loan may be more expensive than a traditional mortgage, there has been an increase in its popularity. More lenders now offer bridge loans, which means better can get better offers. Securing a bridge loan will help an investor purchase ideal property for their portfolio, proving good value in the long run. 

What should I consider before taking out a bridge loan?

Pricing and leverage are the key factors to consider before accepting a loan offer. However, if you are applying for larger loans, you should look into the loan covenants as well as the contractual terms and conditions. 

How long does it take to get a bridging loan?

You can get your bridging loan approval within 48 hours. Financing your property through this funding source is quick, which is why it has become popular.

Am I eligible for a bridging loan

Compared with traditional mortgages, the lending criteria for a bridging loan is very flexible. The method of assessing income and affordability differs because borrowers are not required to make monthly payments. Your eligibility will be determined by the loan-to-value ratio, the type of property you are using to secure the loan, and your exit strategy. 

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Luca Bertolino

Mortgage Expert

Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.

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