What is a Bridging Loan?

For anyone who is unsure, a bridging loan effectively works to ‘bridge the gap’ in finances that you might have. For example, the interval between two transactions, typically the buying of one house and the selling of another.

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Author: Carl Shave - CEO and co-founder
Last updated: 30 May 2024

How do bridging loans work?

They work by providing upfront funding to complete a project or property purchase. It is given before any mainstream credit funding can be secured against the same property.

The term ‘bridging’ describes the process of bridging the time frame between two lines of credit effectively.

For instance, if you buy a property at an auction, you might need funding fast to finish the purchase. Mainstream traditional funding methods will nearly always take a lot longer to arrange.

In this situation you could get a bridging loan for the short term, to complete your purchase. Then at the same time arranging more traditional mainstream funding. Once you secure your mainstream funding, you can use it to repay the bridging loan.

You could also use a bridging loan to purchase a property that needs development or is dilapidated. Depending on the condition of the property, a mainstream lender may not be willing to lend against it.

When looking at the above situations, the ‘exit strategy’ to repay the bridging loan is securing alternative mainstream funding. A lender may not always require you to find additional funds to repay their loan. However, they will expect you to have a solid repayment plan. This could be the sale of the property you are purchasing or the sale of alternative assets.

Bridging loans are typically structured as ‘interest-only’ loans, allowing borrowers to make monthly repayments or defer them until the end of the loan term. You can then roll the interest up and repay it all at the same time as settling the loan.

An introduction to Bridging Loans

Useful Information

Best bridging loan lenders

Bridging loans are a specialist area of lending, therefore, lenders and products aren’t always visible to the public. While it is possible to arrange a bridging loan directly with a provider it is not advisable to do so. This is due to the complex nature and the need for careful consideration of an exit strategy. Especially if the strategy involves securing mainstream funding.

Lenders usually prefer to work with experienced brokers.

Our business partners have access to some of the most well-known lenders, as well as the smaller more specialist niche lenders. Offering various bridging loans for a property.

Bridging loan interest rates

Bridging loans are a niche type of lending. As such, rates are always higher than that of a high street bank or building society.

While lenders will publish bridging loan rates, this can change depending on the individual circumstances of a case.

While trying to obtain the best rate, it’s important to look at the overall package to assess the cost of the bridging loan. They will nearly always have fees attached. It’s important to take all this into account as well as the length of time you plan to keep the loan.

Contact us to see if our trusted business partners can help and ensure that you are getting the best rate.

Bridging loans & mortgages

Borrowers often opt for these loans to quickly purchase property before arranging a mortgage. Mainstream banks’ slow lending process prompts this choice. Bridging loans swiftly provide funds, bridging the gap until finalising a mortgage.

While many succeed in transitioning from bridging to a mortgage, there’s a risk. Relying on mortgage approval is precarious. If not approved, you’re left with a hefty short-term loan, potentially unaffordable. Only consider bridging finance if mortgage approval is certain to avoid financial pitfalls.

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Bridging loans with bad credit

Bad credit can pose a hurdle to securing bridging loans, similar to other finance options. Whilst this is true for many high street lenders, bad credit does not necessarily mean you have to shut the door on this option. There are specialist lenders available who will consider people with bad credit.

Whilst these options exist, we always advocate that people look to improve their credit rating. Some actions that people can take include:

  • Limit credit card use or use them wisely. Only when required. Do not use them as a cash-flow “solution”.
  • ALWAYS pay debts and bills on time.
  • Avoid payday loans or taking out other forms of credit.
  • Look for ways to repair your credit.

Bridging loan mortgage broker

Due to the sheer number of lenders out there, it is advisable to contact a Financial Conduct Authority (FCA) regulated broker. Our trusted business partners know which lenders to approach to find the most competitive deals.

If you would like to discuss your options, get in touch with us today.

Benefits & risks of bridging loans

Bridging loans are very useful for non-residential buyers. As a way to source auction finance for those who make their living through property. They present a speedy way to pounce on promising properties when the time is ripe. Bridging loans can also aid short-term business needs during transitions between premises.

There are a few risks to be aware of when choosing. Like most short-term finance options, interest rates are often relatively high. It’s important that anyone using a bridging loan is aware of all the charges and the level of interest incurred.

It’s also important to know exactly how you will repay your bridging loan. Missed payments on short-term financial products can quickly spiral into penalty fees. Having a concrete idea of precisely how you will be able to repay, will protect you from the potential risk of growing debt.

What's the difference between open and closed bridging loans?

Borrowers typically use them when facing short-term financial needs. “Tiding them over” until a better source of long-term finance becomes available. Typically, this source will stem from the sale of an old property or the completion of a mortgage agreement on a new property.

For some borrowers, it is possible to know precisely when these funds will become available. Some people will have a completion date set in stone on an old property, others will know exactly when their mortgage will be agreed.

In these cases, it’s possible to set a fixed date for the repayment of the loan.

The loan becomes closed, when a specific repayment date is decided and agreed upon.

Lenders are more likely to approve these loans due to their lower interest rates. That’s because closed loans give lenders a greater degree of certainty and confidence in the repayment.

Borrowers use these when uncertain about the availability of their expected future finance.

In such cases, borrowers can use an open bridging loan, which doesn’t have a set repayment date. This allows borrowers more flexibility and ensures they avoid substantial penalties.

While open bridging loans are more flexible, they are also more expensive. Because of the additional uncertainty regarding repayment, lenders usually apply higher rates of interest to cover the potential risk.

They are also rarer. Lenders are typically less willing to provide open bridging loans as they carry more risk.

When are bridging loans best?

Selling a house is rarely straightforward, with many legal hoops to jump through. This can seriously put the brakes on purchasing a new home.

Fast bridging loans offer a partial solution to this problem. Lending borrowers the money they need to secure their next dream property before it’s snapped up by another buyer.

Following the credit crunch, rules and regulations have repeatedly changed. This means that securing a mortgage can sometimes take longer than anticipated.

While it is not advised that you take on quick bridging loans without mortgage approval. It can ensure you have the funds to purchase your new property while you wait for your mortgage to be completed. In a housing market access to quick bridging loans can be the difference between losing out on your ideal property.

Buying property at auction requires you to think and act fast. That’s what makes fast bridging loans a good option for those in this scenario.
Successful bidders are often required to pay 10% of the property price upfront as a deposit. Then pay the remainder outright within 28 days. Property auction buyers must have the finance they need close at hand. If they fail to pay, the financial penalties can be severe.

While there are many scenarios in which short-term bridging loans are appropriate, there are others in which they may be risky. You may want to avoid bridging loans when:

  • You do not know exactly when or how you will be able to make repayments
  • Your mortgage has not been approved, and you are not confident it will be
  • You have not fully understood the interest rates and fees applied to the loan

Do you think a quick bridging loan could be the right solution for your situation? Discuss your circumstances in confidence and with no obligation with our trusted business partners.

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Bridging loan FAQs

You must repay the lender the original funds along with any rolled-up interest.

Before the lender agreement, they would have required you to have a strong exit strategy. This is to ensure the monies would be available to settle the bridging loan when required. This could have been agreed as selling the property or re-financing the same asset to release equity.

Once you can exercise your exit strategy, you will be expected to use the funds to settle the loan. The term of your bridging loan is usually limited to a short period of time. Therefore, any exit strategy would need to come to occur within the timeframe for you to fulfil your agreement.

Bridging to the value of 100% of the property or asset is available. But this is not as straightforward as it sounds.

While lenders will be happy to lend 100%, they require you to use additional assets as security. This will naturally bring additional risk to you, the borrower, as if you are unable to settle the loan.

Most lenders will require you to have a deposit of 25%–30% of the value of the property you want to secure the loan on. This categorises as the Gross Loan Amount, encompassing rolled-up interest.

If you do not have deposit amount, then lenders usually take security over other property or asset.

A lot will also depend on your exit strategy. A strongly viable option can secure a product with a smaller deposit requirement.

They are predominantly used by landlords and property developers. Particularly those buying a commercial or residential property at auction.
However, they are also used by ordinary people. For example, a family who want to buy a new property before the sale of their current home goes through.

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