Top 5 FAQs about Bridging Loans
Many people don’t know anything about bridging finance until it’s suggested to them as a solution for the property finance situation they’re in.
It’s a “bespoke” form of lending, often provided by specialist lenders that won’t be as familiar to you as high-street banks. Even though bridge finance is used for buying property, because it’s for short-term borrowing rather than a loan repaid over 25 or 30 years, it’s structured very differently to a mortgage.
The terms of the loan are tailored to your particular circumstances, so this kind of borrowing can be more flexible than a mortgage.
Here are the top five questions people ask us:
1 What is a bridging loan?
It’s a type of short-term property lending which is a “bridge” before you can set up longer-term finance, like a mortgage.
Lenders are focused on the value of a property you can offer as security, rather than your earnings.
They take a “charge” against the property, which is formally registered against the title documents at HM Land Registry. (This is why there are legal fees associated with taking out a bridging loan.)
- The property can be a house you’re currently living in
- Or an investment property you own
If the property doesn’t already have a mortgage on it, this bridging loan will be the “first charge.”
If the property is already mortgaged, a bridging loan will be the “second charge” loan. (Interest rates on second charges are higher because they’re second in the queue to be repaid.)
How do I repay it?
Before the loan is approved you agree on your “exit strategy” with the lender. You might plan to:
- Sell the property after renovations are complete
- Sell the home you’re moving out of to pay for this new home
- Arrange a long-term mortgage on the new property (either a residential mortgage, or a buy-to-let mortgage)
- Sell another property to pay off the loan
The charge against your property means that ultimately the lender can repossess it if you’re not managing to repay the loan. But that’s not good business for them, so before the term of the loan is up they’ll be in touch to check you’re on track for repayment, and possibly offer advice say, on marketing a property that’s for sale.
2 How much can I borrow on a bridging loan?
- From £25,000 up to £50M.
- The amount you can borrow is determined by the value of the property the loan is secured against.
- If the loan is secured against a family home (a property that you or a member of you family live in, or have lived in) this is a regulated loan and the maximum you can borrow is 75% of the loan-to-value ratio (LTV) of the property. On a property valued at £100,000 you could borrow £75,000.
- For a bridge loan secured against a property that’s not a family home (for example, a rental or commercial property) you can borrow up to 80% LTV.
3 How quickly can I get a bridging loan?
We can get you a Decision in Principle from a lender within a few hours of you contacting us.
You will usually get a Formal Offer from the lender within 5-10 working days of contacting us.
You will typically get Completion (money in your account) within 15-20 working days.
4 Can I get a bridging loan if I haven’t got a good credit record?
Bridge finance is usually determined by:
- the value of the property being offered as security (and how much equity you have in it)
- a realistic and achievable exit route agreed with the lender
Providing the chosen lender is happy on these two points, credit issues shouldn’t be a problem.
It’s very unlikely that any kind of refinancing would be agreed as an exit route for a client with credit issues, so the only option for you for paying off the loan will be the sale of a property.
5 How much does a bridging loan cost?
The total cost of a bridging loan is made up of the interest you need to pay and some other costs and charges.
- Interest rates are quoted per month, rather than annually, because you can repay in a matter of months.
- After the first month minimum loan term, interest is calculated daily (so if you repay the loan halfway through a month, you only pay for the number of days you’ve had
You can opt to repay interest in a couple of ways on a loan for an investment property (any property that isn’t your home). For a residential property loan, which is regulated by the Financial Conduct Authority (FCA), you can only “roll up” the interest.
1 “Servicing” the interest
You arrange to pay the set-up fees upfront and make an interest payment monthly – just as with a mortgage.
- Cost-effective if you’ve got the cash flow to cover the monthly payments because it means you’re not paying compound interest
- Allows you to borrow up to the maximum of your LTV
2 Arranging for the interest (and most of the fees) to be “rolled up”
This means they’re added on to the total loan, and repaid at the end (apart from legal fees and the cost of valuation, which need to be paid upfront).
- You don’t have to worry about servicing the loan along the way – your exit plan pays the interest as well as the original loan amount
- You can use all your available monthly cash on the project
- You do end up paying compound interest
- And the maximum of your loan PLUS the interest costs needs to fall within your allowed LTV
If this is a regulated loan – secured against a family home, and regulated by the Financial Conduct Authority (FCA) – the interest must be rolled-up (because it’s assumed you will already have monthly mortgage obligations, and they don’t want your home to be at risk).
If you’re borrowing against a property valued at £100K at 75% LTV (the maximum available for regulated loans)…
The £75K that will land in your bank account has to cover the money you need for your project and also the interest and fees.
In addition to the interest rates on a bridging loan there are a range of set-up costs that need to be paid. They’re similar to the fees for longer-term mortgages, but they can seem more of a burden on a loan you only intend to have for months rather than years.
These fees include:
- The usual search fees and land registration fees
- The lender’s valuation fee (which you will be required to pay)
- Both your legal fees and the lender’s legal fees (which you may be able to minimise by using the lender’s solicitor to do your own legal work as well)
- The lender’s Arrangement or Facility Fee – around 2%
- Your broker’s fee (which will usually be least of all the professional fees)
Use our calculator see how much you can borrow and the costs involved: