Bridging loans are often used by landlords and property developers to fund projects. As they can be used for the initial purchase of a property prior to refurbishment, either as the property in its current state is un-mortgageable or to be able to refinance earlier than six months after purchase if the refurbishment is only going to take a couple of months.
All personal bridging loans are regulated by the Financial Conduct Authority (FCA). They usually fall under mortgage or loans and consumer credit rules. Some business bridging loans are exempt from regulation.
The pros and cons of bridging loans
Pros
Fast application process
Can borrow large amounts
Flexible borrowing
Cons
High interest rates
High fees
Secured against your property
What can you use a bridging loan for?
You can use a bridging loan for the following reasons:
Buying a property before the sale of yours goes through
Property development
Buy to let investment, often at auctions where you need a high deposit to secure a property at short notice
Business ventures
Paying a tax bill
Divorce settlement
How do bridging loans work?
There are two types of bridging loan:
Open bridging loans
Closed bridging loans
An open bridge loan has no set end date. You can repay it as soon as your funds become available. They tend to last for up to 1 year, though they can be longer. A closed bridging loan has a fixed end date. The end date is when you know you'll have the funds available to pay off what you owe. They tend to last just a few weeks or months.
Open bridging loans are usually more expensive than closed bridging loans because they offer more flexibility.You must have a way to repay the bridging loan no matter which type you choose. This is called an exit route.
What are the charges for bridging loans?
When you apply for a bridging loan, the lender adds a 'charge' to the property you're using as security.
Charges determine the priority of debts if you're unable to repay your loan:
First charge loans are where the loan is the first or only borrowing secured against your property. Mortgages are normally first charge loans
Second charge loans are where you take out a loan on an asset on which you already have a loan or mortgage
If a property was seized and sold to pay off outstanding loans, a first charge loan would have to be paid before a second charge loan could be paid back.
Second charge lenders usually need the permission of the first charge lender before they add another loan to the same asset. There is no limit to the number of charges that can be listed on a property.
How much can you borrow with a bridging loan?
The amount you can borrow depends on the value of the property or land you are using for security. Lenders can offer loans from just £5,000 up to over £250 million.
Bridging lenders will quote a maximum loan to value (LTV), usually between 65-80%.
The LTV on first charge loans are generally higher than second charge loans because there's no other claim on your property.
Second charge loans base their LTV on the amount of equity you have after other loans and mortgages are deducted.
What does loan to value (LTV) mean?
Loan to value is the ratio lenders use that shows how much you may be able to borrow versus the value of the asset you want to borrow against.
For example, if you owned a property worth £100,000 and wanted to borrow £75,000, the LTV of the loan would be 75%.
How much do bridging loans cost?
Bridging loans can be very expensive because they charge interest and a range of fees.
Interest rates on bridging loans
Bridging lenders charge monthly interest on your loan. They will not quote the annual percentage rate (APR) because the loans may not even last a whole year. They may only last a few weeks or months.
Interest on a bridging loan is normally charged in 1 of 3 ways:
Monthly interest. You pay the interest each month. It's not added to the balance of your loan. You pay off the loan balance at the end of the term
Rolled up, or deferred interest. You pay all the interest at the end of the term, at the same time you repay the original loan. You do not make any monthly payments, but the interest is added to the loan each month
Retained interest. You borrow the interest from the bridging lender when you apply for the loan. This covers the monthly interest payments, usually for a set period. You then pay everything back at the end of your term
Some lenders let you combine these options. For example, they may retain the interest for the first 6 months after which you pay the interest monthly.
Fees on bridging loans
You'll have to pay fees on top of the interest when you take out a bridging loan. These fees include:
Arrangement or facility fees cover the cost of setting up the loan, around 1-2% of the balance
Exit fees are around 1% of the loan if you pay it back early. Not all lenders charge this
Administration or repayment fees for the paperwork at the end of your loan
Legal fees pay the lender's legal and solicitor fees. These are usually charged at a set rate
Valuation fees cover the surveyor's costs for carrying out a property valuation
Introducer or broker fees are only for when you use a broker. They pay for the broker's service of finding you a loan
This is not an exhaustive list of the fees you may have to pay when taking out a bridging loan. Check with the lender first and make sure you can afford to repay everything, including the fees.
An example of a £100,000 bridging loan
This is how much it could cost you to borrow £100,000 over 1 month, 6 months and 12 months, with a monthly interest rate of 0.65%:
Loan term 1 month 6 months 12 months
Interest £657 £3,942 £7,884
Fees* £2,030 £2,030 £2,030
Total to repay £102,687 £105,972 £109,914
* Fees are based on: 1% facility fee, £250 valuation fee, £35 bank transfer fee, £295 Admin fee and £450 legal fee.
So, the longer it takes you to repay the loan, the more it will cost you. The same is true for if the interest rate is higher.
Where can you get a bridging loan?
International banks and smaller lender offer bridging loans. You can compare bridging loans online. Or, use a broker to help you find one, though they may charge you a fee.
How long does it take to get a bridging loan?
The lender may approve your loan is as little as 24 hours.
Once approved, you could have to wait 2 weeks for:
Your property to be valued
Your lender to complete their checks
The money to be transferred
How to pay back your bridging loan
You have to pay back the full bridging loan amount at the end of the agreed term.
When you pay back the interest depends on if you got a monthly, deferred or retained interest loan.
Closed bridging loans have a set repayment date when you apply.
For open bridging loans, you'll need to arrange the repayment when your funds are ready.
Can you pay back the loan early?
You can repay a bridging loan early. But you may have to pay an early repayment charge. Check with your lender before you decide.
What if you cannot repay the loan?
If you cannot repay your loan, speak to your lender straight away. Some may let you extend your term or convert your bridging loan into a second charge mortgage.
But you may still be charged an arrears fee and more interest if you are late paying back your loan.
What are the alternatives to bridging loans?
Possible alternatives to bridging loans include:
A homeowner loan is a type of secured loan. You'd need to show that you could afford to repay both your mortgage and the loan. You'd also need enough equity in your property to borrow more. You can compare homeowner loans online
A let to buy mortgage combines getting a mortgage on a new property you want to buy and a buy to let mortgage on your existing property. They are used when the sale on your current house falls through, meaning you cannot afford the mortgage on your new house
FINAL THOUGHT - Bridging Loans can make a lot of sense for certain property purchases, but not for all. They can prove very expensive if things go change, for example if your refurbishment takes longer than expected, you will be paying high interest during that period and of course it means you can not earn rent through the same period so it is a 'double whammy'.
On the flip side to this, Bridging Loans can make a property purchase 'happen' as there is potentially no other way. What are your experiences with Bridging Loans?