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Bridging loans

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What is a bridging loan?

Bridging loans are short-term, high-rate interest loans that help people complete the purchase of a property before selling their existing home

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How does a bridging loan work?

Bridging loans bridge the gap between the sale and completion dates in a chain and can help someone planning on selling quickly.

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What can you use bridging loan for?

Most commonly used by landlords, homeowners, and property developers to:

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Buy a property

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Initiate property development

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Invest for buy-to-let purposes

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Pay tax bills

Types of bridging loans

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    A closed bridging loan

    Requires you to know exactly how you’ll be paying off the loan.  This means you’ll be able to tell the lender what funds you’ll be using to pay off the loan from the outset - this is often called an ‘exit plan’. Closed loans are usually settled within a few months.

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    An open bridge loan

    Usually doesn’t require an exit plan and is often used as a means to get funds for an urgent transaction. As you won’t have to provide a detailed plan of how you’ll be settling the debt, open bridge loans can be a time-effective solution. You usually have up to a year to repay your debt.

To make sure you’re choosing the right kind of bridging loan, here’s what you should consider:

Is this a first charge loan or second charge loan?

A second charge loan applies if you already have a loan secured against a property that already has an outstanding mortgage. So for improvements such as extensions, you’d need to take out a second charge bridging loan. The distinction lets the lender know who has priority in the repayment if you can’t pay off the loan by the end of the term. If however you’re taking out a new loan secured against the property, you’d qualify for the first charge loan.

Are you paying fixed or variable rates?

You can choose a fixed or a variable rate on a bridging loan. A fixed rate gives you the security of knowing exactly how much interest you will pay on the loan, but fixed rates tend to be slightly higher than the variable rates on offer. With a variable interest rate the rate can change from month to month.

There are a number of advantages when opting for a bridging loan for high-cost transactions:

  • You’ll receive your money quickly
  • You can borrow a large amount of money
  • Flexible borrowing might apply 

The drawbacks to bridging loans include:

  • The loan is secured against your property, so you risk losing ownership if you can’t repay
  • The high interest rates that come with the loan – this is because you pay for the flexibility and swift payment
  • You’ll be charged a number of fees so it’s a costly option

A development loans is also a short-term loan for property developments including refurbishment and construction and is based on the gross development value which you’ll pay back in stages.

Remortgaging works very similarly to a bridging loan with the key difference being that this is a long-term loan, usually between 25 to 35 years and requires a lengthy application process.

A personal loan is always an option if you can borrow sufficient funds for your transaction but you’re likely to pay higher interest rates than you would with a mortgage.

There are a number of considerations loan providers make when considering eligibility for a bridging loan:

  • Loan providers may only offer bridging loans to customers who also get their new mortgage from them as well – but this isn’t always the case
  • Loan providers usually require property as security, and depending on the loan and provider you may need to own more than one property to qualify
  • You may have to show proof of income. In some cases even though interest is applied and added to your bridging loan monthly you don’t pay back the interest until the end of the loan term when you repay the debt in full. But with other types of bridging loan you may need to pay interest monthly. For this reason lenders will want to check you can afford the repayments.
  • You may need a business plan if there’s a commercial aspect to your plans
  • If you’re planning to develop property, you may need to provide your track record in property

As the loan period of bridging loans tend to last a few months, you can pay your interest in several ways:

  • On a monthly basis: You pay the interest separately and the sum isn’t added to the loan balance
  • In a rolled-up deal: Where you’ll pay the compound interest in full along with the loan when repayment is due
  • Retained interest: Where your monthly interest payments are covered until an agreed upon date so you can then pay back the full sum when the money is due

You’ll usually receive a decision within 24 hours of submitting your application. After which you’ll have to wait roughly 2 weeks for the necessary checks and balances to be processed including property valuations and the money transfer itself.

Major banks, mortgage brokers and specialist lenders provide bridging loans. These loans are not always easy to get and you’ll usually need to discuss your situation directly with the bank to know exactly what’s being offered in a deal.

Bridging loans are known to charge a large number of fees in addition to the interest you’ll have to pay, including:

  • An arrangement fee for the loan set-up. This is often 1-2% of the sum of the loan you borrow
  • Some providers allow you to pay back your dues early which will then be charged as an exit fee of around 1% of your loan
  • You’ll have to pay a repayment fee for the cost of the administration including the paperwork
  • Valuation fees cover the surveyor costs 

You can borrow between £5,000 and £250 million, depending on the value of the property you are securing the loan against. If you put a number of properties forward, you’ll be able to borrow more. Lenders will provide you with a quote based on the loan to value (LTV) which can range from 65% to 80%.

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