Bridging loans

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

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

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.

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