What is a Bridging Loan and How Does it Work?

Bridging loans are short-term financial solutions tailored to help individuals and businesses bridge a temporary financial gap. They’re commonly used when one needs quick access to funds while waiting for more permanent financing or the sale of an asset.

Common Uses

Whether it’s navigating the property market, addressing immediate business needs, or embarking on property enhancements, these loans offer a temporary respite. Some of the most prevalent applications include:

• Buying a new property before selling the old one.
• Funding urgent business expenses.
• Property development and refurbishment.

Types of Bridging Loans

Here are the different types of bridging loans to choose from:

Open Bridging Loans

 Tailored for those who need financial flexibility, open bridging loans don’t come with a pre-determined repayment date. Instead, they generally operate within a time frame, often up to a year. The advantage is the inherent flexibility, but this comes at a cost: lenders, recognising the uncertainty, might levy higher interest rates.

Closed Bridging Loans

These are for borrowers with a clear exit strategy. With a fixed repayment date, they are ideal when there’s certainty about incoming funds, such as from a confirmed property sale. Their structured nature might fetch slightly better interest rates compared to open bridging loans, given the reduced risk for lenders.

First and second charge loans

First Charge Loans

 As the primary loan is secured against a property, a first charge loan takes precedence over any subsequent financial claims on the asset. For borrowers, this might mean better interest rates, but it’s crucial to ensure repayment capabilities, as defaulting could risk the property.

Second Charge Loans

 When a property already serves as collateral for a loan or mortgage, any additional bridging loan would be a second charge loan. Since they sit behind primary loans in terms of repayment priority, they inherently carry more risk for lenders. This increased risk is often reflected in higher interest rates and stricter lending criteria.

It’s imperative to remember that irrespective of the loan type, lenders will invariably seek evidence of a robust repayment strategy. This assurance is foundational for the release of funds, ensuring the loan aligns with both the borrower’s needs and the lender’s risk parameters.

Key Features of Bridging Loans

• Duration and Amount: Bridging loans are typically short-term, ranging from a few weeks to 18 months. Depending on the lender and your financial situation, you can borrow anywhere from £10,000 to £30+ million from the panel of lenders available through our broker.
• Interest Rates: Due to their short-term nature, bridging loans might come with a higher interest rate than traditional loans. Rates can range from 0.4% to 2% monthly.
• Differences from Other Loans: Unlike personal loans or mortgages, bridging loans offer quicker approvals, are secured against assets (usually property), and might have various repayment structures.

Pros and Cons of Bridging Loans

Pros:

• Speed: Bridging loans can be approved and disbursed faster than traditional loans.
• Flexibility: They offer varied repayment options, including rolled-up interest.
• Short-term Solution: Ideal for temporary financial gaps, like buying a property before selling the old one.

Cons:

• Higher Interest Rates: Compared to traditional loans, bridging loans typically have higher rates.
• Secured Against Assets: There’s a risk of losing the asset (usually property) if you can’t repay it.
• Costs and Fees: Additional fees, such as setup and exit fees, can add to the overall cost.

How much does a bridging loan cost?

Bridging loans, while offering flexibility, come with a variety of costs. Here’s a breakdown of the potential components:

Interest Rates:

• Monthly Rates: Bridging loans often have monthly interest rates. The compounding nature of these rates can result in a significant yearly cost.
• Annual Rates (APR): The APR factors in both interest and associated fees and is used to represent the yearly cost of a loan.

Upfront Fees:

• Arrangement Fees: These fees are charged by some lenders for setting up the loan.
• Broker Fees: Brokers who assist borrowers in securing loans, might charge a fee for their services.

Additional Charges:

• Exit Fees: Some lenders have fees for repaying the loan.
• Valuation Fees: Lenders typically require a valuation of the property being used as security, which has an associated cost.
• Legal Fees: Engaging a solicitor in the loan process involves legal fees.

Penalties:

• Early Repayment Charges: Some loans have charges for repaying the loan before the agreed term.
• Late Payment Fees: Missed payments might result in fees and could affect the interest rate.

Compound Interest:

• Some bridging loans offer “rolled-up” interest, where interest is added to the principal and the total is compounded over the loan’s term.

Takeaway 

Obtaining multiple quotes can provide a broader perspective. Additionally, asking for a comprehensive breakdown of costs can offer clarity and transparency regarding the financial commitment involved.

Bridging loan lending criteria

Below, is the lending criteria to factor-in when considering a bridging loan.

Criteria	Description
Age	Borrowers must be at least 18 years old.
Bridging Loan Security	Lenders may accept various assets, including property, land, and other assets like vehicles, trade assets, and jewellery.
Exit Strategy	The borrower must have a plan to pay off the loan, which may include selling an existing property, a business merger, selling a business or shares, cashing in investments, or proceeds of debt repayment.
Loan Size	Bridging loans through our broker start at £20,000 and can be as much as £30mil and above.
Loan Term	Typically 1-18 months, though in some circumstances, it can be extended to 36 months or more. The regulated non-commercial sector has a mandatory 12-month limit.
Deposit Size	The higher the deposit size, the lower the loan-to-value (LTV) ratio and the less risky the loan is for the lender.
‘Acceptable Borrowers’	Private individuals, limited companies, partnerships, pension funds, and offshore companies may apply.
Credit History	Credit history is less important than the security of the loan, but lenders may still consider the borrower’s credit history.
Proof of Income	Proof of income is standard practice for commercial loans and may come from tax returns, audited accounts, or bank statements.
Property Type & Condition	Lenders consider specific property types and assess the property’s condition, planned use, and location.
Location	The location of the property affects its value and the level of risk for the lender. Factors like accessibility, local property market, flood risk, and planning restrictions may impact eligibility.

Can I get a bridging loan with adverse credit?

The credit status of an applicant can influence the terms of a loan. While adverse credit might affect loan conditions, many lenders evaluate multiple aspects of an applicant’s financial situation.

Consequently, individuals with less-than-ideal credit may still receive offers, though the terms and rates might differ.

Risks of bridging loans

While bridging loans offer flexibility, they come with inherent risks that borrowers should be aware of. Below are some examples of risks to factor in when considering this type of loan:

1. Higher Interest Rates: Compared to traditional loans, bridging loans typically have higher interest rates. If the loan extends beyond the expected term, the cost can escalate quickly.
2. Secured Loan: Bridging loans are often secured against property. If repayments are not made, there’s a risk of losing the property.
3. Fees and Charges: Apart from the interest, there are often additional fees such as arrangement fees, exit fees, and legal fees. These can add significantly to the cost.
4. Dependence on Property Sale: If the primary plan is to repay the loan through the sale of a property, and the property doesn’t sell, it could lead to financial strain.
5. Potential for Negative Equity: If property prices fall, you could end up owing more than your property is worth.

Takeaway 

It’s essential to approach bridging loans with a full understanding of the associated risks. Always consider potential scenarios where repayments might be delayed, and ensure you have a viable exit strategy. Consulting with a financial expert can help in assessing if a bridging loan aligns with your financial goals and capabilities.

Alternatives to bridging loans 

Personal Loans

• Interest Rates: Typically lower than bridging loans and spread over a longer period.
• Duration: Can range from 1 to 7 years, or even longer.
• Risks: Unsecured, so your property isn’t at risk. However, failing to repay can damage your credit score.
• Ideal Scenario: Suitable for smaller amounts where the borrower doesn’t want to risk their property and needs a longer repayment period.

Remortgaging

• Interest Rates: Generally lower than bridging loans.
• Duration: Repayment periods can stretch from 15 to 30 years.
• Risks: Extends the liability on the property and may result in higher long-term costs.
• Ideal Scenario: When there’s significant equity in a property and the borrower wants to capitalise on that for immediate financial needs.

Secured Loans (Home Equity Loans)

• Interest Rates: Usually lower than bridging loans but higher than primary mortgages.
• Duration: Typically can range from 5 to 20 years.
• Risks: The loan is secured against the property, so there’s a risk of repossession if you default.
• Ideal Scenario: When borrowers need a larger sum and are comfortable using their property as collateral.

Extended Mortgage

An extended mortgage involves adjusting your current mortgage terms to access additional funds. It’s essentially borrowing more from your mortgage lender, using the same property as collateral.

Reasons to consider this alternative:

• Lower Interest Rates: Typically, mortgages have lower interest rates compared to bridging loans.
• Structured Repayments: An extended mortgage provides a clear repayment structure, making it easier to budget and plan.
• Consolidated Debt: By adding to your mortgage, you’re consolidating the debt, which can simplify repayments.

Reasons against this alternative:

• Longer Debt Duration: Extending your mortgage means you’ll be in debt for a more extended period, which might result in higher overall interest costs.
• Approval Process: Not everyone will be eligible for an extended mortgage. Lenders will reassess your financial situation, property value, and other factors.
• Increased Risk: Borrowing more against your property increases the risk of repossession if you default on repayments.

Takeaway

Exploring alternatives like personal loans, remortgaging, secured loans, or extending your existing mortgage can provide different benefits and potentially more favourable terms in certain scenarios. Always ensure a thorough evaluation to choose the financial solution that aligns best with your situation.

How Bridging Loans Work

• Application Process: Lenders will evaluate the value of the asset being used as security, your exit strategy, and your ability to repay the loan.
• Repayment Structure: This varies but can include monthly interest payments, rolled-up interest, or a combination.
• Exit Strategies: This is how you plan to repay the loan, e.g., sale of a property, receipt of funds from another source, or refinancing.

How to get the best bridging loan for your needs

Navigating the world of bridging loans can be daunting, especially with various lenders offering a myriad of terms and rates. To ensure you secure the best deal, follow these steps:

Assess Your Financial Health

• Credit Score: Check your credit score. A higher score can grant access to better interest rates.
• Current Debts: Understand your existing debts. Lenders will evaluate your debt-to-income ratio to gauge your ability to repay.
• Proof of Income: Be prepared with recent pay stubs or profit/loss statements if self-employed.

Determine Loan Amount and Duration

• Assess Needs: Determine the exact amount needed and the duration. Borrowing more than necessary can lead to higher interest costs.
• Exit Strategy: Know your repayment plan, whether it’s the sale of a property, business revenue, or another source.

Research Lenders

• Variety: Don’t limit your search to banks. Consider private lenders, credit unions, and specialist bridging loan companies.
• Reputation: Look for lenders with positive reviews and testimonials. Avoid those with a history of complaints.

Understand the Costs

• Interest Rates: While the monthly rate is essential, understand the annual percentage rate (APR) to gauge the yearly cost.
• Hidden Fees: Be wary of additional charges like administration fees, exit fees, or valuation fees.

Prepare Necessary Documents

• Proof of Identity: Typically, a passport or driver’s license.
• Proof of Address: Have utility bills or bank statements at hand.
• Details of the Property: If the loan is secured against property, have its details, valuation reports, and any relevant legal documents ready.

Seek Expert Advice

• Financial Advisor: They can provide personalised advice based on your financial situation.
• Loan Broker: Brokers can guide you to lenders that best fit your needs and might even secure more favourable terms.

Negotiate

• Terms: Don’t be afraid to negotiate the loan terms, especially if you have a strong credit history and collateral.
• Early Repayment: If you believe you might be able to repay the loan early, check if the lender will waive any early repayment fees.

Review the Fine Print

• Contract Terms: Before signing, read the contract thoroughly. Look for any clauses that might be unfavourable.
• Legal Counsel: Consider having a lawyer review the agreement. It’s essential to understand every aspect of the contract.

Regularly Reassess

• Refinancing: As your financial situation evolves, there might be opportunities to refinance the loan for better terms.
• Stay Updated: Keep abreast of market interest rates. If they drop significantly, consider renegotiating your loan or switching lenders.

Bridging loan FAQs