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Bridging Loan To Buy A House - Example Of How It Works
If you've found the property you want to buy and need to move quickly, a common option is to use a bridging loan to buy a house. Here, we look at some examples of how bridging loans can be used to buy property.
How can a bridging loan be used to buy a house?
In the past 15 years, bridging loans have quickly become a mainstream property finance solution.
Why?
- They can be fast - A bridging loan can be set up quickly and allows you to act like a cash buyer.
- They can be flexible - Because it's secured against the value of bricks-and-mortar or your deposit, lenders may consider borrowers whose credit record is less than perfect.
- They have a diverse usage - Bridging loans can be secured against commercial and residential property, building plots or even land that doesn't yet have planning permission.
While mortgages are still the default route to buying property for many, bridging finance's key advantages can allow you to buy property in circumstances where a mortgage may not be suitable.
Written by: Sam O'Neill & Sam Hodgson
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Why would you use a bridging loan?
What's different about a bridging loan?
How to apply for a bridging loan
In the video below, our Head of Bridging, Sam O'Neill, summarises everything you need to know about bridging loans and how they work:
What is a Bridging Loan?
A bridging loan is a short-term funding solution typically used to raise capital to meet a tight timeframe or break a property chain. Bridging loans are popular for their flexibility and relatively easy application process, which can take from as little as seven working days to a few weeks.
Whether or not you will be eligible for a bridging loan will centre heavily on your plan to repay the loan. Due to the quick turnaround of these loans, they are commonly used to purchase property before the sale of another property has gone through.
This is where the name 'bridging' loan comes from, as they are typically used to 'bridge' a gap in finance.
In the UK, bridging loans are only available from private lenders, so if you're looking for a bridging loan and don't know where to start, seeking help from a bridging broker can streamline this process.
Bridging loan terms are typically around 12 months but can be tailored to suit your circumstances if needed. Unlike mortgages, they are usually repaid in a lump sum and don't have early repayment fees.
Why would you use a bridging loan?
Bridging loans can be ideal for seizing time-sensitive opportunities, from buying a new home before finalising the sale of your existing property to renovating an HMO. They will typically use the purchased property or an existing one as collateral, offering more flexibility in your eligibility compared to traditional mortgages.
You can use bridging finance for:
- Purchasing a new property before selling your current home could be when downsizing, upsizing, moving abroad, or moving closer to a family member.
- Breaking a mortgage chain - bridge finance can effectively turn you into the kind of cash buyer given preferential treatment by estate agents.
- Landlords who need to buy an investment property quickly - affordable properties that offer the prospect of good returns attract buying competition from other investors and owner-occupiers.
- Buying property at auction - is often the most profitable hunting ground for bargain-priced properties, but the requirement to complete payment within 28 days makes ordinary mortgage finance impossible.
- Cash flow restrictions - bridge finance secured against property can also be used for personal and business purposes when cash is tight.
While you're here, don't forget to check out our complete guide to bridging finance.
What's different about a bridging loan?
Most people looking for property finance will approach a traditional lender such as a high street bank or building society to arrange a mortgage.
However, bridging loans have several features that make them a beneficial way of financing a house purchase when a standard mortgage might not work.
Bridging loans are short term
While mortgages are designed for long-term property finance, with terms usually ranging from 20 to 35 years (and their cost structures and interest rates are priced accordingly).
A bridging loan is specifically designed for the short term: the maximum period for a "regulated" bridging loan (secured against or used to purchase a residential property) is typically 12 months. However, up to 24 months is possible. There are also bridging loan alternatives available based on your circumstances, e.g. if you earn £100k pa.
The aim is to temporarily "bridge" the gap when there is a shortfall in funding, say between the deadline for completion of a purchase and the sale of a previous home. Or between buying an unmortgageable property at auction and doing the necessary renovations that will make it possible to arrange mortgage finance or sell it on.
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Bridge loans can be arranged very quickly
As most purchasers know, standard mortgage finance can take two to three months to arrange, particularly during the busiest buying "seasons" of the year.
Bridge finance is secured primarily against the value of a property rather than the full range of your finances so that lenders can make decisions more quickly.
We work with some lenders who can process an application and release funding within seven working days (depending on your circumstances and eligibility).
Monthly interest rate payments can be deferred
Bridging loans come with the option to "roll-up" interest to be paid at the end of the finance term. This could be advantageous for buying a house because it enables you to avoid monthly interest payments and use the loan entirely to purchase your new property.
If you choose to roll up the interest on your loan, it will be repaid at the end of the finance term and the principal loan amount by your agreed exit strategy. This means that your total loan amount must include the interest cost - meaning you will have less available for the purchase or the renovation works you're funding.
High LTV lending is available
Not only can bridging loans provide funding quickly, but you can secure a substantial amount of finance through a bridging loan. Most lenders will lend up to 75% loan to value (LTV).
We work with some lenders willing to grant bridging loans up to 80% LTV to property developers on a non-regulated basis (which does not involve your residential property), depending on the set of circumstances and the assets used as security for the loan.
Some lenders can consider 100% LTV bridging finance, but it's rare you'll get accepted and you'll need extra security at the very least.
The most effective way to arrange a bridging loan of the maximum value is to secure the loan against both a property being purchased and an existing property. A single property can be used as security on a bridging loan, but the interest rate charged may well be higher with less "security" for the lender.
You'll need an exit route
You need to have an exit plan agreed upon with your lender to access bridging finance. This is the achievable strategy you intend to use to repay the loan at the end of the finance term, such as the sale of your house or the arrangement of long-term mortgage finance.
A realistically achievable exit plan reassures both the lender and you, the borrower. Usually, three months away from your exit deadline, your lender will be in touch to ensure that your exit strategy is proceeding to plan. They may propose changes to the marketing plan, or it may be possible to arrange a short extension to achieve a realistic price on a property sale.
There are no early repayment fees
Long-term mortgage lenders are usually reluctant for borrowers to repay a loan in full before the agreed deadline: their interest rates have been calculated with a view to long-term, ongoing repayments. There will usually be Early Repayment Charges within a specified minimum term (often at least two years) which could add up to thousands of pounds.
Bridging loans are designed for short-term finance: the minimum term is usually one month or three months. And most lenders only charge interest on the actual duration of the loan. So if you take out a bridging loan for 12 months but repay it entirely within six and a half months, you will only pay interest on the exact number of days the loan was outstanding.
Unmortgageable properties
Traditional lenders will not finance properties they deem "unmortgageable" - Examples include:
- Valued under £50,000
- With structural issues
- Without a functioning bathroom or kitchen
- That is derelict
Bridging lenders are much more flexible in their criteria, provided sufficient security is offered in some other property holding. If you need finance for an unmortgageable building, then a bridging loan is likely your most viable option.
How to apply for a bridging loan
The bridging loan lending process can be swift and efficient. A typical bridging loan application will play out as follows:
Initial call
This is where our brokers find out precisely what you need. This will usually require you to provide details of the loan size you want and the asset you intend to use as security.
Indicative terms
Documentation will be sent to you, providing a breakdown of our terms and conditions and a quote for the costs you will incur.
Lender search
Our brokers scour the marketplace to find the lender that will accommodate your financial needs.
Decision In Principle
Lenders provide a document to show they are happy to give the loan size based on their information.
Client confirmation
Upon receipt of the Decision In Principle, you send notification that you want to proceed with the loan application.
Valuation
Our brokers instruct a professional surveyor to value your property and send it to the lender.
Lender confirmation
The lender will send the surveyor's report to their credit community team for proof that the loan is an appropriate size based on your property's value.
Offer
The agreed loan amount will be sent to you.
Solicitors instructed
Solicitors will send all the offer documentation to you to sign.
Funds released
Once you have signed and returned the documentation, your funds will be released.
The time it takes to complete an application and secure the finance will vary from lender to lender and depend on your circumstances.
Explore some of the bridging deals we've facilitated below:
Bridging loan calculator
See what a bridging loan could cost you with our bridging loan calculator.
Contact us at Clifton Private Finance
At Clifton Private Finance, we have relationships with a variety of specialist lenders and can get you the best deal on the market.
We can find the best financial solution for you through our connections with private banks, specialist lenders, family offices, and wealth managers.
Call us today on 0117 959 5094 to see how we can help, or book a consultation with us below.
FAQs
Yes, a valuation is typically required for a bridging loan in the UK. Since bridging loans are often secured against a property or other valuable assets, lenders will want to assess the market value of the property being used as security. This helps the lender determine how much deposit they want you to provide based on the value and condition of the property. You can borrow up to £25m with bridging finance, but it’s typically capped at about 80% of the value of the property you’re using as security. It's important to note that different lenders have varying policies and criteria regarding the maximum loan amounts they offer for bridging finance. Some lenders have a maximum limit of over £1 million, while others may specialize in smaller loan amounts. Additionally, the terms and conditions of the loan, including interest rates and fees, should also be taken into consideration when determining the overall affordability of the bridging loan. Yes, you typically need a 20-40% deposit for a bridging loan. It can be possible to get a bridging loan without a deposit (a 100% bridging loan), but you’ll need other assets in the background to secure the loan against, and more stringent criteria and higher costs could apply. Yes, it is possible to get a 100% bridging loan (also known as a 100% LTV bridging loan), but it is rare. This means that you won’t need to put down a deposit and can borrow the full value of your property. However, the criteria for these loans can be hard to meet, and you’ll need to provide additional assets as security for your loan. Interest rates and fees can also be higher to compensate. While using bridging finance doesn’t technically make you a cash-buyer, it can allow you to act like one. Mortgages take months to process, often leading to an ‘onward chain’ where all parties involved need to wait for funds to be transferred. Bridging finance can usually be accessed a lot quicker than mortgages so you can bypass the onward chain, giving you an advantage over other buyers and being attractive to sellers. Bridging loans typically have a term of 12 months, but some lenders are willing to stretch their terms to 18 months, or even 2 –3 years depending on the case. Terms longer than 2 years will usually only be considered for specific cases. Yes, you can use a bridging loan to pay Stamp Duty. This amount could be covered by a bridging loan, providing you have a way to repay the additional borrowing amount to your lender. Yes, bridging loans are safe when they’re used in the right circumstances with a solid repayment strategy. However, we recommend speaking to a qualified advisor, like our brokers at Clifton Private Finance, before you take out a product. The main factors to consider with bridging finance are that the full loan amount will usually need to be repaid within a year, and like a mortgage, it is secured against a property as collateral. This means that in the case that you aren’t able to repay your bridging loan, your property would be at risk of repossession. But with a watertight exit strategy, bridging finance can be an efficient way to secure property quickly. Bridging loans are designed to be short-term so there’s no maximum age limit when applying for a bridging loan. This does depend on the lender, as some bridging lenders do have an upper age limit, but there are lenders on the market who offer bridging loans for borrowers aged 70 and over. Bridging loan interest rates usually range between 0.45% - 2% per month, depending on the case and the market rate. Unlike mortgage interest rates, bridging loan interest is calculated monthly instead of yearly. This is because bridging loans are short-term and, in many cases, repaid within a year. Bridging loans can be arranged without early repayment penalties, so interest is calculated monthly to ensure you only pay interest on the months you have the loan for. Unfortunately, mainstream banks in the UK don’t offer bridging loans. This means that if you’re looking for a bridging loan, you won’t be able to get one using a lender you’d find on the high street. There are a variety of specialist lenders that offer bridging loans, but because these lenders are smaller and more niche, you may need a bridging broker to access them. Banks typically charge two main fees when taking out a bridging loan – arrangement fees and interest. But there are other costs to consider such as valuation fees, broker fees and administration fees. Costs can vary from lender to lender, and will also depend on what your bridging loan is for (e.g., residential or commercial purposes.) Arrangement fees are what the lender charges you to take out the loan and can range between 1.5 - 3% of your overall loan. Bridging loan interest, on the other hand, is calculated monthly. This can catch borrowers out who may be expecting an Annual Percentage Rate (APR) like with a mortgage. Yes, you can convert a bridging loan to a mortgage through refinancing, and it is common among borrowers who use bridging finance to buy residential properties. However, whether or not you’ll be able to refinance to a mortgage is dependent on your financial circumstances, the lender, and the property you’re planning to buy. It’s important to be sure that refinancing is a viable repayment option before you take out a bridging loan on a residential property. Yes, bridging loans are typically more expensive than mortgages. Bridging loan interest rates can be much higher than a mortgage, and are calculated and displayed as monthly rates instead of the usual annual percentage rate (APR) that you’ll see on a mortgage. However, bridging loans are a short-term solution, and you’ll only pay interest on the months you’ve borrowed money for – and you can repay early without any charges (for most loans). There are many circumstances where bridging loans are an affordable option and a means to an end - for borrowers that need to finance a property purchase quickly, it may be the only option available. The two most common ways to pay a bridging loan are to sell a property or refinance to a mortgage. You may also need to ‘service’ the loan through the term, which means paying the interest monthly. However, you can opt to ‘roll up’ your bridging interest to be repaid at the end along with the capital. There are also other ways to repay a bridging loan, such as selling a business or even using money from an inheritance. The method in which you pay your bridging loan can be flexible, just as long as it is clear in your application that you have a surefire way to repay your loan when the terms are up. In most cases, a bridging loan will require a minimum deposit of 25%. However, the minimum can vary depending on the lender and the specific circumstances of the loan itself. Generally, bridging loans are secured against a property or other valuable assets, and the deposit required is often expressed as a percentage of the property's value, known as the loan-to-value ratio. In some cases, 0% deposit bridging loans are an option, but only if you have other property or assets in the background to provide additional security. No, typically, you’ll repay a bridging loan in one chunk at the end of the loan term. Bridging loans are a form of short-term finance and will usually need to be repaid within 12 months, but there can be room for flexibility. In some cases, borrowers may be required to make monthly interest payments. This means that each month, you would pay the interest accrued on the loan amount while the principal amount remains outstanding until the end of the loan term. But usually, the interest is "rolled up" or added to the loan balance and paid with the rest of the loan at the end of the term. This option can help protect your cashflow so you can spend it on moving costs or refurbishments, for example. Bridging loans can be arranged in as little as 7 working days. However, it depends on the complexity of the bridge loan and your specific circumstances. It may also be more expensive for you to rush an urgent application through – but not impossible. Bridging loans are a popular option for borrowers who are under time constraints, such as buying a property at auction or breaking a chain. The key factors lenders tend to consider are: Security - Bridging finance is usually secured against property or other valuable assets. Lenders will assess the value and marketability of your security. Exit Strategy - Lenders will want to understand how you plan to repay your bridging loan. In most cases, this is selling your old property, selling the new property (flipping), or refinancing with a long-term mortgage. Loan-to-Value (LTV) Ratio - Lenders consider the loan amount compared to the value of the property being used as security as a percentage. The LTV ratio can vary, but most lenders will have a maximum of 60-80% LTV. Remember, the criteria for obtaining bridging finance in the UK can vary depending on the lender and your circumstances.
Do you need a valuation for a bridging loan?
How much can you borrow with bridging finance?
Do you need a deposit for a bridging loan?
Can I get 100% bridging finance?
Does a bridging loan make you a cash buyer?
What is the longest bridging loan term?
Can I use a bridging loan to pay stamp duty?
Are bridging loans safe?
Can an 80 year old get a bridging loan?
What is the monthly interest rate on a bridging loan?
Do banks still do bridging loans?
How much do banks charge for bridging loans?
Can you turn a bridging loan into a mortgage?
Is a bridging loan more expensive than a mortgage?
How are bridging loans paid?
What is the minimum deposit for a bridging loan?
Do you pay monthly payments on a bridging loan?
How long does it take for a bridging loan to come through?
What is the criteria for bridging finance?
