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What is a Bridging Mortgage?
A bridging mortgage, usually referred to as a bridging loan, is a type of short-term property loan.
They provide short-term financing (usually 12 months) with greater flexibility than standard mortgages.
But despite their flexibility, few people realise how useful they can be as alternatives to traditional loans.
And others are put off by their costs and charges, being unfamiliar with how the fee structures work.
In this post, we’ll guide you through the ins and outs of bridging mortgages, and include some examples of just how versatile they can be – we’ll show you:
- How they work
- What they can be used for
- How much they cost
- How to apply, and eligibility
- How much you can borrow
- And how you can get one
Written by: Sam O'Neill & Sam Hodgson
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How do bridging mortgages work?
What are bridging mortgages used for?
What do bridging mortgages cost?
How to get a bridging mortgage?
How do bridging mortgages work?
A bridging mortgage is often used to "bridge" the gap between purchasing a new property and selling an existing property.
To explain, it provides a temporary source of funding to help homeowners complete a purchase of a home they may have their eye on or a property in which they’d have to move fast to secure.
With a bridging mortgage, you don’t have to worry about selling your existing property initially or being stuck in between without the necessary funds to hand.
Here’s an overview of the process simplified, and some useful information up front:
Assessment
When a homeowner applies for a loan, the lender will assess their financial situation, including the equity in their existing property and the expected sale proceeds.
Approval
If the lender approves the loan, the homeowner can proceed with the purchase of the new property – the loan is then secured against the borrowers existing property.
Repayment/exit strategy
The borrower will need a solid exit strategy in place, which is typically the proceeds from a property sold (which would be the property the loan is secured against). The repayment will differ for each borrower, depending on the terms and criteria of the loan – typically, bridging mortgages span a 12-month term.
Interest and fees
Bridging mortgages come with higher interest rates and fees than more traditional borrowing, so it's important to be aware of overall costs when considering bridge finance.
A bridge mortgage can present a higher risk and is not a form of borrowing suited to all – at least without proper knowledge.
Before deciding whether a bridging mortgage is the right option for you, we’ll explain further the process; from the application, to cost and additional fees, and how to find the best deals.
Sam O'Neill
Head of Bridging
Let us do all the hard work of finding the right bridging lender for your circumstances.
We secure bridging finance for applications of all types, and we negotiate competitive lending to meet your needs and timescale.
What are bridging mortgages used for?
Here is an overview of what bridging mortgages can be used for:
Property Purchases – The most common use for such a mortgage, as it perfectly fits the in-between stages of purchasing a property and selling your existing one. However, it is not just utilised when purchasing a home or residential property – it can be for any type of property, such as property for commercial use.
Refinancing – Bridging mortgages can also be used to refinance an existing property when traditional lending options are not available. This can help homeowners to pay off debts, make improvements to the property, or take advantage of lower interest rates.
Property development – Bridging mortgages can be used when funding development ventures, self-builds, or purchasing land.
Business purposes – Bridging mortgages can be used for business purposes, such as expanding a business, purchasing equipment, or covering operating costs.
Refurbishments – Bridging mortgages are useful in funding property refurbishments or renovations. If you own BTL (Buy-to-let) properties, a bridging mortgage can be a good way to improve the value of said properties through refurbishment, or if you intend to rent them out but they are in an un-mortgageable state.
Auction purchases – When it comes to property auctions, if you make a purchase, you will only have 28 days to finalise - therefore, bidders can make use of a quick and flexible loan such as a bridge mortgage to secure a property at auction within the time frame.
Bridging mortgages also work for nuanced, or more niche circumstances, like funding an extension while awaiting tax-free pension drawdown.
Whatever the situation, with the right broker, you can find a bespoke solution tailored specifically to your circumstances using a bridging mortgage.
For more information and examples, check out our video below on the basics of bridging mortgages:
What do bridging mortgages cost?
A bridging mortgage weighs various factors when it comes to cost – for instance, the LTV (Loan-to-value) or the amount you intend to borrow, the length of the loan term, and the chosen lender you borrow from can affect overall costs.
Interest rates can vary from lender to lender – rates are determined by your creditworthiness, the LTV, the value of your property etc. – so it is important to consider your options and which lender you borrow from.
On top of interest rates, there are some important additional fees to be aware of when it comes to a bridging mortgage:
Arrangement fees
Some bridging mortgage lenders charge an arrangement fee, which can be a percentage of the loan amount or a fixed fee.
Valuation fees
A lender may require a property valuation to assess the value of the homeowner's existing property, which can cost several hundred pounds depending on the value of your property. With the help of a broker, it is possible to get an online, or drive-by valuation, which can prove a cheaper alternative.
Exit fees
Some lenders may charge an exit fee when the loan is repaid, which can also add to the cost of a bridging mortgage – typically, these types of loans will not have early repayment fees, however.
You should always consider that this type of mortgage is of higher risk – you will need to display to a lender that you have a sufficient exit strategy in place before you can successfully apply.
It is often best to get expert advice from a bridging mortgage broker who can deal with lenders directly on your behalf.
Lastly, to find the most cost-effective bridging mortgage, shopping around and comparing the costs of other bridging mortgages is essential.
Each lender will have different fees and lending criteria, so it is advisable that you consult several lenders and compare their prices.
For more help, read our full guide to bridging loan costs.
Alternatively, if you know how much you need to borrow, try using our free bridging calculator for a rough quote on how much it could cos.
Bridging mortgage criteria
There are certain requirements you must meet, a list of criteria – often different depending on the lender you take the mortgage out with.
Lenders will consider your application based on several factors; here are some of them:
Credit History/Score – Borrowers will be assessed based on their credit history, and score. Typically, you need to have a good standing order in order to be eligible for a bridging mortgage.
Income and employment – You’ll likely need to demonstrate that you have a regular and stable source of income, so that lenders can properly assess the suitability of a loan and make a judgment as to how, and if, you can repay the loan within the term.
Property valuation – lenders will need to know the value of a property that you intend to take a loan out against, and the value of the property can impact a lender’s decision.
Equity in property - Most bridging mortgages are secured against a property, and a lender will evaluate whether there is enough equity in order to secure the loan amount you need.
Purpose – Whether the loan is intended for buying a new home or renovating an existing one before selling, the lender needs to know what the loan is for. It will be necessary for them to assess the feasibility of any project before lending money.
Exit strategy - Since bridging loans are short-term loans, the borrower must provide a solid plan for repayment – typically, this comes through the sale of the property the loan is raised against, but it could be in the form of additional assets or other properties.
An application's risk and feasibility will be assessed differently by each lender – but these are some of the main factors considered.
How much can you borrow with a bridging mortgage?
The affordability calculations for bridging mortgages aren't based on your income like standard mortgages are.
Instead, you can generally borrow as much money as you can prove you're able to repay through your exit strategy, typically up to about 80% of the loan to value.
For example, if the property you're buying with your bridging mortgage is worth £300k, you could borrow of your 80% LTV which would be £240k. So you'd need a secured asset or bridging deposit of 20%.
In some cases, you may be able to borrow up to 100% of your LTV, especially if you can secure your loan against additional assets (this could also get you a lower interest rate).
Try our bridging mortgage calculator to see how much your intended borrowing could cost you.
How to get a bridging mortgage?
It is best to seek the help of a bridging mortgage expert to fully understand and view all your available options when it comes to important financing decisions such as taking out a bridging mortgage.
It is possible to go directly to lenders; however, for the inexperienced, we recommend the services of a broker who can help guide you through the entire process - from application to comparing rates and getting a bespoke deal for your own personal scenario.
Here at Clifton Private Finance, we can help you better understand your options, whether you're new to bridging mortgages or an experienced property developer.
Call us today on 0117 959 5094 to see how we can help, or book a consultation with us below.
0203 900 4322
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?
