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Are Bridging Loans a Good Idea?
Bridging finance has become a popular funding solution in the last decade, but are bridging loans a good idea?
A bridging loan can be a good idea depending on what kind of property finance you need, for how long, and whether you have a solid exit strategy in place.
In this guide, we explain what bridging loans are, how they work, and their pros and cons, and we provide lots of examples so you can be confident in deciding if a bridging loan is right for you.
Written by: Sam O'Neill & Sam Hodgson
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When are Bridging Loans a Good Idea?
How Bridging Loans Differ From Mortgages
The Pros and Cons of Bridging Loans
How to Qualify for a Bridging Loan
When are Bridging Loans a Good Idea?
Bridging loans can be a good idea in certain situations where there is a temporary need for funds before a more permanent financing solution can be arranged.
Some examples of this are:
- Buying a house before you sell your current property
- Buying a house at auction
- Renovation or refurbishment
Bridging loans tend to have higher interest rates than mortgages, but they can also offer more flexibility. They're also short-term, so if you pay your bridging loan early, you'll typically only pay interest for the months you had the bridging loan.
How Do Bridging Loans Work?
In a nutshell, a bridging loan is a short term finance solution for buying a property.
They typically span a 12-month term – although they can be more flexible given the need and depending on the lender.
Many people find bridging a great solution when traditional finance, like a mortgage, is not an option for them.
As the name would suggest, bridge loans assist in 'bridging the gap' between selling and buying property. Alternatively, you may find bridge loans useful when financing renovations, buying a property at auction or investing in property development.
Naturally, bridging can be applied to myriad scenarios, but its most common usage is buying a new property before your previous home has sold.
How Bridging Loans Differ From Mortgages
The main difference between the two is that a mortgage is a long-term loan while a bridging loan is short term.
Mortgages are typically used to purchase a property outright for the long term while bridging loans are often used to secure a property quickly in the short term before refinancing later down the line.
Like most short term loans, bridging finance usually comes with higher interest rates and additional fees, so they’re typically designed to be held for only 12-18 months.
The key difference, and a great selling point, for bridging loans is how repayments and interest rates function.
With a bridge loan, you don’t make monthly repayments towards the capital of your loan like you do with a mortgage.
Instead, you pay it off as a lump sum at the end of your term.
This is where your exit strategy comes in – how are you going to repay your loan?
Here are the most common type of bridging loan exits:
- Selling another property (your current home, for example)
- Selling the property you’ve bought with your bridging loan (after you’ve done some renovations, for example)
- Refinancing with a standard mortgage for the long term (perhaps you were buying at auction and needed to complete within the 28-day timeframe)
- Selling a separate property or asset altogether
- Any other expected large cash windfall (such as a pending inheritance, for example)
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This convenience is also reflected in how the interest is charged on a bridging loan.
You often have the option to 'roll up' interest payments to the end of your loan term.
This means you don’t have to worry about making any repayments to your bridging loan for its entire term (which helps with moving costs or cash flow for your development project, for example), and you repay your loan and interest together when you have the funds.
You’ll also only pay interest up until you repay your loan, so if you can pay it back sooner than 12 months, you could save money.
A standard mortgage doesn’t allow this type of interest structure or early repayment.
Ultimately, bridge loans offer flexibility for those with experience but require a level of preparedness for those uninitiated – it’s important, and a requirement from lenders, to have a clear and robust exit strategy.
What Are the Types of Bridging Loans?
Aside from the most common use (bridging the gap between buying a property before yours sells), there are several different types and uses of bridge loans.
Here’s an overview of what bridge loans can be used for:
- Refurbishments - Bridging loans can be used to fund property refurbishments or renovations. This can be particularly useful for property developers and landlords who need to make improvements to a property in order to rent or sell it.
- Property development - Bridging loans can also be used to fund business ventures, such as purchasing a new commercial property or investing in property development or land purchase.
- Auction purchases – You will have only 28 days to finalise the purchase of a property bought at auction, therefore, bidders can make use of the fast financing a bridge loan allows for.
- To pay care home fees - care home fees can be expensive upfront, and you might need to sell a property that's no longer in use to cover the costs. But if the timings don't line up, a bridging loan can help.
- To pay inheritance tax (IHT) - it's common to have to pay a large IHT bill before you've received the money, so if you don't have the funds to hand, a bridging loan can fill the gap.
These are general uses that can apply to numerous scenarios, and the key takeaway is the flexibility with which bridge loans can be applied to your own circumstances.
Watch our video below for an example of how to fix a broken property chain with a bridging loan:
Fergus Allen
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 the Costs of Bridging Loans?
The cost of a bridging loan depends on a variety of factors, including the amount of your loan, the length of your loan, and your lender.
Interest rates can vary from lender to lender and can be determined by your creditworthiness, the LTV (Loan-to-value), the type of loan you wish to take out and the value of the property (or properties) used as collateral.
In addition to interest, some of the other most common bridging loan costs include:
- Arrangement fee - A fee charged by the lender for setting up your loan and processing your application. This can be a percentage of your loan amount or a flat fee.
- Valuation fee - A fee the lender charges to have your property valued - typically a flat fee (Tip: our brokers try to prioritise lenders that accept online valuations to save you costs).
- Legal fees - Some lenders require you to pay your own legal fees, while others may include these costs in your loan.
- Exit fees - Some lenders charge an exit fee when you repay your loan, usually a percentage of your loan amount.
It's also worth noting that each lender has different fees, lending criteria, and varying interest rates, so it’s important to shop around and compare the costs of different bridging loans to find the most cost-effective solution. - Broker fee - most people use a finance broker, like us, to help them find a suitable and low-cost bridging loan, and a fee will apply.
Bridging Loan Calculator
Our bridging loan calculator is a valuable tool that helps simplify the process – it’ll work out an indicative quote and support the initial stage of finding out if bridging finance is the best option for you:
The Pros and Cons of Bridging Loans
Bridging loans can be a useful financing option for certain situations, but they also have their own set of pros and cons. Here are some of the main advantages and disadvantages to consider:
Pros:
- Speed of funding - Bridging loans can be approved and funded much more quickly than traditional mortgages, making them a good option for property buyers who need to move quickly.
- Flexibility - Bridging loans can be tailored to the borrower's specific needs, with options for open or closed loans, first or second charges, and more.
- No early repayment charges - Most bridging loans don’t carry any early repayment charges, meaning if a borrower can pay off the loan early, they can do so without incurring any additional costs.
- Unmortgageable property - Some properties that would not qualify for a traditional mortgage can be acceptable for a bridging loan – properties bought at auction, for example. You can then refinance later after developing the property.
Cons:
- Higher interest rates - Bridging loans typically come with higher interest rates than traditional mortgages.
- Short term - Bridging loans require the borrower to pay them off in a relatively short period of time, which can be a problem if a property doesn't sell as quickly as expected or if refurbishment and development plans exceed costs.
- Risk - If the borrower cannot pay back the loan on time, they could lose the property as collateral, meaning it can be a relatively high risk strategy without a level of preparedness.
- Fees - There are many fees and additional costs associated with bridging loans, such as arrangement fees, valuation fees, and more.
It's important to weigh these pros and cons and compare different options before applying for a bridging loan.
An experienced bridging broker can ensure you understand the terms and conditions of your loan and find the right lender and product suited to your circumstances.
How to Qualify for a Bridging Loan
Qualifying for a bridging loan can vary depending on the lender, as they’ll consider your application based on a variety of factors:
- Property - Most bridging loans are secured against a property, so the property will need to be valued and considered as worthy deposit against your loan.
- Purpose - The lender will need to know what your loan is intended for, such as buying a new property or renovating a property before selling. They will need to assess the project's feasibility before agreeing to lend.
- Exit strategy - Since bridging loans are short-term loans, the borrower must provide a solid repayment plan – 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.
- Credit History - Borrowers typically need a good credit history to qualify for a bridging loan. This will include a minimum credit score and a track record of paying bills on time and managing credit responsibly. But if your credit score is poor, we may still be able to help you.
Related: Guide to finding the best bridging loans
How We Can Help
Bridging loans aren't typically offered by high street banks anymore, so it's likely you'll need a specialist lender. Each lender will have their own approach to assessing risk and the feasibility of each application.
At Clifton Private Finance, we have an award-winning bridging team dedicated to driving results. We have relationships with lenders across the whole bridging market and have access to the best deals. Our bridging brokers can guide you through the process and liaise with lenders on your behalf.
To see what we can do for you, call us at 0117 959 5094 or book a consultation below.
FAQs
Understanding the difference between net and gross calculations is essential when comparing deals from bridging loan lenders. The calculation determines the maximum LTV (Loan-to-Value), how much you can borrow, and how much you will eventually repay. Here’s the difference: When calculating the net loan amount for bridging loans, the borrower deducts the loan costs and additional fees (such as the arrangement fee) from the total loan amount - this is known as net loan calculation. Contrary to that, gross loan calculation is based on the loan amount the borrower can receive without deducting any costs or fees. In brief, the gross loan calculation represents the total amount available to the borrower, while the net loan represents what the borrower ultimately receives after deductions. A common complication arises when it comes to comparing bridging lenders, as different lenders advertise their bridging loan products differently. The upshot of this, is that it can become difficult to determine if a higher LTV (loan-to-value) represents the actual amount you could receive. Lenders typically use a gross loan calculation when advertising or promoting their bridging loan products. This is because the gross loan amount represents the maximum loan amount the borrower is eligible to receive, and can be used as a marketing tool to attract potential borrowers. Nevertheless, the net loan calculation is used when negotiating an agreement, which is the amount the borrower will receive after deducting fees and other costs. Borrowers are responsible for repaying this amount, and lenders will use that amount to determine repayment schedules and other loan terms. How a broker can help with bridging loan calculations A broker can assist with bridging loan calculations by providing clarity, expertise, negotiation skills, and a comparison of loan options to help you make more informed decisions. A first charge bridging loan refers to a bridging loan that is the only charge against the property, i.e., there is no existing mortgage on that property. A second charge bridging loan is when there is already a mortgage on the property that the bridging loan is being secured against. In the event of repossession, the 'first charge' has the legal right to be repaid first, before the second charge, which is why second charge loans can be slightly more expensive as they're a greater risk to lenders. It is still entirely possible to secure a second-charge bridging loan and they are common within the industry. Yes, you can get a bridging loan with bad credit. While lenders will look at your credit score and factor it into your application, there is no requirement for regular loan servicing with a bridging loan, and so your income is not analysed and your credit score is significantly less important than with a mortgage. Almost all regulated bridging loans are short-term, and have a duration of 12 months. Bridging loans are short-term by nature. However, there can be some flexibility on term length, particularly for unregulated bridging. For example, bridging for development projects, flipping properties, buy to let bridging loans and commercial bridging loans can all have longer terms up to 36 months. Some bridging loan lenders allow you to extend your term if at the end of 12 months your property hasn't sold or your alternative funding hasn't come through yet - however, this is down to the lender's discretion and there are no guarantees. It's important to be aware of the risks of bridging loans, and your property can be seized and sold to compensate for failure to repay. A bridging loan exit strategy is simply the way in which you plan to repay your bridging loan. The most common exit strategies are selling an existing property, selling the property you're purchasing, refinancing with a mortgage, or a combination. Other more unique exit strategies can include selling a business, receiving a pending inheritance, or receiving a large tax rebate. Here are some of the most common alternatives to bridging loans: We break down each of these other financing tools in our full guide to alternatives to bridging loans. While none of these options provide the flexibility, loan size and low interest rates that bridging loans do for property transactions, you may find they are more appropriate finance options for your specific situation. No, there is no strict age limit for securing a bridging loan. Bridging loans are typically 12 months in duration, which means that there aren't age limits in place like there are for mortgages that can last for 25+ years. The main example where age may be an issue is if you plan to refinance your bridging loan with a standard mortgage. In which case, you'll need to be eligible for a standard mortgage to qualify for your bridging loan - and if you are approaching retirement age, this could be an issue and you may be rejected for a bridging loan. However, we work with specialist equity release and lifetime mortgage lenders that can provide a Decision in Principle for later-life lending (if it's feasible) so that your bridging loan can be approved if it makes sense with your broader strategy. There are two types of bridging finance: regulated bridging loans and unregulated bridging loans. It simply depends on the intended use of the property you're purchasing. When you or a family member intend to live in the property you’re purchasing with your bridging loan, you’ll need a regulated bridging loan. If you're getting bridging finance on property that you or a family member will not be living in, or if it’s a commercial property, then you’ll need an unregulated bridging loan (commercial bridge loan). And if you intend to sell the property to repay your bridging loan (flipping the property) instead of refinancing or selling another property, you’ll get an unregulated bridge loan. Regulated bridging loans are authorised and regulated by the FCA and are usually locked to a 12-month maximum term. Unregulated bridging loans, meanwhile, can have extended periods of up to 36 months and are generally more flexible. If you’re unsure, it’s best to speak to a qualified adviser to go over exactly what you need and find the best bridging loan for you. Yes, your bridging loan lender will require a new valuation to be carried out for all properties in your bridging loan transaction. In some cases, we can work with lenders that can facilitate a 'desk valuation', which is a valuation carried out online based on the local property market, images of the property and the specifications of the home - this can save a considerable amount in fees and speed up your application, but it's not always possible, especially for higher value properties. 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. You don't necessarily need a deposit for a bridging loan in the traditional sense of cash reserves, but you do need security for your loan in the form of another property or asset to keep the loan-to-value below 80% at a maximum. For example, if you're buying a £300k property with a £300k bridging loan, you'd need another property to secure the loan against along with the property you're buying, or else your loan to value would be 100%. You can effectively secure a loan for 100% of a property value, but only if you have other property as security to keep your overall loan-to-value below 80%. So, if you're getting a loan for 100% of a property value, you'll need another property in the background to secure it against. The easiest way to see if you're eligible is either to give us a call or use our bridging loan calculator that automatically calculates your LTV. Using funds from a bridging loan to purchase a property puts you in a strong position as a buyer - similar to that of a cash buyer. Being a cash buyer is attractive to sellers because there is no onward chain requirement, and the funds are ready to go for the purchase. Using a bridging loan also eliminates the need for the chain to complete, and puts you in a position where funds can be available in a matter of weeks for completion; effectively rendering you a cash buyer to prospective sellers. Regulated bridging loans (for residential properties) are typically 12 months, however, some non-regulated bridging loans for buy to lets and commercial properties can be up to 36 months. Some lenders are more flexible on term durations than others, and it can be a case-by-case basis as to whether you'll get approval for a longer loan term. 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 generally considered safe provided they are used for suitable property transactions. Speaking to a bridging loan adviser is recommended if you're unsure about the risks and suitability of a bridging loan for your situation. Generally speaking, the main risk of a bridging loan is that if you cannot repay the loan, your property can be repossessed and sold to clear your debt. For example, if you take out a bridging loan to buy a new property but your existing property fails to sell and you cannot recoup the funds, this could become a risk. However, bridging lenders always require their own valuations for any property involved in a bridging transaction to combat this. Another example could be that you're unable to secure a mortgage to refinance your bridging loan. At Clifton, we make sure your remortgage plans are sound if this is your bridging loan exit strategy, and can even arrange your mortgage for you through our dedicated mortgage advice service on the other side to smooth the process. 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. No high street banks currently offer bridging loans. Instead, bridging loans are provided by specialist short-term finance lenders. At Clifton Private Finance, we are a whole of market brokerage that deals with multiple bridging loan lenders, and we act as an intermediary between clients and the lender ensuring the process is smooth and hassle-free, and making sure our clients are getting a good deal. 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. You cannot turn a bridging loan into a mortgage, but you can repay a bridging loan with a mortgage and effectively refinance it into a long-term arrangement. This is common when buying an unmortgageable property with a bridging loan, carrying out refurbishments, and then mortgaging it once it is wind and water-tight and a new valuation has been carried out. This is also common for properties bought at auction where a mortgage would be too slow to arrange, and so a bridging loan is used which is then replaced with a mortgage later. 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. If there is a purchase involved, bridging loans are paid from the lender to the lender’s solicitor, then to the client’s solicitor, and then to the seller’s solicitor - so, you as a client will not see the funds in your own account - similar to a mortgage. If there is no purchase involved (for example, for a bridging loan for home improvements before selling), the funds go from the lender to the lender's solicitor, to the client’s solicitor, and then to the client's bank account. In terms of how bridging loans are repaid by you, they are repaid as a lump sum, either at the end of your term or during it. You can choose to either 'service' the interest, so pay the interest back monthly, or roll it up into the value of the loan to also pay this off as a lump sum along with the capital. 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. You do not pay monthly instalments towards the capital loan of your bridging loan. Some bridging loans require you to repay the interest accrued each month, but most lenders will actually give you the option to roll this up into the loan value, meaning you repay it with your lump sum at the end and have absolutely no monthly commitments. It's worth noting that as soon as you pay off most bridging loans, you stop accruing interest - so, the quicker you pay it off, the less expensive it will be, and there are typically no ERCs (early repayment charges). 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.
What are net vs gross bridging loan calculations?
Which calculation do lenders use for bridging loans?
What is the difference between first-charge and second-charge bridging loans?
Can you get a bridging loan with bad credit?
How short-term are bridging loans?
What are bridging loan exit strategies?
What are some alternatives to bridging loans?
Is there an age limit on bridging loans?
Are bridging loans regulated?
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?
