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What is a Bridge Loan?
What is a bridge loan and how can it be used to buy a home? A bridge loan is a type of short-term finance often used to buy property. While mortgages tend to be the default when buying property, there are occasions where time is of the element and deadlines need to be met.
In these cases, a mortgage may not be suitable. Mortgages can have stringent eligibility requirements and on average take around six weeks to process.
If, for example, you’ve bought a house at auction, you’ll have one month to produce the funds, which may simply be cutting it too fine if you apply for a mortgage.
And while bridging finance can be associated with higher costs than other types of finance, this could be worth it if you’ve found a property you like and want to secure it as soon as possible.
Bridge loans can be convenient in similar scenarios because the application tends to be simpler than for mortgages. It’s typically processed more quickly and offers room for flexibility.
In this blog, we’ll explore the common uses for bridge loans, how much they cost, and the application process.
Written by: Sam O'Neill & Sam Hodgson
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What are the criteria to get a bridge loan?
Bridge loan application process
How much do banks charge for bridge loans?
What is a bridge loan?
In contrast to long-term finance options like mortgages, bridge loans are designed to bridge a gap in finance while you’re waiting on a sum of money. Bridging finance terms are usually around 12 months, and the full loan is usually paid at the end of the term in one lump sum.
The crux of the application relies on providing a solid repayment strategy. This makes it useful for scenarios like house flipping or downsizing. In these scenarios, there is a clearcut answer as to how you will secure the funds to repay your loan within a year.
But there are other ways to pay your bridge loan, such as refinancing to a mortgage, selling a business, or using funds from an inheritance.
Provided you have a surefire way to repay the bridge loan, you could use a bridge loan to fund a home you’ve bought at auction, break a chain, or even refurbish your property.
How do bridge loans work?
Bridge loans are meant to be temporary financial solutions. Typically, they’ll need to be paid back within the year, but bridge loans are designed to allow a certain level of flexibility.
Some bridge loan terms can be as long as two years, and commercial bridge loans can even be up to three years.
The individual terms of your bridge loan can be arranged on the offset and will depend on circumstances like your repayment plan, borrowing amount and the value of the property you want to buy.
Your borrowing amount and the value of the property you wish to buy will play a significant role in shaping the terms of your bridge loan. Your lender will assess the property's market value, its potential for resale, and the viability of the exit strategy you have in place. This evaluation can help them determine the loan amount they are willing to offer and the appropriate terms for repayment.
What are the criteria to get a bridge loan?
Criteria for bridge loans are typically looser than mortgages, which contributes to their quick processing time.
You’ll also need to provide a deposit. Lenders will often require a 25% deposit minimum and depending on your circumstances and how much you’re looking to borrow, the average deposit amount can range between 20 – 40%.
Lenders generally put the most weight on the viability of your property, as in most cases, this will be your means of repaying the loan. This is where valuations can be essential because they can provide the lender with additional confidence in your exit plan.
Bridge loan application process
The application process for bridge loans can be simpler than for a mortgage. The key criteria for bridge loan eligibility is your exit plan, unlike mortgages, which are based on using personal or rental income to repay the loan in the long-term.
As well as this, bridging finance is only offered by private lenders in the UK, who can typically be more accommodating for more unique circumstances.
For these reasons, you usually won’t need to provide as much paperwork, and while lenders will need to do a credit check as part of the application, depending on how you plan to pay back your bridge loan, there may be less emphasis on your credit rating.
The documents you’ll need to provide for a bridge loan application are:
- Identification
- Proof of address
- Evidence of assets
- Evidence of liabilities
- Bank statements for three previous months
And if you’re planning to repay your bridge loan by refinancing to a mortgage, you’ll also need the agreement in principle for the follow-up mortgage.
How much do banks charge for bridge loans?
Bridge loans tend to cost 1 – 2% of your borrowing amount. This is known as an arrangement fee, which is how much the bank is charging you to take out the loan.
You will also usually need to pay:
- Interest fees
- Valuation or survey costs
- Admin fees
Bridge loans can be more expensive than mortgages, and this is usually because bridge loans usually cater to circumstances involving a certain level of urgency, making them higher risk than mortgages. Because bridge loans are only offered by specialist lenders, the pool of lenders to choose from is much smaller than with a lot of mortgage applications, which can also drive up costs.
However, because they’re short-term, you will only pay interest on the months you have the loan for, and there are no early exit charges.
If you’re not planning to repay your bridge loan by refinancing to a mortgage, there are cases where a bridge loan is a more affordable option. And if you’re relying on a quick processing time to purchase your property, bridging will most likely be the only suitable finance option.
Bridge Loan Calculator
Find out how much you could borrow with our bridge loan calculator below:
How quickly can you get a bridge loan?
Bridging loans can be arranged in as little as 7 working days, which is what makes them suitable for borrowers looking to secure property finance quickly. However, how quickly your application is processed will depend on a few things.
Firstly, the purpose of the loan can determine the turnaround time of a bridge loan. Bridge loans for investment or commercial purposes are unregulated, which allows them to be processed more quickly than those used to buy residential property.
Bridge loans for residential property are regulated and typically take longer to process. Regulated bridge loans can take as long as one month to process, but in most cases, they will still be quicker than a mortgage.
You may be able to arrange a bridge loan to meet an especially short timeframe, but this will usually involve higher fees.
Some other factors that can impact how quickly you can get a bridge loan are your lender’s internal processes, as these can differ from lender to lender and the property valuation.
As well as this, completing your side of the application fully and providing the appropriate documents can help ensure that the application is processed efficiently and avoid any administration delays.
Do you need a good credit score to get a bridge loan?
You don’t necessarily need a good credit score to get a bridge loan. A good credit history is beneficial in any loan application, but more than anything, bridge loan eligibility is based on the viability of how you plan to repay your loan.
If you plan on refinancing to a mortgage, you may find you have more limited options if you have adverse credit. Credit checks are a significant part of a mortgage application, and you’ll need a mortgage agreement in principle to be eligible for your bridge loan if that’s how you plan on repaying it.
However, if you want to repay your bridge loan through other means, such as a property sale or funds from an inheritance, poor credit history will be much less of an obstacle.
How we can help
If you're not sure where to start on your bridge loan application, working with a specialist bridging broker can help. At Clifton Private Finance, we have access to a wide range of specialist lenders and can get you the best deals on the market for your specific situation.
We can liaise with the lenders on your behalf and guide you through the paperwork. Working with a specialist broker is not only more likely to get you a better deal than if you were looking by yourself, but it can also help make your application process smoother.
Get in contact
If you’d like to discuss how we could help get you started, get in contact for a free no-obligation consultation with one of our advisers.
Call us on 0117 959 5094 or make an online enquiry with us 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?