Categories
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
Skip to:
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
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?
