Bridging Loans

A Full Guide to Bridging Loans

Bridging loans are a unique type of short term property finance.

Despite their many uses and invaluable flexibility, most people don’t know much about them and how they can be used to guarantee a property purchase you have your hopes set on.

In this guide, we cover everything you need to know about bridging loans, including:

• How they work
• What they can be used for
• How much they cost
• How much you can borrow
• And how you can get one

And we include plenty of real-life case studies throughout to showcase precisely how they work in real-life scenarios.

In this guide

• What are bridging loans, and how do they work?
• What are bridging loans used for?
• 9 Example Uses of Bridging Loans:
  

1. Buying a house before selling your current home
2. Downsizing
3. Bridging loan to fix a chain break
4. Buying an unmortgageable property
5. Buying a property at auction
6. Paying off an interest-only mortgage
7. Paying care fees
8. Bridging loan to flip a property
9. Commercial development projects

• Bridging loan criteria
• How much does bridging finance cost?
• Are bridging loans regulated?
• How can I get a bridging loan? 

What is a bridging loan, and how does it work?

Bridging loans typically are short term loans secured by existing property used to purchase another property and repaid on the sale of existing property or other assets.

For example:

• You are buying a new family home and selling your existing one to fund the purchase.
• You’ve made an offer on a property you’ve fallen in love with, but the buyer of your current house pulls out, meaning you can’t complete your purchase.
• To avoid losing the new home, you can use a bridging loan secured against your current property to fund your purchase.
• Bridging loans usually have a 12-month term, so you’ll have 12 months for your house sale to go through, and you can exit your bridge (repay your loan) as a lump sum upon its eventual sale.

Because bridging loans are secured against your existing property or assets, interest rates are much cheaper than what you’d expect to pay for an unsecured loan, and you can borrow a lot more.

Generally, you can borrow as much as you want as long as you have a verifiable way to pay it back within 12 months.

In addition, the interest you pay on a bridging loan is rolled up into the total value of your loan instead of being charged monthly.

This means that you don’t have to worry about making monthly interest (or capital) repayments during the term of your loan, and you can protect your cash flow for your relocation or living costs.

Once your property or other asset has been sold, you can then pay off your interest comfortably with the proceeds of your transaction.

Watch our video below - Bridging Loans Explained: Costs, Timescales, Examples, & How To Get One:

What are bridging loans used for?

The clue is in the name. Bridge loans are typically used as a short term solution to bridge a gap between a purchase and a sale or another combination of transactions where a standard, long term mortgage wouldn’t be suitable.

The typical example above is buying a property before selling your current home.

However, other uses of bridging loans are often overlooked, and many people don’t realise how useful they can be in certain situations.

Ranging from simple to complex, here are some different examples of bridging loans.

9 Example Uses of Bridging Loans: 

1. Bridging loan to buy a house before selling your current home

This is one of the most common uses of bridging finance, and it’s as simple as it sounds.

Buying a new house while selling your current home can be stressful. There’s a considerable amount of administration and various costs involved, and if something goes wrong, it can amplify the pressure.

Many people choose to use a bridging loan to secure their new property while they wait for their current home to sell for the following reasons:

• Using a bridging loan effectively makes you a cash buyer – this is a great position to be in, and your offer to buy will be attractive to property sellers.
• It gives you 12 months to sell your house – you give your current home time on the market to generate interest and allow time for a great offer to come through.
• This means you don’t have to worry about buyers pulling out.
• And you can even raise more funds than your new purchase value and spend the extra money on some refurbishments to your old property to increase its value before selling.

Our complete guide goes into more detail and different scenarios: Bridging Loan For Buying A House: Example Of How It Works 

2. Bridging loan to downsize

Using a bridging loan to downsize into a smaller property is also an everyday use of bridging finance.

Along with all of the above benefits, you also benefit from raising a lot more than you are buying for because the property you are securing your loan against will likely be more valuable.

For example, if you are selling your property for £500k and buying for £350k, a bridging lender would happily lend you £500k to be repaid upon the sale of your property, which after buying your new home would leave you with £150k to fund:

• Moving costs
• Refurbishments on your current home to increase its value
• Any work required on your new home before you move in
• Legal costs and other fees you’ll need to cover throughout your house purchase process

Read our guide on How A Bridging Loan Can Help You Downsize Your Home In Retirement 

3. Bridging loan to fix a chain break

If your buyer has pulled out last minute, you face losing the new home you have your heart set on.

One of the main advantages of bridging finance is its speed.

Why?

With a standard mortgage, your bank needs to ensure that you can afford to gradually repay your loan over 25 or 30 years with money you don’t yet have.

The affordability calculations are complex and time-consuming, and there’s a lot of red tape to get through for your underwriter.

However, a bridging loan will be repaid as a lump sum within 12 months from assets you already have – in this case, the property you are selling.

This means that bridging lenders can arrange finance significantly more quickly than a standard lender.

Our typical time frames for arranging bridging finance are from 2 to 6 weeks, with an average of 3 to 4 weeks, depending on the case's complexity. If you’re unsure if we can meet your tight deadlines, give us a call and speak to a bridging adviser to find out if we can help.

Read our how-to guide on the process: How To Use A Bridging Loan To Buy A House Before Selling 

4. Bridging loan to buy an unmortgageable property

What do you do if you’ve found a significant development project but can’t get a mortgage to buy it because of its condition?

If your property is uninhabitable, not wind and watertight, or has structural issues, then you may be unable to get a mortgage for it at all.

So, if you don’t have the cash to pull together and buy the property outright, a bridging loan is probably your only solution – but don’t worry, it’s a great one.

Property developers frequently use bridging loans to purchase a property that can’t be mortgaged.

A bridging loan secures then have 12 months to develop the property up to the mortgage standard. They can refinance onto a standard property loan (they use the traditional mortgage to repay the bridging loan and then repay the mortgage monthly as standard).

Please read our complete guide on this: How to get finance to buy an Uninhabitable property 

5. Bridging loan to buy a property at auction

If you’re buying a property at auction, you typically need to complete the purchase within 28 days.

This time frame is too short for a standard mortgage.

Bridging loans can be arranged very quickly, under the agreement that you will later refinance with a standard mortgage.

Because your bridging lender knows that you will repay your loan as a lump sum through an entire mortgage, they can release the funds within 28 days in most cases.

You then have 12 months to arrange standard mortgage finance on your property to repay the bridge, and often your bridging loan adviser will recommend the right product for you that fits your requirements.

Read our comprehensive guide to property auction finance here

6. Bridging loan to pay off an interest-only mortgage

You are generally required to repay an interest-only mortgage as a lump sum at the end of its term. Unlike a standard repayment mortgage, you don’t repay the capital of your loan over time each month. Instead, you only repay the interest your loan generates, and at the end of your term, you repay the loan in full.

This is usually done by either selling the property you have used the mortgage to purchase or selling other assets to cover the costs, such as other properties or stocks and shares.

However, interest only mortgages are often used to purchase large, high-value properties that are often unique and/or bespoke to the owner.

This makes them hard to sell, and many people find that they need a bridging loan to fill the gap between when their interest only mortgage ends and finding a buyer for the property.

A bridging loan provides an extra 12 months to your deadline, and you can repay it upon the sale of your property or other assets. 

7. Bridging finance to pay for care fees

Clients often approach us in the difficult situation of arranging for their parents or family members to move into care and need short term finance to cover the costs.

Care fees can be costly, and if your family member doesn’t have the savings to cover the initial costs, on top of moving expenses, it can be challenging to find the money to pay for them.

The long term solution is usually to use the proceeds of the family member’s house sale to cover the ongoing care fees.

However, if they’ve moved into care unexpectedly, you probably won’t have time for the house sale to go through before care fees are due.

And if the property has been lived in for a while, it may need some TLC and refurbishments to get it up to its full market value before selling.

A bridging loan, secured against the property for sale, is the perfect solution to take the stress and pressure away from a delicate situation, creating the space and time for you to focus on the health and comfort of your loved ones rather than financial logistics.

A 12-month bridge can be used to pay for any initial care fees, moving costs, and property renovations, and repaid when the property sells, giving it plenty of time on the market to receive reasonable offers.

Because the bridging loan is secured against the property, interest rates are much lower than a standard loan would charge, and you can borrow much more – at least up to the value of the property if needed.

8. Bridging loan to flip a property

Many property developer clients use bridging finance to fund their development projects.

Whether you’re new to property development or have a portfolio behind your belt, a bridging loan can be a great short term funding solution.

If you have significant wealth already - enough to cover the purchase of your new development project – you may not want to liquidate it to make the purchase, especially if you plan to flip the property for a profit after completing your work.

Alternatively, suppose you don’t have any other way of financing a property development project. In that case, a bridging loan can secure the property for you to work on under the condition that you sell it before your term ends to repay your loan while keeping the profits.

Here are our services for Short Term Loans For Flipping Houses

The process is usually comprised of 3 steps:

Step 1: Purchase your development property project with a short term bridging loan.

Step 2: Use the additional funds raised to complete development work on the property.

Step 3: Sell the property for a profit, covering the fees of the bridging loan, the development costs and your income.

The bridging finance we can arrange has the interest rolled up into the loan's value.

This means that you don’t have to worry about making monthly interest repayments throughout your loan, and instead, you can protect your cash flow for use on your project.

Here’s our complete guide on How To Get A Renovation Mortgage 

9. Bridging finance for commercial development projects

Commercial bridge loans are a slightly different type of bridging finance.

Suppose you’re looking to develop a business from your property that will fund its mortgage. In this scenario, you may need a bridging loan to initially secure the property to start the business, generate income, and then refinance later.

It’s similar to the steps for financing an unmortgageable property above:

Step 1: Purchase a property with the potential to generate income with your bridging loan – for example, a property with land on which you can build a series of holiday lets.

Step 2: Include your development finance in the value of your bridging loan to allocate these funds to setting up your business on the property – for example, converting vacant buildings into holiday lets.

Step 3: Once the business is up and running and generating income, refinance onto a regular, long term mortgage to be repaid by the revenue from your company.

For complex scenarios like this, it’s always best to speak to an adviser early on so that we can get an overview of your plans and assess the likelihood of us being able to secure the relevant finance.

Related guide: How to get refurbishment finance for a buy to let property

Bridging Loan Criteria

Each lender in the UK has its own list of bridging loan criteria that a borrower has to fulfil in order to qualify for a loan. Some lenders look for low risk borrowers while others have niche areas they can facilitate. 

As a rule, there are two essential criteria you'll need to meet:

• You will need to have a form of security - usually one or more properties, or an asset that the loan can be secured against.
• You will need to have a solid exit strategy to repay the loan. A lender will want to know how you will repay the loan by the end of the agreed term. In most cases, this will either be through selling the property or refinancing with a traditional mortgage loan.

Since the loan is secured against property or collateral, a lender won't need proof of income. Equally, your credit history won't affect an offer as long as any outstanding debts or adverse credit don't impact your ability to repay the loan. However, if you do have a bad credit rating, you may have to pay higher interest rates.

Other basic criteria you will need to fulfil include:

• Minimum age of 18 years old
• Use the loan to purchase or refurbish residential or commercial property
• Live or have a registered address in the UK (UK expats are eligible for bridge finance in the UK)

Bridging finance is available to individuals and businesses. Loans can be set up for:

• Private individuals
• Limited Companies
• Partnerships
• Offshore companies

If you have any questions about your eligibility for a bridging loan, speak to one of our advisors who will be happy to discuss your situation.

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How much does bridging finance cost?

There is a range of different costs involved with bridging finance, and how much you pay will depend on the complexity of your case, your loan size, and other factors.

Here’s a list of bridging loan costs and how they work:

• Bridge Loan Interest Rates

The interest you repay on your bridging loan is calculated as a monthly rate instead of an annual rate, like with a standard mortgage.

This is because you may not hold your bridging loan for a whole year, and most bridging lenders allow you only to pay interest on the months you’ve held your loan if you repay it early.

Because of the short-term nature of bridging finance,  interest rates are usually much higher than a typical mortgage, but you only need to pay the rate for a much shorter period.

Here are some example interest rates based on a few different bridging scenarios:

• Your bridge loan rates will be affected by several factors, including:
• Your loan to value ratio (LTV)
• How much do you want to borrow, and for how long
• The condition of the property and what you’re planning to do
• Whether it’s a regulated or unregulated bridging loan
• The location of the property
• Your credit history

For more information, please read our complete guide to bridging loan costs.

The bottom line

When weighing up the cost of a bridging loan, the critical thing to remember is how much value the loan can add to your life or business.

If it means you can snap up your dream property and there’s no other alternative, it’s probably more than worth it.

And our clients often find that they entirely cover the cost of their bridging loan from the profit they make on refurbishing their existing property and securing its total value on the market with longer to sell.

Use our free bridging calculator tool to see how much your property finance could cost. 

Are bridging loans regulated?

There are two types of bridging finance: regulated and unregulated.

When you or a family member intend to live in the property you’re purchasing with your bridge, you’ll need a regulated bridging loan.

If the resident of the property you’re buying will not be you or a family member, 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. 

How can I get a bridging loan?

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