A mortgage isn’t the only option when buying a property. In some situations a bridging loan is a better option – especially when you need to move fast. We explore how bridging loans work and whether a bridging loan is right for you.
What is a Bridging Loan?
A bridging loan, or bridge loan, is a short term loan which can be at a high value. Terms are individually negotiated between brokers and lenders to find you the best deal. The loan will ‘bridge’ the gap between buying a property and finding a long term way to pay for it, or sell it on. Most bridging loans are issued for up to 24 months but can be repaid sooner.
Bridging loans are available to individuals, limited companies, partnerships, UK and foreign nationals. They are most commonly used by property developers and landlords, looking to raise funds swiftly but can also be used to purchase your next home.
There are both commercial and residential bridging loans. If you’re buying property to live in, you need a residential loan which will be regulated by the Financial Conduct Authority, while buying as an investment, buy to let or commercial premises is unregulated borrowing.
Who would use a Bridging Loan and why?
Typical situations where people take out bridging finance include:
Buying at auction – Buying at auction can get you a bargain priced property, but you usually need to pay in full within 28 days which isn’t long enough to arrange a traditional mortgage. A bridging loan can be set up in a matter of days. If you are planning to purchase at auction it is better to know your finance options before you attend to ensure that you do not commit to something you are unable to afford.
Buying property before you sell your current home – once your house sale completes you repay the bridging loan. Being a ‘cash buyer’ makes you an appealing purchaser and can help you escape a property chain. It is also useful if you have a ‘chain break’ where one buyer within the chain pulls out during the purchase process.
Buying property for renovation – Some people use a bridging loan to finance a big renovation project, especially if the property can’t be mortgaged in its current state. This may include significantly altering a property, self build, conversion of a larger property into a House of Multiple occupation (HMO) or a property deemed as ‘uninhabitable’ – missing a bathroom, kitchen, roof etc. For ground up development projects development finance may also be used (link)
Purchasing an asset for development prior to planning permission being obtained – Planning gain can be achieved through investors purchasing sites of land and property with a view to securing planning permission, which then makes the plot more valuable. Once planning permission has been granted, development finance options (link) can be put in place or the site can be sold on.
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What do you need to qualify for a Bridging Loan?
It is essential to know your exit strategy before entering into a bridging loan. Ideally you will have at least two options which may include selling, refinancing or settling the loan with the imminent release of other assets . You will need to work with a broker to be able to explain to the lender exactly how and when you will repay the debt.
Generally, you will also need to be able to put some of your own money into the deal. Lenders may give a bridging loan worth up to 75% of the property value as a maximum inclusive of all fees and charges, meaning the net loan received by you would be lower.
To extend the borrowing further you could secure the loan against both the property you’re buying and other property you own.
It’s possible to get either a First Charge bridging loan or a Second Charge loan. The legal ‘charge’ confirms who receives money first if you can’t repay the loan and your property gets repossessed. Usually, mortgage lenders have ‘first charge’, so the mortgage debt is paid back first. If you put up your home as security for a bridging loan, that lender has second charge after your mortgage provider.
It’s important to get advice so that you fully understand the benefits to your next project as well as the risks and costs of a bridging loan.
How much does a bridging loan cost?
The full cost of the loan depends on the size, interest rate and arrangement fees. There may be property valuation and admin fees and there will be legal costs involved. Generally, interest costs and fees are higher than on a mortgage, but are still a great way to finance your next property. Interest and charges can often be rolled up and repaid at the end of the loan, otherwise they can be paid monthly.
There is usually a difference in fees and loan totals depending on whether you have a first charge bridging loan or second charge loan.
What if I have bad credit?
Adverse credit can make it more difficult to obtain a bridging loan, but it depends on the severity of your debt problems. One or two missed payments may be acceptable, while County Court Judgements or bankruptcy could make it very challenging.
How do you apply for a bridging loan?
You will need to contact a good broker as bridging loans cannot usually be arranged direct. We will explain what you need to consider and help find the most suitable lender for your situation.
You will need the usual ID and bank statements, plus proof of any assets you will be using as security for the loan. You will also need to set out a clear exit strategy.
How can The Mortgage Mum Specialist Finance help?
We’ve helped many clients buy property with a bridging loan – especially when they need to act fast to get that dream property or investment. Our team is highly experienced in property financial services and we’re here to explain all your options.
We look at your specific situation, your priorities and ambitions – then find the most suitable products for you. Contact us today for an initial chat about how we could help you. (insert specialist finance inbox and phone number details)
Your home may be repossessed if you do not keep up with the repayments on your mortgage.