The name “bridging loan” can be a bit confusing. It comes from the original use of this type of secured loan, to help homebuyers purchase a new property before selling their existing one.
The idea is that it provides enough money so that the new property can be bought and moved in to. When the previous house is sold, the proceeds are used to fully repay the bridging loan.
But while it still retains it’s name, a bridging loan has so many more uses.
This article looks into how bridging finance works, the different ways it can be used and who is eligible for one.
What is a bridging loan?
A bridging loan is similar to a mortgage or secured loan.
It is a loan that is secured against a property, or in the case of a cross-collateral bridge, across multiple properties.
However, these loans are only granted for short durations, typically 3-24 months, and then they must be repaid in full.
Most loans are available upto 75% loan to value (LTV) and there’s no need for any monthly repayments, it’s all paid at the end.
How do they work?
These loans are accessing the equity you have built up in an existing home, residential property or commercial property.
So you need to own an asset with sufficient equity for the amount you need to borrow. Loans can be setup as a first charge or second charge.
They can be arranged very quickly and there’s no need for any payments until the loan ends. However, the interest rate charged is quite high, so you won’t want to keep the loan for any longer than is necessary.
The lenders are primarily concerned with the property being used as security as a means of justifying the loan. This means that your level of income, or credit history, is of lesser importance.
Who is eligible to borrow?
Pretty much anyone is eligible.
- Individuals
- Partnerships
- LLP’s
- Limited companies
- Special Purpose Vehicles (SPV)
Unless it’s classed as an FCA regulated loan, your ability to prove your income or afford any monthly repayments is not important.
Loans can be approved even if you have experienced some bad credit.
What can a bridging loan be used for?
These loans are incredibly flexible and quick to arrange. As long as the security is strong enough, you can use it for any purpose.
You just have to convince the lender that you will repay them in full and on time! This is called your exit strategy.
Successful strategies for repaying a bridging loan
What are some common exit strategies for bridging loans?
USES FOR BRIDGING LOANS
Chain break finance
This is probably the best known use for a bridge loan.
If your property chain breaks down, or you just want more control over when you move, then a bridge loan can help. It removes the need to sell and buy at the same time.
You get the funding you need to move into your new house, and the short term loan is repaid when the previous home is sold.
Property auctions
There are bargains to be had a property auctions, but there is a need to move fast and the finance needs to be equally as fast.
Traditional mortgages cannot be relied on to be ready in time when purchasing property at an auction. So a bridge is used for the initial purchase, offering upto 75% LTV.
This can then be repaid either when you sell the property or refinance it on to a long-term mortgage, such as a buy to let mortgage or serviced accommodation mortgage or even a commercial mortgage.
Uninhabitable properties
Typically these can be found at property auctions but ultimately an uninhabitable property is unmortgageable.
A house that is not fit to be lived in is not an attractive proposition for a mainstream mortgage lender. They want a watertight house that has heating, running hot water and a working kitchen. Otherwise they are unable to lend.
This can sometimes be the case when buying a repossession house, as they have often been neglected by their owners. Fortunately bridging lenders love funding derelict and uninhabitable properties, even those that have subsidence!
They will provide a loan for the initial purpose, and possibly the refurb work as well. Once the building work has finished the loan is repaid from the sale proceeds or from a long-term mortgage.
Properties with subsidence
Houses that suffer from subsidence can be fixed by underpinning, where the foundations and ground beneath the house are excavated and reinforced.
You won’t be able to get a mortgage approved for a house that has existing subsidence. So a bridging loan can be used for the initial purchase, and then once the works have been completed, you can remortgage on to an underpinned property mortgage.
Buying below market value
Mortgage lenders will calculate their maximum loan using the lower of the purchase price and the open market value.
If you have the opportunity to buy a below market value (BMV) property then a bridging loan can help by lending against the higher, open market value figure.
You can grab a bargain without putting as much cash in.
Business ventures
Need some money to kick off a new business idea?
If you have enough equity then you can raise the money needed, which can be for any purpose. You can use your own home or other investment properties you may own as security.
Solve cash flow issues
Cash flow problems are common and can crop up unexpectedly.
Plug the gap with a short-term loan and keep your business running smoothly.
Inheritance tax and probate
Liquidating and disposing of an estate can often take much longer than expected. In the meantime the IHT bill is due and other beneficiaries are looking to receive their share.
Where this involves the sale of a property, bridging finance can be utilised to provide the funding needed until the sale completes.
Divorce settlements
Where there is a need to raise money to help with a speedy conclusion.
Short leases
If a lease is classed as short then a standard mortgage lender will not be able to help.
A bridging loan can be used in two ways: 1) To enable a property to be purchased and have the lease extended, 2) To capital raise on a property already owned so that the lease can be extended.
Quick purchase, no messing around
Whether this relates to you or the seller, bridging finance can be used to facilitate a quick purchase of a property, with funds available in a few weeks.
The exit plan can then be an onward sale or refinance.
Paying a tax bill
An unexpected tax bill is unwelcome at the best of times. Raise the money needed to pay a tax bill and avoid HMRC penalties.
VAT bridging loan
When purchasing a commercial property VAT is normally added on top of the agreed purchase price. If you are registered for VAT then this can be claimed back, but it does negatively affect your cashflow.
A VAT bridging loan will fund the VAT bill until you receive a refund from HMRC.
Second charge lending
Maybe you own a mortgaged property but need to raise some short-term money. No problem, second and third charges are acceptable, providing the valuation is high enough.
Purchase and develop
Where substantial building works are planned, or needed, it’s unlikely that a mainstream lender would help.
Bridging finance can be used to purchase the property, with further funding agreed for the development works.
Exit by selling or refinancing.
If more time, or money, is needed then a finish and exit loan could help.
Portfolio expansion
While you cannot, and should not, keep the financing for the long term, it does allow landlords the flexibility to move quickly on additional purchases and then seek to arrange longer term solutions for the exit.
One example might be the purchase of a semi-commercial property, a retail shop with a flat above. Applying for a semi-commercial mortgage can take 6-8 weeks, so a bridge can be used to secure the deal and then wait for the longer term mixed use mortgage to be approved.
To buy a castle
Castles that come up for sale in Britain are often in some disrepair. So a bridging loan will be used for the purchase finance and then a long term castle mortgage can be arranged once the renovation is complete.
Buying a plot of land
Perhaps you are a self-builder or maybe hoping to benefit from a future planning gain. A planning gain bridge loan can be used to initially purchase the land while waiting for planning permission to be approved.
To stop repossession
Where repossession is imminent, a bridging loan can be used to pay off the mortgage debt, preventing repossession. This allows the owner more time to sell the property, for a higher price, without a forced sale situation.
100% mortgage retention
Your long term mortgage lender has imposed a 100% mortgage retention as the property needs some essential works. Using a bridging loan you can still purchase the property and carry out the repairs. Once done the retention can be lifted and the mortgage can take over financing.
Home improvements
Using a bridging loan to pay for home improvements would not normally be very cost effective. But, if you are up against a deadline and need to pay a builder or contractor, then it can provide short-term money in a hurry.
Any other reason you can think of
As long as the money is to be used in a legal and ethical way, then it will be good enough for a bridging lender.
They will make sure that the property is adequate for their security and that your declared exit strategy is realistic and feasible.
Not on the High Street!
The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
If your situation is a bit different or needs a more personalised solution then our brokers can help.
Expert advice, for all situations.
Second Charge Mortgages
It’s important to get expert advice when taking out a second mortgage as there are a lot of things to consider.
Bridging Loans
The most flexible of secured loans and often misunderstood. Bridge loans can be used in so many different ways and can be arranged super fast.
Complex Mortgages
A complex mortgage could be considered any situation that does not fit with the standard lenders. Typically this would be borrowers who have multiple income streams and/or properties of non-standard construction.
Thinking about taking out a bridging loan?
Bridging loans can be used for a wide variety of purposes, such as buying a property, releasing equity at short notice or covering a commercial property VAT bill. They are an ideal option when you need to raise money quickly and don’t want to sell your property.
With a bridging loan, you can get the cash you need without having to wait for the sale of a property or mortgage approval. This means you can take advantage of any opportunities that come your way without worrying about the timing.
And since there are no restrictions on how you use the money, you can put it towards whatever project or goal is most important to you.
Are bridging loans regulated?
Sometimes, it depends on how the property will be used:
REGULATED
A bridging loan will be classed as regulated if the loan is secured against a property which the borrower, or their immediate family, currently occupies or intends to occupy.
Regulated bridging loans have a maximum term of 12 months.
- Regulated by the Financial Conduct Authority
- Secured by first legal charges against property that is or will be occupied by their close family
- Borrower or family need to occupy at least 40% of the property
UNREGULATED
A loan will be unregulated if it is secured against a property that you have never, and will never live in.
This could be a buy to let or holiday let property, for example.
- First charge loan on a commercial property
- First charge loan on an investment property
- Second charge loan on the borrower’s home that is over £25,000 and for business purposes
Lenders of unregulated loans are not bound by the FCA’s regulations.
FREQUENTLY ASKED QUESTIONS
How long does it take?
You should receive an initial decision within 24-48 hours. Subject to other checks and valuation, funds could be available in 7-14 days.
How are bridging loans repaid?
Bridging loans do not require regular payments, they are settled in one go. The way you intend to repay the loan is known as an ‘exit strategy‘.
What’s the maximum loan?
There is no maximum loan size, but most lenders only go up to 75% LTV.
How do I know if a loan is regulated?
Your bridging loan broker will be able to advise you of this, based on the FCA guidelines.
Can you get a loan with bad credit?
These lenders are much more amenable to bad credit. However, it is the lending scenario as a whole that will be the deciding factor.
What’s an open bridge?
Bridging loans can be set up as ‘open’ or ‘closed’.
An open bridge means at the time of application there is no firm date established for repayment.
