If you’ve found your dream home but haven’t yet sold your own property you might be tempted by a bridging loan so you don’t lose out on your purchase.
As the name suggests, bridging loans are designed to help you ‘bridge the gap’ between the money you have at hand and the money that you’ll have shortly to repay what you owe.
They can be a very expensive form of borrowing, and not everyone will be eligible for this type of loan, so it’s worth understanding how they work properly before taking one out.
Here’s what you need to know.
- What are bridging loans?
- What are the different types of bridging loans?
- How much can you borrow with a bridging loan?
- What are the interest rates on bridging loans?
- How much will a bridging loan cost?
- How long does it take to get a bridging loan?
- Where can I find a bridging loan?
- Can you get a bridging loan if you’re retired?
- What are some of the advantages and disadvantages of bridging loans?
- What are some alternatives to bridging loans?
What are bridging loans?
Bridging loans are a type of short-term loan that uses a current property as security against the loan, although other valuable assets can also be used.
They are most frequently used to manage cash flow issues with properties, so people often use a bridging loan if they haven’t been able to sell their home quickly enough to buy a new property. Other reasons people may use them include:
- To become a cash buyer
- To buy a property at auction
- To fund the renovation of a dilapidated property that they haven’t been able to get a mortgage on
- To invest in a buy-to-let property.
People might use them for other purposes too, such as paying for care home fees until the property of a sale has gone through.
They can be a useful type of loan for many people, but because of the costs involved, they shouldn’t be entered into lightly.
What are the different types of bridging loans?
There are various types and features of bridging loans, including:
First and second charge bridging loans
When you take out a bridging loan on your property, your lender will apply a ‘charge’ to your property. This ensures that if you don’t repay your loan, the lender can recoup their costs from the sale of your property.
Charges on bridging loans can be either first or second charges, which outline the order in which the loans against your property will be paid.
If you don’t have any other loans secured against your property then a bridging loan would be considered a ‘first charge’. This means that if you don’t repay your loan, your lender would receive its payment first from the sale of your property. First charge bridging loans tend to be cheaper as there’s less risk to the lender that their money won’t be repaid in full.
If you already have other loans secured against your property, such as a mortgage, then your bridging loan may be a ‘second charge’ loan. This means that if you don’t repay your loan, your lender would be paid second from the sale of your property, with your mortgage lender receiving the first payment. This type of bridging loan tends to be more expensive as there’s a higher risk that the lender won’t get their money back in full. Second charge bridging loans often need the consent of your mortgage lender.
Open and closed bridge loans
Open and closed bridge refers to how the bridging loan will be repaid:
Open bridge loan – This type of bridging loan doesn’t have a fixed repayment date. This doesn’t mean, however, that you don’t need to have a plan as to how you’ll repay the loan. Lenders will want to know your exit plan and they’ll normally expect payment within one year. This can be useful if you don’t know exactly when your funds will be available, but this flexibility comes at a cost.
It’s worth knowing that if you take out an open bridge loan, some lenders will let you pay the interest when you repay the whole loan, rather than as you go along. This is known as ‘retained interest’ and essentially means that all the interest is deducted from the initial bridging loan sum, and at the end of the term you pay back the full amount you originally applied for.
Closed bridge loans – This type of bridging loan has a fixed repayment date, and tends to be cheaper than an open bridge loan as there is a defined date by which the loan will be paid off. This can be a good option if you’re selling your property and are waiting for completion. These tend to be shorter-term loans.
Fixed or variable interest rates
When you take out a bridging loan you’ll usually be able to choose between a fixed or variable interest rate:
Fixed interest rate – this means your interest rate will be fixed for the duration of your loan, so your monthly payments should be the same each time, or if you’re paying at the end of the loan, you’ll know how much you need to repay.
Variable interest rate – this means your interest rate can change throughout the term of your loan so your payments may fluctuate each month.
How much can you borrow with a bridging loan?
Bridging loans enable you to borrow anything from £25,000 up to millions of pounds, but the exact amount you’ll be eligible for will vary depending on your circumstances, credit history and the value of the property or assets you’re using to secure the loan.
You may be able to borrow up to 75% of the property value you’re putting up as security if it’s a ‘first charge’ loan (i.e. there’s no other mortgage secured on it) and you’re able to cover the interest payments, although in some cases this amount may be lower.
When working out how much you need to borrow for your bridging loan it’s really important to be as precise as possible in your calculations.
What are the interest rates on bridging loans?
Generally, bridging loans have monthly interest rates between 0.4% to 2% but they could be more than this depending on your circumstances. This might sound relatively inexpensive, but bear in mind that if, for example, you see a bridging loan rate of 1% monthly, this is the equivalent of paying 12% annually. The equivalent annual interest rates for these types of loans can therefore be anything between 5.41% and 26.82% or more if the interest is compounded or 4.80% to 24.03% if not compounded.
The exact interest rate you might be charged on a bridging loan will depend on a number of things including your credit history, the amount you’re borrowing and whether it’s a first or second charge loan.
The payment terms will also vary from lender to lender. Some might want you to pay interest monthly, while others will roll up the monthly interest payment and request payment when you repay the loan. It’s important to make sure you understand how much interest you’ll be paying and when, so ask your lender to outline the requirements for a specific loan.
While the interest alone is expensive on a bridging loan, there are also several other costs you’ll need to consider, which we outline below.
How much will a bridging loan cost?
Bridging loans are one of the most expensive types of borrowing not only because of the monthly interest rates but also because there may be a number of other fees that you’ll need to pay.
The exact amounts you’ll need to pay will vary depending on your circumstances, but you can usually expect your bridging loan to include the following charges:
|Arrangement fee – a one-off charge to pay fees for the arrangement of your loan||1%-2% of loan value|
|Valuation fee – you’ll need to have your property valued as part of the loan approval process.||£200 – £1,000|
|Administration fee – a one-off charge for the admin required to organise your loan.||Around £500|
|Legal fee – this charge covers the cost of the legal work required for your loan.||£500 – £2,000|
|Broker fees – if you’re using a broker to arrange your loan, they might charge a fee.||0.5% and 2% of the loan value|
|Early repayment fees – depending on what type of bridging loan you take out, you might be charged a fee if you pay back your loan early, but this will vary from lender to lender.||Variable|
|Exit fee – regardless of whether you’re paying back your loan early or not, you might need to pay a fee when you repay your loan in full. Again this will vary.||Variable|
How long does it take to get a bridging loan?
Bridging loans can be quick to arrange with some lenders approving your application within 24 hours and paying your money within two weeks, although others may take up to three weeks for your application to be approved.
The timeline will depend on several things, including your lender’s specific lending criteria, the checks they require, and how fast you’re able to provide the evidence they’re after.
Where can I find a bridging loan?
There are plenty of comparison sites and high street lenders where you can find a bridging loan, or you can use a broker to help you navigate the process.
There are specialist bridging loan companies and brokers that can help you find the best deal, and they can sometimes help speed up the process and/or negotiate better interest rates on your behalf. Some brokers might charge a fee so you’ll need to factor this into your costs, but others might not, so it’s worth shopping around.
Can you get a bridging loan if you’re retired?
The eligibility criteria for most bridging loans is that you need to be over 18, live in the UK and have a good credit history, so being retired shouldn’t stop you from getting a bridging loan.
Bridging loans aren’t generally dependent on your regular income being a certain level, but are instead secured against an asset, which can make them particularly useful if your money is tied up in your property.
You will, however, need to be able to demonstrate that you have a plan for how you’re going to repay the loan along with any fees and interest.
Some lenders have upper age limits, however, so make sure you check whether the lender you’re considering using has one.
What are some of the advantages and disadvantages of bridging loans?
The obvious advantage of a bridging loan is that it can buy you breathing space while you sell your property or raise conventional finance, but you must have a way of paying off the debt if your plans fall through.
- Speed – Bridging loans can normally be arranged quickly
- Payment levels – If you opt to have the interest retained you don’t have to pay interest until the whole loan is repaid
- Flexibility – Loans are flexible and can be paid off as soon as you’re able to.
- They’re expensive – You would typically pay up to 2% a month for a bridging loan, plus any extra fees, which is equivalent to 12% over a year. If you compare that to best buy mortgage rates of around 5% APR, you can see how much more expensive it is.
- Your home is at risk – using your home as security might mean that if you can’t make the repayments you’ll have to sell your home to cover the cost.
- High fees – there are several additional charges which can substantially bump up the overall cost of your loan.
What are some alternatives to bridging loans?
Bridging loans are expensive and they’re not the right option for everyone so if you’re in this position, there are some other options that you might consider:
- Remortgaging – if you’re looking to release some cash to buy another property, you might consider remortgaging. Of course, this is a significant long-term financial commitment so it’s not a decision to take lightly.
- Let to buy – This is a type of buy to let mortgage that lets you rent out your property and you can use the equity you’ve freed up to purchase a second property. Again, this is a long term financial commitment.
- Personal loan – If you’re looking to borrow up to £50,000, then you might want to consider a personal loan instead. They have lower interest rates and lower fees, so are likely to be a cheaper option than a bridging loan.
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