Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon.
Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon.
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Adam Messer talks us through bridging loans, answering some frequently asked questions.
What is a bridging loan and how do they work?
A bridging loan is a little bit different from a standard mortgage. It’s a loan you take for a short period of time, and the interest works a little bit differently.
It’s normally a 12-month deal, but you can get them slightly longer. Generally speaking, bridging loans fit into two kinds of areas: commercial and residential. If you’re taking a loan on a property that you either live in or you’re going to live in, that’s going to be regulated by the FCA.
If it’s on a property that isn’t your main residence, that won’t be lived in by you or an immediate family member, or if it’s purely an investment or on a commercial building, then that is more of a commercial deal. It’s unregulated. From our point of view, the two are very similar. We go through the same process and do the same things.
The whole point of a bridging loan is that it is more flexible than a standard mortgage. You can get it on all sorts of different properties. It just gives people more choice. In a nutshell, a bridging loan is short-term finance when you can’t necessarily get a mortgage.
Who is a bridging loan for? Can anybody get one?
Basically anyone can get a bridging loan, but there are only certain circumstances where you would want one. If you could get a traditional mortgage, that’s going to cost you less than a bridging loan.
There are some typical examples that we come across:
- To buy a home with no chain. If someone is wanting to buy a new property before they’ve sold the property they live in now, that’s a prime example for a bridging loan.
It often happens with the older generation, who haven’t got a mortgage on their house and don’t want to go through the hassle of being in a chain. They find a house they like, want to buy it, secure it, move in, and then worry about selling. It’s a lot less stressful to do the two separately rather than try and tie it all together. You take a bridging loan to buy the new property, and then when your current home sells, you pay off the bridging loan.
- To renovate a property to let. Another common example is to buy a ‘fixer-upper’ to eventually let out. You can’t take a normal Buy to Let mortgage on that kind of property because it’s not lettable. To get a mortgage on a property to live in, it needs to be habitable with some sort of kitchen, bathroom and running water. And habitable is very different from lettable.
A property needs to be lettable in its current state – if not, you can’t secure a normal Buy to Let mortgage on it. Instead you can take a bridging loan, do the work, get it lettable again in a nice condition, and then refinance it to pay off the bridging loan. That’s the exit strategy.
- Small development projects. I’ve also helped people secure bridging loans for small developments, to change offices into flats or houses into flats – typically where you need finance on a property but you can’t just get a traditional mortgage.
- Buying at an auction. A bridging loan can be organised quickly, so if you’ve got a property to buy at auction that needs a lot of work, a bridging loan is a good option.
What is the ‘exit strategy?’
This is just a term that lenders use to work out how you’re going to actually pay this money back. It’s not like a mortgage where we repay it over time. With a bridging loan, you’ve got to know at the start how it’s going to be paid off because you need to repay it within a year.
Your exit strategy can depend on the situation. If you’ve found a house you want to buy, but you haven’t sold yours, you will repay the bridging loan when you sell your existing house.
Just as a side note, actually, an interesting point with a bridging loan is that you can secure it across more than one property. You can’t do that with a standard mortgage, but with a bridging loan you can.
As an example, if you’ve got a house now, worth £500,000, and you want to buy another house worth £400,000, you couldn’t secure a 100% of that purchase price on just the new property. You’ve got to have some equity and some deposit. But you could add those two properties together at £900,000 – against that, a £400,000 loan makes a lot more sense for the lender.
Going back to the exit strategy, with the investment property we’ve bought to renovate and let out, our exit strategy could be refinance. Once it’s ready for some tenants, we can refinance that on a Buy to Let mortgage.
We’ve probably increased the property value as well, so you might find you could borrow a little bit more than you owed on the bridging loan. I’ve done this a lot for people in the past, where it gives you some money back to do the next project. Having said that, Buy to Let is a bit tricky at the moment. As we record this in October 2023. Buy to Let mortgages are harder to get.
I’m working on a deal now for someone buying a farm. This is another example of a bridging loan. This is land that hasn’t got planning permission, so we can’t take traditional development finance or a self-build mortgage, but we could take a bridging loan.
We need a decent deposit of 40% or 50%, then once the planning comes in, the profit will be their exit strategy, linking together with development finance.
I also helped someone buy some offices like this. They were pretty sure the planning would be fine, so we used a bridging loan to buy the offices. Planning came through and they refinanced to development finance to convert the offices into flats.
You’ve got to think about your exit strategy because the lender will want to know what it is. They will also make sure it’s achievable – because they don’t want to be in a position where you can’t pay them back.
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Some bridging loans are first charge, some are second charge. What does this mean?
This is the same whether it’s a bridging loan or any sort of mortgage. Most standard mortgage lenders want the first charge on your property.
You’ve probably heard of property deeds, and these are all held at the Land Registry electronically these days. Let’s say you got a mortgage with NatWest. On your deeds it will be recorded that NatWest has a charge over the property, and it just means you owe them money.
Mortgage lenders and standard bridging lenders ideally want the first charge – it means that the property can’t be sold without paying off that charge. A second charge is similar, but it’s about the order of importance. Let’s say NatWest has first charge, and then you want to borrow a bit more money from a second lender, secured on your property as well. They’re going to take the second charge.
The interest rate is normally higher on a second charge because there’s a bigger risk for the lender. If you sell your property, NatWest is going to get paid off first, and then the second charge will get paid after that. If there’s not enough equity, the second charge lender might not get all their money back.
We can take a bridging loan as a second charge, but it’s obviously cheaper to do it as a first charge. If we’re spreading it across more than one property, then it could be a combination. It might have first charge on one property and second charge on another. Generally, we would try and get as much as we can on the first charge if possible.
How long does it take to arrange a bridging loan?
If it’s a fairly straightforward deal it can be done very quickly. You could go from the application to money released in a month. It depends on the lender and how many questions they ask.
Some lenders ask more questions than others. It also depends if they want valuations. If there’s plenty of equity and the property is not high value, they might be able to do a desktop valuation or an auto-valuation, which will help speed things along. It can be much quicker than a normal mortgage as long as everything lines up neatly.
What if I have bad credit? How does this affect getting a bridging loan?
It’s similar to a standard mortgage. The lender wants to know that you’re a safe bet to lend their money to. They want to know that you’re going to pay it back.
But because you don’t need to make monthly payments, and I’ll explain why in a minute, it’s more flexible for people with bad credit. Most people don’t pay monthly with a bridging loan – they tend to let the interest accumulate.
If you’ve got serious credit issues, we might struggle in the same way as we do a normal mortgage. We also need to think about the exit strategy. If your exit is refinancing, we need to be certain we can get the finance. So, it can be more flexible, but there are limits.
What do bridging loans cost?
The interest on a bridging loan works quite differently from a normal mortgage. With a normal mortgage, you pay an annual interest rate of, for example, 5%. The lender works out what your annual interest would be on your loan, and you pay that daily.
With a bridging loan, that interest rate is monthly. At the moment [podcast recorded in October 2023] you might pay between 0.6% and 1% per month. Those rates sound really low – but per month, that’s quite hefty interest, and that’s why a bridging loan is a backup option. If you can get a normal mortgage, that’s always going to be more cost-effective.
You don’t need to pay the bridging loan interest each month – you tend to let it roll-up or accumulate. At the start of your bridging loan, the lender will work out how much interest you’re going to pay, assuming you keep the loan for 12 months.
The lender might say that the interest will be £24,000 over 12 months – that’s added to the loan. If you pay the bridging loan off after three months, you’ve only accumulated three lots of £2,000 a month – so it will cost you less than keeping it for 12 months. After the first month, there won’t be any early repayment charges or fees or penalties to repay your bridging loan early.
With a bridging loan, six months is the key because at that point it’s then easy to get a mortgage. If it’s within six months it’s harder to get a remortgage for various reasons – lenders don’t like it. But if you’ve only got the bridging loan for six months you’re only going to pay half the total interest.
How do you apply for a bridging loan?
We do all that for you. We’ll see what your options are and whether we can get a standard mortgage, or whether it’s a bridging loan or development finance that you need. We’ll take that information and go to different lenders.
All lenders like to do different things – some are better on commercial, some are best for investment properties etc. and they all work in slightly different ways. We explain our recommendation and do the application. We’ll ask you for some paperwork – ID, proof of income, bank statements etc.
Income is probably less important for a bridging loan, but we may need to factor it in for the exit strategy. We’ll liaise with the lender to make it as seamless and hopefully as easy as possible for you.
What are the alternatives to a bridging loan?
You usually need a bridging loan for a specific reason. I’ll always see if we can get a standard mortgage first, but generally speaking there isn’t really an alternative to bridging unless you can fund your project in cash. But you wouldn’t be listening to this podcast if you had a load of cash!