Bridging Loan

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:

1. 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.
   
   
2. 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.
   
   
3. 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.
   
   
4. 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.