Bridging Loans Made Simple
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Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon.
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Bridging Loans Made Simple
A bridging loan is not something you will generally come across as you simply move from one residential house to another in your life, as long as everything goes smoothly and exactly to plan. A bridging loan though will help you open up possibilities that you simply won’t have under “normal” circumstances and can also help movers and developers alike complete on transactions that ordinarily may not be possible.
What is a bridging loan?
A bridging loan is a short-term mortgage, secured on a property just like any regular mortgage. They are designed to “bridge” the gap from one to thing to another. They can be used for purchases or re-mortgages where you need finance quickly or that a traditional mortgage lender may not be able to do. For example if you want to buy a new property before you have sold your current one, a bridging loan may be able to give you the funds you need to complete on the new purchase. You would then repay the loan when your previous sale completes.
How is a bridging loan different to a normal mortgage?
There are a few major differences with a bridging loan. The first is the amount of time you will have it. Whilst you might expect to have a standard mortgage for 25 years or even longer, a bridging loan will generally be granted for up to 12 months. Also unlike a standard mortgage where the interest is calculated daily using an annual interest rate, a bridging loan will have a monthly interest rate and so the payments will usually be much, much higher than you would pay on the equivalent mortgage. However, the bridging loan will be available in situations where other mortgages will not.
What income do you need for a bridging loan?
This is another big difference for a bridging loan. For most loans the lender will not really assess your income. This is because instead of making a monthly payment like you would on a normal mortgage, the monthly interest will be “rolled up” or in other words will just accumulate each month. So, because you don’t have to find the money each month it doesn’t really matter how much you earn. What is important to the lenders though, is how the loan and the interest will be repaid at the end of the 12 months or sooner. This is called your “exit strategy” and may be the sale of your previous house or maybe a re-mortgage to repay the loan. We might use this example where you have bought a property that is not fit to live in or rent out then you have refurbished it and now it is ready to secure a standard mortgage.
How long does it take to get a bridging loan?
As a bridging loan is a little more simple to organise than a standard mortgage. With much less importance being put on your income and situation, they can generally be approved and funds released much quicker. The application is simpler generally because the lender is more interested in making sure the “exit strategy” is sufficient to repay the loan and that it will cover the amount you borrowed plus the interest that has accumulated rather than assessing your income.
How much can you borrow on a bridging loan?
Because the lender is not looking so much as your income, how much you can borrow on a bridging loan really depends on the property and the situation. Generally speaking you can take up to around 75% of a properties value as a loan. It is not always that straight forward though! If you have other property to use as security then you could borrow more. For example if you own a home worth £600,000 with no mortgage on it and you want to buy a new house for £500,000 before you have sold. The lender may well spread their loan over both properties, then it will be less than 50% of the total property value and your exit strategy (sale of the original house) will more than cover the amount you have borrowed for the new one. Whereas without the bridging loan unless you have the cash to buy the new house, it simply wouldn’t be possible.
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Can you get a bridging loan for a buy to let?
Yes absolutely! In fact this is one of the most common reasons to use a bridging loan. The reason is this, to get a normal mortgage on a residential property, the property needs to be “habitable” this means it needs to have things like a kitchen, bathroom, heating, running water, etc. It doesn’t need to be particularly nice or somewhere you would want to live for long but you need to be able to move in and survive there!
But when it comes to a buy to let property, not only does it need to be habitable it also needs to be “lettable”. This is wholly different and means the property needs to be in a much better condition than it does to live in yourself. So when you are looking at a property that is not ok to let out in its current state then a bridging loan is the answer! We have helped multiple people secure bridging loans for this purpose. For example, a property bought for £200,000 to let out, you will need 25% deposit plus fees and enough money to do the renovation so we would expect to take a bridging loan for around £150,000. Let’s say after 6 months you have finished the renovation and now the property is ready to rent out and the value has increased to around £300,000. We can potentially secure a normal buy to let mortgage now up to 75% of the new value. This will give you £225,000 which will pay off the bridging loan and give you some extra cash back for your next project!
Can you get a bridging loan for a property that is not habitable?
This is a perfect example of when you might take a bridging loan for a house to live in. If the property is not considered “habitable” most standard mortgage lenders will not secure a mortgage on it. The bridging loan will step in here and give you the funds. You will need to make sure you have enough money for at least a 25% deposit and the refurbishment though, unless you have other assets to also secure the bridging loan on as discussed above.
Can you get a bridging loan if you already have a mortgage?
Yes you can potentially. This would be classed as a “second charge” which means if the property is sold, the original mortgage will be repaid first and then this loan second. This represents an increased risk to the second lender and so you should expect to pay a higher interest rate than for a “first charge”. You will also only be able to take the total borrowing on the property to around 75% of its value.
How much does a bridging loan cost?
The flexibility and situations that bridging loans can help with mean they do come at a cost. In some cases this can be quite significant but equally in some cases, without the bridging loan the transaction may not be possible at all! For a standard bridging loan you should expect to pay anywhere between 0.5% and 1.5% per month. That may sound low but don’t forget that is a monthly rate and not an annual rate. So for example, a loan of £100,000 exactly at 0.75% would cost £750 per month. You don’t usually have to pay that though, you can just let it accumulate and repay the total loan plus accumulated interest at the end of the term or sooner.
How do you pay off a bridging loan?
This is called your “exit strategy” We have talked about this a few times on this page, but it is important when arranging a bridging loan that we have a clear idea of how it will be repaid. If this is a re-mortgage, then we would want to do an agreement in principle to ensure it looks feasible before we commit. If it is the sale of a property, then we will need to be confident of its value.
Why use a broker to arrange a bridging loan?
To be honest, this is mostly about access to lenders. Bridging loans can be complex and involve multiple properties, strategies and plans and so most lenders simply won’t provide this type of loan direct to a customer. You will usually need a broker to help you put the case together and do the application for you. We have access to many specialist lenders that are just not available directly and so will be able to help you find the lowest cost option for your exact situation, no matter how complex it may be!
Due to the more complex and time-consuming research and packaging, our standard fee for arranging a bridging loan is £1000.
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