The Ultimate Guide to Getting a Bridging Loan
Sometimes, a mortgage isn’t the best way to raise money for a property. You might not even be able to get a mortgage on some properties either – and that’s where a bridging loan comes in.
Here’s your comprehensive guide to bridging loans to help you decide if it’s what you need. If you’re still not sure about whether a bridging loan is right for you, remember you can always speak to our expert mortgage brokers, too.
So, what is a bridging loan, when should you get one, and how do they differ from regular mortgages?
When Is a Bridging Loan Used?
There are a few situations when a bridging loan may be the best option for your property purchase. Let’s take a look at each in more detail.
Auction properties often don’t meet traditional mortgage requirements. They may not be habitable, for example, and need a lot of renovation work before you could move in.
The fast-paced world of auctions also doesn’t suit typical mortgage arrangements, and as you may not end up buying the property you first had your eye on, your financial requirements may change.
A bridging loan offers a lower loan-to-value ratio than most mortgages but can be arranged much quicker to fit into the short 28-day payment requirements of property auctions.
Like auction properties, some houses on the open market won’t be habitable. Even a cooker missing from a kitchen could be enough for a mortgage lender to refuse a loan arrangement.
If you need to buy a property in a state of disrepair, a mortgage isn’t going to suit. A short-term bridging loan, however, can help you to fund the purchase so that you can work on the property to make it habitable again.
A bridging loan can also cover renovation projects that require a change of purpose. This may not suit a mortgage application as there is no guarantee that, once the property is purchased, a change of purpose application will be granted.
If you’re willing to take on that risk, bridging finance will mean you can buy the property and make the necessary adaptations and planning consent applications.
To cover delays in a mortgage application
Bridging finance may help you if you’re struggling to satisfy your mortgage lender’s requirements on a property – or if you don’t have time to apply for a mortgage.
Say, for example, you’ve made an offer on a house with a mortgage – but then the lender finds that the property is worth less or it isn’t actually habitable after all. Or, you’ve found a property and need to move quickly – far more quickly than a mortgage application would allow.
You may need to move out of your existing home or rented accommodation on a set date – and the last-minute mortgage refusal or delays in the application could leave you homeless.
Bridging finance can help you. The loan is much quicker to arrange than a mortgage, so you can use the finance to – quite literally – bridge the gap until the mortgage provider is satisfied.
Prevent a property chain collapsing
Similar to covering the gap caused by mortgage delays, bridging finance can also be used when home purchasers don’t need a mortgage – but face a property chain collapse.
For example, Diane and Anthony have paid off their old mortgage and own their house in full. They have a large amount of cash in savings and want to upgrade to a bigger home. Their house is under offer for £300,000 and they have a further £300,000 in savings. They’ve found their dream home that costs £550,000. The combined amount of the sale price and their savings means they can afford the new property.
However, their buyer’s sale has fallen through, so the purchase of Diane and Anthony’s house won’t complete in time either. This leaves them in a bind: they need the funds from the sale of their house to complete their purchase. If they lose their buyer, they could lose their dream home.
So, Diane and Anthony turn to bridge financing, borrowing £250,000 and using their full £300,000 savings to complete the purchase of their dream home. They put their existing house back on the market and use the proceeds of the sale three months later to pay back the bridging loan.
How Are Bridging Loans Different from Mortgages?
Mortgages are long-term home loans spread over (typically) several decades. Bridging finance is a short-term property loan designed to give you breathing space on properties that require renovations or to prevent your property purchase falling through, as explained above.
Bridging loans come at a higher cost than mortgages, and a lower loan-to-value ratio than most mortgages. However, they’re much quicker to arrange and mean you can access the finance without waiting weeks for a mortgage application to be granted.
You also don’t have to pay monthly interest payments, but if you can’t repay the loan in full at the end of the term, the property may be repossessed by the lender to sell.
You repay the loan at the end of the agreed term, including the interest and fees. This means you’ll need to have the capital in place to make the payment – for example, if you’ve turned a previously uninhabitable property into a suitable family home, you could then apply for a mortgage to pay off the bridging loan.
Who Is Eligible to Apply for a Short-Term Bridging Loan?
Applying for a bridging loan is like applying for a mortgage. Lenders allow for varying degrees of bad credit history but you still need to prove the funds can be repaid.
Bridging finance is available for different entities, too: individuals, limited companies, and LLPs can apply for it for residential, buy-to-let, or development purposes. It can be granted for property purchases, remortgaging situations, and to release equity – but you’ll always need to provide a feasible repayment plan.
Advantages of Bridging Loans
Bridging loans help many property purchasers because:
- They’re much faster to arrange than a mortgage
- They act as a stop-gap to prevent property purchases falling through
- You don’t have to make monthly interest payments (the interest can be paid at the end of the term)
- You can get finance for properties that mortgage providers won’t lend for (renovations, a missing cooker or toilet, etc)
This all sounds brilliant – but there are a few downsides, too.
Disadvantages of a Bridging Loan
The cost of a bridging loan is more than a mortgage of the equivalent amount. This is because interest rates are normally between 6-18% per annum (or 0.5-1.5% per month). Compare this to a typical annual mortgage rate of 1-3% and you can see how quickly the interest mounts up.
You’ll also pay an arrangement fee of between 1-3% of the amount borrowed, rather than a typical set fee of £999 for a mortgage (or £1999 for a buy-to-let mortgage).
If something changes, so you can’t sell the property or gain the capital you anticipated to repay the loan, the property may be repossessed. For example, if you buy a property to renovate and sell for a profit, but can’t find a buyer before the end of the loan term, you could lose the property.
A bridging loan is short-term, often 6-12 months. It’s not supposed to be long-term finance – instead, it offers you some breathing space to find more appropriate finance for your long-term property plans.
How a Bridging Loan Broker Can Help Your Application
As you can see, a bridging loan can be a really useful way to find short-term finance for a property purchase. However, navigating the various deals available is often confusing – especially if you’ve never applied for bridging finance before.
A bridging loan broker will have access to the whole of the finance market – including deals you may not be able to find yourself if you approached lenders directly. A broker will also advise you on whether a bridging loan is the option they’d recommend – or if alternative financing options would suit your plans better.
Call us on 0208 323 8989 or book an appointment with our bridging loan experts today to find out how to secure short-term finance for your next property purchase.