If you need finance in a hurry, then a bridging loan might be the answer. Flexible and with competitive rates, a bridging loan can be tailored to meet your circumstances and get you the money you need – often much quicker than a traditional mortgage.
If you’re still waiting to sell your old house but don’t want to miss out on buying your dream home, or if you’re looking to snap up a property at auction and need the money fast, speak to one of our expert advisers and let us help you bridge the gap in your finances.
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A bridging loan is a short term, interest-only loan that is secured against your property. A bridging loan is normally used when you want to buy a new property but need to “bridge the gap” between selling your old property or taking out regular mortgage.
In some ways, bridging loans are similar to regular mortgages – they are loans secured against a property and they can be arranged as either first charge or second charge loans.
If the property you’re securing the loan against is mortgage-free, then you will have a first charge bridging loan. If the property already has a mortgage against it, you will have a second charge bridging loan.
The main difference between a first and second charge is that the rates are generally a little higher for a second charge bridging loan – that’s because the lender is taking a little more risk. (For a more detailed explanation of the differences between first and second charges, see our secured loans page).
Where bridging loans differ from regular mortgages is how they are regulated, the term, the way interest is charged and how the loan will be repaid.
Bridging loans can be either regulated or unregulated. If you occupy, have occupied, or plan to occupy the property the loan will be secured against, then you will have to take out a regulated bridging loan. These loans are regulated by the Financial Conduct Authority and give you, as the customer, a greater level of protection.
If the security property is not going to be occupied by you or your immediate family – such as a buy-to-let property – then you would take out an unregulated bridging loan.
Bridging loans are short-term loans, much shorter than traditional mortgages. For regulated bridging loans, the maximum term is 12 months. For unregulated loans, some lenders will let you borrow for up to 2 years.
Bridging loans can be arranged on a “closed” or “open” basis. A closed bridging loan has a fixed repayment date, while an open bridging loan does not – although the lender will expect you to pay it back by the end of their maximum term.
Because bridging loans are short-term, interest is charged on a monthly basis in one of 3 ways:
- With this type of loan, you’ll make monthly interest payments and pay off the capital balance (the amount you borrowed) at the end of the term.
- Rolled up. This is where the interest is added to the loan each month and you’ll pay everything off at the end of the term. The benefit here is that you won’t have to make any monthly payments – however, you should bear in mind that the interest compounds as it “rolls up” which can work out to be more expensive in the end.
- This is where you borrow a set amount of interest as part of your loan and pay it back at the end of the term. Retaining interest can give you the benefit of not having to make monthly payments, without having the interest compounding every month as it would with a “rolled up” loan. If you pay back the loan early, then any unused interest you borrowed is given back to you.
When it comes to interest payments, some lenders can give you a level of flexibility you won’t find with regular mortgages. For example, let’s say you have a 12 month bridging loan. You don’t want to make interest payments straight away, so you could retain interest for six months, and then move on to monthly payments after that.
As bridging loans are interest-only loans, one of the most important factors is your “exit” from the bridge – your plan for paying back the loan. Usually, this is done by the sale of a property, by taking out a regular mortgage, or by using an investment or pension lump sum.
Lenders will closely assess your exit strategy to determine how realistic it is. They’ll need you to provide some evidence to prove you have a sensible plan in place.
One of the disadvantages of bridging loans is that regulated bridging loans are capped at 75% loan-to-value, which means that you’ll need a 25% deposit at least. Some lenders will go up to 80% loan-to-value for unregulated bridging loans.
Because they are short term, sometimes secured against properties that might not normally qualify for a mortgage and therefore riskier for the lender, bridging loans are more expensive than regular mortgages – the equivalent annual rates can range between 6% – 20%.
Fees can also be higher, often between 1% – 2% of the loan. This is because of the additional work required to get the loan through quickly – you could get your money in as little as two weeks from application.
A bridging loan might be right for you if:
- You want to buy your new home but haven’t yet sold your old one, or your sale has fallen through – you have a “broken chain.”
- You want to buy a property at auction and need the funds quickly.
- You want to buy a property that is not currently habitable, or would not be mortgageable, in order to renovate it and sell it.
- You need quick finance to pay a tax bill or divorce settlement.
Representative example: Interest is calculated monthly, starting from 0.45% and can either be rolled up (payable at the end of the bridging loan term) or serviced (payable on a monthly basis). Terms can be considered up to 36 months.