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Bridging Loans
Peter Matthews answers frequently Googled questions about bridging loans.
What is a bridging loan and how do they work?
A bridging loan is best described as short-term funding secured against a property asset. It was designed to bridge the gap between selling a property and buying another.
For example, if you’re in a chain of movers and everyone ahead of you wants to complete on July 30, but you can’t complete on your sale until August 30, you can take bridging finance to complete the purchase. The loan is then repaid when your sale goes through, bridging the gap in the chain.
So that’s where the term bridging comes from. Today it’s stretched to become a term that covers short-term funding for a number of projects.
This includes buying properties at auctions that may need work to make them habitable or ready to let out. It can range from simple improvements to major refurbishments such as knocking down most of a house and rebuilding. While bridging loans can be used for development projects, they primarily serve as short-term funding to prepare a property for marketing or sale.
Are there different types of bridging loans for commercial and residential properties?
It’s not so much commercial versus residential; it’s regulated versus unregulated. If you’re buying a property at an auction, it’s usually because there are works needed on the property, such as a new kitchen or bathroom to make it habitable and to enhance its value.
If you intend to live in it, your borrowing comes under regulated bridging loan regulations. Stricter checks are done to ensure it’s right for you to borrow that money.
If you’re buying for commercial purposes or refurbishment with no intention of living there, it’s an unregulated bridging loan where FCA rules don’t apply. Currently, most of the market focuses on regulated bridging loans, as most people use them for their own home or for a chain break.
Can you have a fixed or variable rate on a bridging loan?
Normally, yes. Up until recently they were always fixed at a given rate per month, because they’re short-term loans. They can be three, six, nine, 12 or 18 months.
But in the past year interest rates have increased dramatically and steadily, and lenders are now looking at offering variable rates. They don’t want to commit for a long period on a fixed rate. So you need to be mindful of whether the contract you’re taking on is a guaranteed sum or if it could vary.
Because they are short term, the interest rates charged on bridging loans are typically higher than standard residential or Buy to Let mortgages. Currently the gap has narrowed due to the base rate increases. [podcast recorded in July 2023]
Who’s a bridging loan for? Can anyone get one?
Yes, there are lenders that will lend to basically anybody who is purchasing a property. Typically you’ll need a 25% deposit, although some lenders can look at only 15% to 20% depending on the project and the property.
Most vendors would prefer somebody who has some experience of owning properties, either on a residential basis or on Buy to Let. But a first time buyer with a good credit history could still buy at auction with a bridging loan.
What is the exit strategy?
That is very important. Going back to traditional bridging, covering the gap between sale and purchase, that was known as a ‘closed’ bridge – the lender saw the mortgage offer you had on the purchase, so they knew the money was coming from the other lender in a month or two.
Now, bridging lenders look at what the proposed exit is. If the property is for letting, does the property lend itself to that, and would you be able to borrow enough on current interest cover ratios to repay the bridging loan? Are you selling the property to repay the bridge – have you bought it as a ‘flip and sale?’. The lender will look at whether that is a realistic exercise and if there will be enough profit in it. Is there a chance you could potentially not be able to sell the property?
Even though it’s short-term funding, the lenders have a duty of care to make sure that you can repay that commitment. The typical exits are refinance on a mortgage, Buy to Let refinance or sale of the property.
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Some loans are first charge and some are second. What does this mean?
In the main, the bridging lenders look at first charge, where they have first security over the property. That tends to be where you are facilitating some work on it.
For lending where there is already a first charge on the property – potentially a residential mortgage or Buy to Let borrowing – you could take a short term second charge loan. That borrowing sits behind the first lender. You could then potentially re-mortgage or get a further advance from your main lender when the work’s done to repay the bridge.
If you are buying a property at auction and you don’t have sufficient deposit, some lenders will lend 75% against the property that you’re buying. If there’s sufficient equity in a property that you already own you can take a second charge to get the balance of the deposit and enable you to purchase.
How long does it take to arrange a bridging loan?
It’s designed to be fast finance – typically you can complete within five days, if all your ducks are in a row.
The main holdups to completing quickly are arranging to get a valuation on the property done, getting that report back and getting the legal work completed. At the moment there is a holdup within the Land Registry for getting entitled documents and registration.
So if you buy a property at auction, do lots of work on it and then try to refinance it, you have to make certain that the property has been registered in your name at Land Registry to be able to refinance.
If you’re buying at auction you have 28 days in which to complete, because when the hammer goes down, you exchange contracts and commit to the purchase with a 10% deposit.
What if I have bad credit? Will this affect me getting a bridging loan?
It’s taken into account, but there are lenders there for everybody. As long as there’s a valid explanation of why the problem occurred, there are lenders that will be sympathetic. If it was a life event beyond your control or a business event, for example, you can often get a loan despite being credit impaired.
If your exit from the bridging is going to be onto a Buy to Let or a residential mortgage, the lender would want to see that with your credit file you do have the ability to get a long term mortgage to repay the bridging loan.
What do bridging loans cost?
Rates are changing all the time, depending on the Loan to Value (LTV). From 50% up to 80% LTV it can be between 0.5% per month up to 1.25% per month. It’s all down to the property that you’re buying, your background, your credit, the lender, the location of the property and the potential for letting.
Bridging is very much a product where you should seek professional advice to find the most suitable option. It’s not just the most suitable lender, it’s the most suitable rate as well.
How do you apply for a bridging loan?
This is where we come in. We specialise in this area and we have a number of lenders that we deal with on a regular basis offering both commercial and residential, regulated and unregulated loans.
We have very good relationships with them, which means not only the fastest possible service but the best available rates for our clients. To apply, start with a phone call to tell us what you’re trying to achieve, and we will help you get there with our lending partners.
What are the alternatives to bridging loans?
Let’s say you want to build your own home – in that case there are self-build mortgages available. If you’re buying at auction, if the property is suitable security for a mortgage there’s potential to get a Buy to Let mortgage within that time.
When you’re buying at auction the difficulty is in being certain that you’ll get that mortgage. You need to get a valuation done on the property prior to exchanging contracts on it. If you spend £500 on a valuation on the property and then don’t get it at auction, that’s £500 wasted. There are cheaper alternatives, but they are more risky because of the timescales to complete the funds.
Bridging loans are definitely a valuable tool in the housing market, but they are expensive. You should only take one when it makes financial sense for your project to do so. It should be regarded as part of an investment project, where the cost of the bridging is part of your development budget.
Do take into account the cost of the finance to make sure that it’s still financially right for you and will be profitable. Most important of all, seek professional advice.
Some Bridging Finance is not regulated by the Financial Conduct Authority.
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