A guide to bridging loans

What is a bridging loan and how do they work?

Timing is crucial when investing in property, and if you need to make a purchase quickly, it isn’t always possible to get a mortgage. A bridging loan is an alternative that’s faster but works very differently.

What is a bridging loan?

A bridging loan is a type of short-term financing that’s sometimes used when buying property. As the name implies, it’s designed to bridge a gap between the time you buy a property and a moment in future when you expect to be able to repay in full. 

So, a bridging loan can allow you to buy and pay for a new property before you’ve sold a different one, or to buy a property quickly (e.g. at auction) before arranging a mortgage.

Who can get a bridging loan?

You’ll need to be a UK resident over the age of 21 to apply for a bridging loan. Usually, bridging loans are used by property developers or investors rather than residential buyers.

How much can you borrow?

Like mortgages, bridging loans are based on a ‘loan-to-value’ or LTV ratio. You can usually borrow at a maximum LTV of 60-75%, meaning you can borrow between 60% and 75% of the value of your property.

For a £200,000 property, for example, this is between £120,000 and £150,000.

Usually, you can borrow at the top end of this range if you don’t also have a mortgage on the property, and at the lower end if you do have a mortgage. This is because both the mortgage and the bridging loan are secured on the same property.

If you fail to make your repayments, your mortgage provider has a higher priority claim to that property and any money made from its sale.

A bridging loan on a property with no mortgage is called a first charge bridging loan, while a loan on a mortgaged property is called a second charge bridging loan.

When will you need to repay a bridging loan?

Rather than making monthly repayments, you’ll agree to repay in full, with interest and charges added, at a later date.

There are two types of bridging loans with different repayment terms:

Closed bridging loans

If you take out a closed bridging loan, you’ll have a set date on which to repay it. This might be linked to the completion date for the sale of this or another property.

Open bridging loans

If you take out an open bridging loan, you won’t have a fixed repayment date, but will usually be required within a certain period, e.g. one year. 

Which type of loan you choose will depend on how you plan to raise the capital to repay it.

What happens if you’re unable to pay?

Your bridging loan will be secured on your property, so if you fail to repay the loan, the property will be repossessed and sold to pay off your debt.

How much are the fees for a bridging loan?

Usually you’ll pay an arrangement fee of around 2% of the total loan amount, as well as a monthly fee of between 0.5% and 1.5%. This is quite a bit more than most mortgages, so you won’t want to take out a bridging loan for longer than you need to. 

Bear in mind that you might also need to pay valuation fees, administrative fees, redemption fees or exit fees, so always compare the total costs when you’re choosing a bridging loan. 

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