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What is a bridging loan?

A bridging loan or often called, bridging finance, is a short-term borrowing facility that is secured against a property.

A bridging loan is typically for 12-36 months and is typically repaid via a mortgage or because of a property sale.

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What are bridging loans used for?

Bridging loans are classed as a specialist lending product and can be used for a variety of reasons, including:

  • Property purchase, auction finance, or capital raising options.
  • Property refurbishment and development finance.
  • Broken property chain solutions.
  • Financing currently non-mortgageable properties.
  • Complicated situations.

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How does a bridging loan work?

Bridging loans work by allowing a borrow to benefit from a fast, short-term lending solution. Due to the nature, speed, and flexibility of the bridging loan, arrangement fees and rates are usually higher than with a traditional mortgage.

An alternative product to a bridging loan is a secured loan which we will recommend where appropriate. Utilising the services of an independent mortgage broker, like us, will likely save you both time and money.

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Bridging Loans FAQs

Are bridging loans a good idea?

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Yes, when used for the right purpose, a bridging loan can be a great idea and solution to a short-term financing situation. Seeking trusted independent advice in this area is crucial as mistakes can be costly, an experienced broker will save you both time and money.

A bridging loan can be set up quickly and act as a ‘chain break’ until a property is sold, or a new mortgage has been arranged. They are often used in property transactions when timing is crucial.

Bridging finance can be in the region of £5,000 up to £25m+ and can be set up in a matter of days.

In our experience, a bridging loan is often used by investment property owners looking for development options or high-end residential purchases to plug a gap with a sale and a purchase. We usually advise clients to factor the cost of bridging into their return-on-investment calculations to get a clear picture of whether it’s worth the additional fees.

How much does a bridging loan cost?

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Bridging loans can be expensive, however, they are a brilliant solution for the right customer. The set-up fees and interest rates can be higher than with a traditional mortgage, however, they are a short-term solution.

We advise our customers who are looking to purchase via a bridging loan to factor any bridging finance costs into the overall cost of the property to see if it’s viable.

Bridging finance is often used to purchase do-er upper properties at auction where a 28-day exchange is required.

Your bridging loan broker will run through all the associated fees before you apply to ensure your understanding.

How to get a bridging loan?

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It’s always best to get a bridging loan via a mortgage broker as this will save you time and money. Bridging finance is classed as specialist lending and many lenders only offer their products and deals via brokers. Due to the nature of the lending mistakes can be costly.

You’ll need to provide details of your assets and liabilities along with your income as part of the application process. You’ll need to have a plan in place to repay the loan, such as from the sale of a property or via a future remortgage.

Your mortgage broker will research the current deals available and recommend the best bridging loan for you based on your personal situation.

How quickly can I get a bridging loan?

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Fast, a bridging loan can be paid out in a matter of a week or two when required. Due to the nature of lending, a customer typically is wanting a quick solution to a problem.

Working alongside your broker and providing any information quickly and accurately will speed up the application process. An experienced broker will likely know which lender will be right for you and your situation from your initial conversations, saving you more time.

What are the typical terms for a bridging loan?

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The typical terms for a bridging loan will depend on what type of loan is suitable for you and what your objectives are, for example, you may only require a loan for 6-12 months if you have a property to sell. Maybe you require a bridging loan for longer if you are doing a refurbishment project.

As a general guide, bridging loans can be used up to 24 months, however, some can be for longer depending on your situation.

Bridging finance is available on both properties that have a current mortgage on them or are mortgage free.

What are the interest rates on bridging loans?

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Bridging loan interest rates are usually higher than with traditional mortgage lending. Due to the speed of the loan being paid out and the short-term nature, the risk is much higher to the lender therefore they price this accordingly.

Still, even with higher interest rates, bridging loan can be a cost-effective solution for the right customer.

What is the purpose of a bridging loan?

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Bridging loans can serve various purposes, including:

Property Transactions – Bridging loans are commonly used in property transactions to bridge the gap between the purchase of a new property and the sale of an existing property. This helps buyers secure a new property without having to wait for their old property to sell.

Auction Purchases – They can be used to secure properties bought at auctions where immediate payment is required. Time is critical here as usually a deposit is paid immediately when the auction ends.

Property Development – Developers might use bridging loans to fund construction projects while waiting for long-term financing to come through. Examples here include a purchase of a doer-upper property that requires renovations including a new kitchen and bathroom etc to allow it to be ‘mortgageable’.

Business Needs – Businesses might use bridging loans for working capital, expansion, or other short-term financial needs.

Complicated Situations – Bridging loans can be a great solution for complex situations. We find that many customers that enquire with us have bespoke situations which are rarely straightforward.

What are the different types of bridging Loan?

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As with regular mortgages, there are lots of different types available to cater for individual client circumstances. As part of receiving great Bridging Finance Advice, your advisor will recommend the best way forward based on your situation.

Here’s a summary of the types of bridging loans that are available:

  • Closed Bridging Loan – A closed bridging loan has a predetermined repayment date, typically when a specific event occurs, such as the sale of an existing property. This type of loan is suitable when you have a clear and fixed timeline for repaying the loan.
  • Open Bridging Loan – An open bridging loan does not have a specific repayment date and is used when the borrower is confident about repaying the loan but hasn’t yet finalised the exact timeline. This type of loan offers more flexibility in terms of repayment.
  • Residential Bridging Loan – A residential bridging loan is used by individuals to purchase or refinance residential properties. It can be used for various purposes, such as buying a new home before selling the existing one.
  • Commercial Bridging Loan – A commercial bridging loan is tailored for businesses and can be used for purchasing, refinancing, or developing commercial properties.
  • Development Finance Bridging Loan – This type of loan is specifically designed for property developers and is used to finance construction or development projects. The loan is usually based on the project’s value and potential future value.
  • Regulated Bridging Loan – A regulated bridging loan is subject to regulatory oversight, typically when the borrower is an individual and the loan is secured against their primary residence. This is often used when there’s a delay in the property sale.
  • Unregulated Bridging Loan – An unregulated bridging loan is not subject to the same regulatory requirements and is typically used for commercial or investment purposes.
  • First Charge Bridging Loan – In a first charge bridging loan, the lender has the primary claim on the property’s value as collateral. This is common when the property is unencumbered or has a small existing mortgage.
  • Second Charge Bridging Loan – A second charge bridging loan comes into play when there’s an existing mortgage on the property. The lender takes a secondary claim on the property’s value after the primary mortgage lender.
  • Refurbishment Bridging Loan – This type of loan is used to fund the renovation or refurbishment of a property. The loan amount is often based on the property’s after-renovation value.
  • Bridging to Let Loan – A bridging to let loan is used by property investors to purchase a property, renovate it, and then refinance with a buy-to-let mortgage once the property is ready for rental.
  • Bridging to Sell Loan – This type of loan is used to finance the purchase of a property with the intention of quickly selling it at a higher price. It’s often used by property flippers or investors aiming for short-term capital gain.
  • Auction Finance Bridging Loan – Auction finance bridging loans are specifically designed for purchasing properties at auctions, where immediate funding is required.

What are the alternatives to bridging loan?

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Depending on your personal situation, there may be alternatives to taking out a bridging loan. Here’s a short list of the most popular ones, your advisor will run through these in more detail.

  • A Regular Mortgage – This will depend on whether this longer-term finance will suit your situation and if the property is in a condition to qualify for a mortgage.
  • Secured Loan/Second Charge – As above, in addition, you’ll need permission from your existing mortgage lender and enough equity in the property to qualify.
  • Personal Loan/Credit Cards – If you’re only looking for a small amount it might be worth considering unsecured borrowing such as a personal loan or credit card.
  • Development Finance – These loans work in a slightly different way and can be a great product for investors looking at refurbishment projects. We’ll help compare options here.
  • Fast House Buying Companies – These can be useful if you’re looking to release cash in the short term and qualify for a good price.

Bridging Finance Advice – Why Use Us?

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All clients will receive a free, no-obligation consultation where we’ll answer all your questions and explain a route forward. You can book this online via our ‘speak to an advisor’ button or telephone.

Each type of bridging loan has its own terms, eligibility criteria, and purposes. As part of our Bridging Loan Advice process, we’ll recommend the best way forward for you and let you know the fees and costs involved with your bridging loan.

 

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Bridging Loan Considerations

Security

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Bridging loans are typically secured against an asset, often the property being purchased or other valuable assets. The collateral serves as security for the lender in case a client fails to repay the loan.

Higher Interest Rates

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Due to the nature of the lending, bridging loans tend to have higher interest rates compared to traditional longer-term mortgages. This is because they are designed for short-term use and carry a higher level of risk for the lender.

Speed and Accessibility

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One of the main advantages of bridging loans is their quick processing and accessibility. They are designed to be approved and disbursed rapidly, which can be crucial in time-sensitive transactions. If you are organised and working with a great advice team, like us, bridging finance can be set up and agreed within days.

Flexible Repayment

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Repayment terms for bridging loans can vary. Some loans might require monthly interest payments with the principal paid back at the end, while others might allow for interest to be rolled into the final repayment. Your bridging advisor will run through these options with you in detail and recommend the best way forward.

Exit Strategy

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Bridging lenders typically require a clear exit strategy. A plan for how the loan will be repaid. This often involves demonstrating how the borrower intends to secure long-term financing or complete the sale of an asset to repay the bridging loan.

Creditworthiness

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While creditworthiness is considered, the decision to grant a bridging loan is often more focused on the value of the collateral and the viability of the exit strategy.

Associated Costs

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In addition to the interest rate, borrowers should be aware of other costs associated with bridging loans, such as arrangement fees, valuation fees, legal fees, and potentially early repayment charges. All the costs will be explained clearly as part of the bridging finance advice process.

Risk Considerations

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Borrowers need to carefully consider the risks associated with bridging loans, including the potential challenges in securing long-term financing or selling the asset within the expected timeline.

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Registered Address: 10 Consort Court, Hull, HU9 1PU.

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