Bridging loans can be an incredibly flexible way to finance property purchases, especially when time is of the essence. But they have many other purposes, including raising short-term funds to support your business.
Our explainer guide to bridging finance has all the details...
What is a bridging loan?
A bridging loan is quick, flexible short-term finance, typically with a 12-18 month term, secured against property or other assets. Loans start from £50,000 up to many millions of pounds.
The method of repayment, known as the exit strategy, is typically the sale or refinancing of another property, but it could also include the liquidating of other assets, such as stocks and shares.
Bridging loans came about as they were originally designed to bridge the funding gap between selling a property and buying another.
That's still a common use case, but these days there are many other reasons why a borrower might use bridging finance.
What can a bridging loan be used for?
- Purchasing a property before the sale of your current home has been completed. For example, where your original buyer has fallen through but you don't want to lose the home you're buying.
- To downsize to a smaller home before you've sold your current one.
- To purchase an unmortgageable property to refurbish or renovate before selling or refinancing it. Eg to buy a house without a working kitchen or bathroom
- Buying property quickly at auction, where completion may be expected in 28 days and a traditional mortgage may take too long to arrange.
- Paying an inheritance tax bill, so that probate can be granted more quickly.
- Buying a below-market-value property quickly before refinancing it onto a standard mortgage.
- To pay off a looming tax bill
- For business investment.
- To exit a development finance loan if you need more time to sell some or all of your property or move it onto long-term finance.
How does bridging finance work?
The maximum loan-to-value (LTV) is typically 75 percent, but that's the gross loan amount, which includes the lender's arrangement fee and interest charges.
After deducting the fees and charges, the net loan amount you receive often ends up at around the 65-70% LTV mark. So you'll need around a 30-35% deposit for the property purchase.
Borrow against multiple properties up to 100% LTV
Most lenders want to see the borrower put down some deposit. However, a few bridging loan providers allow borrowing up to 100% of the property purchase price, by taking security against multiple properties.
For example, the loan could be secured against both the purchase property and one or more background buy-to-let properties.
There are two important points to bear in mind with 100% LTV bridging loans.
First, as the lender is taking on additional risk, both the fees and interest rates will be more expensive.
But more importantly, should the borrower default on the loan, all the properties offered as collateral are at risk of repossession.
Per-month interest rate quotes
Unlike a regular mortgage, where the interest rate is quoted on an annual basis, bridging finance interest rates are quoted per month to reflect the short-term nature of the loan.
For example, a bridging finance quote of 0.75% per month is 9% annualised. But loans can, of course, be paid back within months if funds or alternative finance becomes available.
Paying the bridging loan off early
Many loans have no exit or early repayment charges. But typically a minimum of one or three months interest payments are required to ensure the lender receives some return.
