How do bridging loans work?
As we’ve touched on already, bridging loans often live up to their name by ‘bridging’ a gap between a debt and a main line of credit becoming available. They’re offered on an interest only basis at relatively high rates, usually secured against a property or other asset as a first or second charge, and the debt is settled by the borrower’s exit strategy.
More often than not, you aren’t required to make monthly repayments. Where land or property is involved, the exit strategy is usually a sale or a remortgage, and the lender will want to see evidence that your exit plans are achievable beforehand.
Are bridge loans a good idea?
This depends on your circumstances. Bridging finance can offer a lifeline to property developers, landlords, businesses and house-hunters in situations where timing is of the essence and other financial products such as residential mortgages are not an option for whatever reason.
Examples of how bridging loans are used
The following examples should give you an idea of why people typically use bridging finance…
- You’re buying property at an auction and need funds quickly. Winning bidders at property auctions usually need to exchange contracts and pay the deposit on the day, and then pay the full amount to secure the purchase within 28 days. A bridging loan could help you raise the necessary amount while a mortgage would take too long to arrange. In this scenario, the exit strategy could be a sale or a remortgage.
- You’ve been declined for a mortgage because you have bad credit or no income – but know that your cashflow/credit problems will be resolved in the near future. A bridging loan could allow you to secure the property you’ve got your eye on before a rival buyer makes an offer. The exit strategy would usually be switching to a mortgage once you’re eligible.
- You’re hoping to renovate a dilapidated property but cannot obtain a mortgage for it because a mortgage provider has dubbed it uninhabitable. Some bridging lenders are flexible enough to grant you funds to carry out the work needed to bring it back into a mortgageable state. The exit strategy in this case could be a sale or a remortgage.
- You want to renovate a property and borrow against its increased value, but have been turned down for a secured loan. Bridge finance can provide funds to revamp the property and the exit strategy would be a remortgage based on the new value.
Technically speaking, bridging finance can be used in many other scenarios by any business or individual, providing there’s a viable exit strategy in place. For bridging loan advice from the whole-of-market experts we work with, get in touch today.
Where can I get a bridging loan?
Bridging loans are available via mortgage brokers and advisors. The ones we work with are whole-of-market and are best positioned to connect you with the lenders offering the best bridging loans with the most favourable rates in the UK for somebody in your shoes.
How hard is it to get a bridge loan?
Most bridging lenders, especially unregulated ones, are more flexible than mortgage lenders, but whether your application is successful will likely come down to the strength of the exit strategy. The more water-tight your plans, the more likely you are to get a loan.
Bridge loan criteria: How to qualify for one
Qualifying for a bridge loan mostly comes down to the strength of the exit. If yours is viable, that’s half the battle. From there, you only have to worry about securing the best rates, and that is a case of meeting the eligibility requirements at as many lenders as possible.
Getting the best bridging loan rates in the UK comes down to convincing as many lenders as possible that you’re a low-risk borrower with achievable plans for the funds.
This is always assessed on a case-by-case basis, but lenders tend to reserve their best rates for customers with the following…
A strong exit strategy
Without an exit strategy in place, most people won’t quality for a bridging loan. The exit strategy is vitally important in any bridging loan deal, and the stronger yours is, the more likely you are to get the best rates.
Most exit strategies involve either a sale or a remortgage, and the lender will want you to clearly evidence that your plans are achievable.
It obviously helps if you have an offer on the table (for a property sale) or a remortgage agreement in principle in place.
For development projects, the lender will be keen to see that you have the means to complete the proposed work – exploring the possibility of delays or setbacks – and that the project will raise the required amount of capital at the end of the loan term.
A good security property
This is directly linked to exit strategy. If your exit strategy is a sale, it will always help if you have a good and desirable security property that is guaranteed to change hands for the desired amount.
The lender will look at factors such as its location, build type and more to see if there are any variables that might deter buyers, such as non-standard construction or leaseholds.
Although most UK lenders have bridging loans criteria that is flexible enough to cater for bad credit customers (as long as their adverse doesn’t put the exit strategy at risk), having clean credit will help you get the best rates at some bridging finance providers.
Bad credit can be an issue if your exit strategy is a remortgage and underwriters might need to be reassured that there’s no possibility of further adverse building up during the term.
Experience in property
Like bad credit, a lack of experience in property isn’t a deal-breaker for anyone seeking a bridging loan as there are lenders who are more than happy to deal with first-timers.
However, experience is always a bonus as proof of a strong track record in the industry will help you convince lenders that you can achieve your plans. They may want to see evidence of past projects as proof, and if you can provide it, you might land a more favourable deal.
A healthy deposit
While most bridging loans are offered with a 70-75% loan to value ratio (unless the deal is classed as high risk), those in a position to put down a higher deposit often end up with superior rates.
As is the case with mortgages, the best rates kick in at around 40%.
How long does a bridging loan take to arrange?
In straightforward cases, it is possible to have a conditional offer on the table within a matter of days, subject to a valuation.
Bridging finance is much quicker than the likes of a residential mortgage because the lending decision usually hinges on the strength of the exit strategy, i.e. how you plan to pay the loan back at the end of the term.
What does the bridging loan application process involve?
Getting a bridging loan isn’t radically different to applying for a mortgage.
The application process usually involves the following steps…
- The borrower makes an initial enquiry and the broker carries out a fact find to establish their circumstances and financial situation.
- The borrower is asked to evidence their exit strategy and the broker assesses its viability.
- The broker sources bridging lenders in search of an agreement in principle (an initial approval before application) – though many bridging lenders skip this stage and go straight to full application.
- After approval by an underwriter, the lender will issue a conditional offer. Unlike with a mortgage, this offer is not binding and is subject to a full valuation taking place, and everything going smoothly with the bridging loan solicitors.
- At this stage, the application is no different to a mortgage – it’s over to the bridge loan solicitors to carry out their legal checks and bridging finance conveyancing.
- Completion and release of funds can happen very quickly, so long as the solicitor is a good one – it generally helps to use one that has good experience in bridging finance!
Make an enquiry and we can help you get the ball rolling on this process by connecting you to the right broker based on your personal needs and circumstances.
Regulated and unregulated bridging loans explained
We’ve already covered the definition of a bridge loan, but it’s also important to make the distinction between regulated and unregulated bridging finance.
Regulated bridging loans
Regulated bridging is aimed at anyone who needs the funds for a residential property they already live in or are planning to live in.
They are overseen by the Financial Conduct Authority (FCA), giving the borrower protection against bad advice and mis-selling amongst other things.
Unregulated bridging loans
Unregulated bridging loans aren’t as dodgy as the name suggests. This is simply the term for commercial bridging finance, which needs to be bespoke, flexible and tailored to the borrower.
For example, if you are investing in a buy to let, an unregulated lender would allow you to borrow against potential rental income, rather than your personal income.
Most bridging finance brokers are unregulated, as they lack the necessary clearance to operate in a regulated environment, but they can offer you bespoke bridging finance advice from a commercial standpoint.
Open and closed bridging loans
Another distinction we need to make is between two different types of bridging loans: open and closed.
Open bridging loans
Open bridging loans are somewhat more flexible than closed as there is no clear date that the bridge loan has to be repaid on.
An exit strategy must be evidenced as usual and there will be a cut-off point, but it will be within a specific timeframe, rather than a defined date.
Closed bridging loans
Closed bridging loans have clear settlement dates, agreed in advance. You will only be offered one of these deals if the lender knows exactly when you’ll be able to pay the money back.
For example, if the exit strategy is a sale with an offer already on the table. Closed bridging loans generally come with lower interest rates, but are harder to come by.
Bridging finance interest charges explained
Relative to other forms of borrowing, interest rates can be higher, so it’s important to clarify how the lender will charge interest to give you an idea of the overall cost. Interest on bridging finance is charged in one of three ways: rolled up, monthly or retained.
Rolled up vs monthly
With rolled up interest, the borrower does not make any monthly payments. The interest is compounded monthly and is payable at the end of the term. This is suited to customers who are unable to make monthly payments because they are short of capital until their exit strategy has paid out.
Monthly payments work exactly the same way as an interest-only mortgage – the borrower chips away at the interest each month and the loan amount is still due at the end.
What about retained?
Finally, with retained interest, the customer ‘borrows’ the interest as well as the loan amount. The final total is tallied up at the beginning based on the length of the term and is payable at the end.
For example, if the borrower wants to take out £100,000, the actual amount they sign up for would be more like £115,000 with fees and interest factored in.
If you’re still unsure about the cost of a bridging loan in the UK or want to know more about the different ways interest can be charged, get in touch and the whole-of-market experts we work with will offer their insight and connect you to the right lender.
How much can I borrow for a bridging loan?
Bridging loans are always assessed on a case-by-case basis, and whether the lender rubber stamps your application often comes down to the strength of the exit strategy
. Most bridging lenders impose no strict limit on the amount they’re willing to hand over. As long as you can convince them your exit strategy is viable, many bridging providers will believe it is in their interest to lend you the amount you need, regardless of how much that may be.
Deals worth tens of millions and even higher are not unheard of.
What is the minimum amount I can borrow?
At the other end of the scale, certain lenders may impose a minimum loan value to ensure the deal is worth their while. Some won’t do business if the deal is under £50,000 and others may turn you away if it’s under £30,000 – but bridging finance, by nature, is flexible, so it may be possible to find a lender who will approve smaller bridging loans than that.
For the right advice on bridging loans and the amounts on offer, get in touch and a whole-of-market expert will assess your application and connect you with the best lenders.
How long are bridge loan terms?
All bridge loans are offered on a short term, interest-only basis with terms of 12 months or less as standard. Some lenders may be willing to stretch to between 18 and 24 months under the right circumstances, and the longest term you’re likely to find is 36 months.
How much deposit do I need?
Most bridging loans taken out for property purposes are offered with a loan to value (LTV) ratio of 70-75% including the rolled-up/retained interest (the gross loan amount), so you will need a deposit of at least 30%-35% of the property’s value.
Bridging lenders, though, can be flexible and if you have equity in another property or asset they may be willing to utilise this.
LTV is usually the same for commercial and residential property if the exit strategy is secure and the deal lower risk, but for higher risk deals, the ratio can drop to 60% or even 50%.
What is considered high risk will vary from lender to lender – some place LTV caps on certain commercial properties, such as shops and petrol stations, for example.
Can I get a bridging loan with 100% LTV?
It is possible to get a bridge loan with high LTV (up to 100%) but this usually means putting up extra assets/properties as security. Most lenders are happy for borrowers to put up multiple securities, but this comes with the risk of multiple repossessions if you’re unable to pay up at the end of term.
You may also have to pay valuation fees for each asset/property.
Can I get a bridging loan to purchase land?
Yes, but you may need a specialist lender as many UK bridging finance providers won’t lend on land transactions as they consider them too risky.
Some of the lenders who do offer these loans may ask you to put up additional security to safeguard the loan and place strict caps on loan to value – anything between 50-65% is common. They will also expect you to have a watertight exit strategy and planning permission also helps.
Exit strategies for land bridging loans include…
- Selling the land post-development:
If you’re using the funds to develop the plot you could potentially sell it at a profit and use the funds to pay off the loan.
- A self-build mortgage:
If you’re planning to build or oversee the construction of a residential property on the land (one you plan to live in afterwards), you can refinance the bridge loan over to a self-build mortgage to pay off the debt.
- Development finance:
If your plans involve building a commercial premises or an investment property (such as flats), you’d refinance onto developer finance.
- A standard remortgage:
You can take out a regular mortgage on a plot of land, borrowing against its increased value after you’ve used the loan to develop it.
Can I get bridge loan finance to buy any property type?
Bridging loans are available for most property types, including…
- Residential properties
- Buy to let properties
- Commercial properties
- Unmortgageable properties
However, some lenders place restrictions on certain types of property because they consider them high risk, though this is usually determined on a case-by-case basis.
Using a bridge loan to get a mortgage on a residential property
There are a number of scenarios where a borrower might consider using a personal bridge loan as a springboard to a mortgage, and we outlined some of them earlier in this article.
- Perhaps you have short-term cashflow problems or bad credit, but know these issues will be resolved in the near future.
Bridge loan funding would allow you to snap up the property in the immediate term and taking out a residential mortgage when your credit/income problems have been revolved would cover your exit.
- Bridging loans can also be used in the event of a chain break. Let’s say you’ve found your dream home but the sale of your existing property has fallen through, stopping the move in its tracks.
A bridge loan would provide you with the funds to move to the new house without selling your current property. When another buyer is found, the sale can serve as the exit strategy.
Some bridging providers will be happy to lend under these circumstances if the property you’re selling has sufficient equity.
- The residential property may be considered ‘unmortgagable’ in the eyes of mainstream lenders – perhaps it has no bathroom or kitchen facilities or doesn’t have a roof.
Maybe with some bridging loan-funded renovations, the property would become habitable once again, allowing you to take out a residential mortgage to serve as the exit strategy once the works are complete.
- Some (but not all) lenders will allow you to use a bridging loan for a house deposit, but this will only be possible if you know you’ll be able to pay it back plus interest at the end of the term – in other words, you need a clearly evidenced exit strategy.
If you’re looking for bridging loan lenders in the UK for a deal involving residential property, a regulated provider is what you’ll need. The advisors we work with have access to the entire market and can connect you with the right one, based on your circumstances.
Bridge to let mortgages
We often hear the question “what is a bridge to let loan?” as this term is occasionally bandied about on bridge loan wikis and lenders’ websites. Basically, this is when a bridging loan is used as a means to secure a mortgage on a buy to let property.
Some lenders are willing to provide both the bridging loan and the BTL mortgage and will offer a bridging loan agreement in principle on the latter when the loan funds are due to be released. There’s often a loan to value cap of 75% under these circumstances and the BTL mortgage application will need to meet the lender’s usual criteria for this product.
Bridge loans for commercial properties
There are a number of unregulated bridging providers who are willing to lend on commercial properties and loan to value ratios often the same as residential – 70-75% for straightforward deals and anywhere between 50% and 60% for those considered higher risk. However, there are certain types of commercial property that some lenders either won’t touch, or offer unfavourable rates on as they consider them too high risk, such as petrol stations and restaurants.
Investments like these often require a specialist lender. As bridging loans are always assessed on a case-by-case basis, it’s theoretically possible to find a lender who will grant funding for any type of commercial property, from hotels and care homes to factories and farms, if you can prove the exit strategy is water-tight.
Often there will be more stringent checks involved, and some lenders will insist that you provide a business plan so they can assess the viability of the investment.
Can I get a second charge bridging loan?
Some lenders are willing to offer second charge bridging finance loans. Those which do tend to offer higher interest rates under these circumstances, and maximum loan to value (LTV) will likely be no higher than 70% of the gross loan amount.
Third and fourth charge bridging is less common, so you would only be able to get a loan of this nature from a specialist lender, and even then, it would have to be an exceptionally good investment to convince them to provide funds under such risky circumstances.
Is bridging finance available anywhere in the UK?
Pretty much. In England and Wales, the rules are no different from one city to the next, although some lenders have minimum loan/property values so high that only properties in London meet them.
North of the border, a restricted number of bridging lenders operate in Scotland and the rules and criteria they have are largely the same. Your provider options will be further limited in certain Scottish postcodes and away from the mainland.
Are bridge loans still available in Northern Ireland?
Yes, although the situation is similar to Scotland in the sense that there are postcode restrictions. A small number of bridging providers are willing to offer loans for Northern Ireland and abroad, usually on an unregulated basis, and only when it’s a good deal.
Bridging loan FAQ
In this section you’ll find additional bridge loan information based on some of the most frequently asked questions we receive about these products.
What are the main advantages and disadvantages of a bridging loan?
The main advantage of bridge finance loans is how quickly they are to arrange. This means they can help you out in tight spots where other forms of borrowing would let you down due to the amount of red tape and paperwork involved.
They are also flexible, as much of the underwriting is taken care of if you have a viable and clearly evidenced exit strategy.
In terms of the disadvantages, the main one is the interest rates, which are typically higher than for mortgages. Furthermore, bridging lenders are less flexible when it comes to things like late payments, and have been known to charge higher fees and penalties.
Whether a bridging loan is a good idea depends on many things. It’s important to ask whether there’s a less risky way to achieve your goals. You should also make sure the exit strategy is viable, and identify and factors which may jeopardise it.
The expert advisors we work with can discuss all of this and more with you to ensure a bridging loan is the right option. If you choose to proceed, they can connect you with the best lender based on your personal circumstances and needs.
What happens if I can’t repay a bridging loan?
If you are unable to pay up at the end of the term, most lenders will consider extending the agreement if you can guarantee that your exit strategy will be paying out soon. However, they could hit you with hefty fees and charges for increasing the term.
Whether the lender kicks off repossession proceedings when a borrower can’t settle up is at their discretion. If they don’t think an exit is in sight, they might do this right way.
There may be times when a bridge can be refinanced at the end of the term, affordability and loan to value permitting, but expect greater scrutiny around the exit if it’s already failed to pay out once.
Can you apply for bridging loans online?
Yes, many bridging lenders will allow you to apply online and much of the application can be carried out through this channel. However, it’s always recommended to speak with a whole-of-market advisor, like the ones we work with before you proceed.
Can I get a bridging loan if I’m unemployed?
It’s theoretically possible to get bridging loan finance without personal income in the traditional sense as every application is assessed on a case-by-case basis.
However, you will need to prove that you have an exit strategy which will pay out enough to repay the loan. Moreover, most regulated lenders will insist on the borrower having personal income if the exit strategy is a remortgage, and if you’re using the funds to buy a property you’re planning to renovate, the underwriters will want to know how the works are going to be funded.
What’s the difference between a bridge loan and a swing loan?
There’s no difference! ‘Swing loan’ and ‘bridge loan’ are interchangeable terms.
Are there bridging loans for over 70s?
Absolutely! Although some bridging providers have upper age limits (usually 80 and up) the vast majority are flexible enough to lend with no maximum age restrictions, as long as the borrower has evidenced a strong exit strategy.
What documents do I need for a bridge loan application?
Before rubber stamping your bridge loan contract to finalise the agreement, the bridging lender will usually need you to evidence the following with the relevant documents…
- A valuation report:
This doesn’t usually need to be conducted in advance as most lenders will have their own panel of surveyors carry it out. A minority, however, might request that you foot the valuation bill yourself. If more than one security property/asset is being put up, you may have to pay the additional valuation fees.
- Proof of ID:
Proof of address (and residency, if applicable) will also be requested. Driver’s licence, passport etc, are commonly accepted for this.
- Proof of exit strategy:
This is standard for a bridging finance application. If your plan is to remortgage, then a deal in principle will suffice. Those using non-standard exit strategies such as investments or inheritance to settle the debt may be asked to provide proof that the funds are entering their bank account within a set time-frame.
- A business plan:
If there is a commercial element to the property you’re investing in, the underwriters may request a business plan to assess its viability.
- Evidence of your experience in property:
This will only be requested if your plan is to develop a property. They may ask to see evidence of previous projects to examine your track record in the industry, especially if it’s a complex development.
- Proof of income:
Some lenders will request a diminutive type of income proof (bank statements etc), but this isn’t always necessary as the exit is of greater importance.
What costs and fees will there be on top of the interest?
Bridging loan borrowers may be required to pay some/all of the following fees…
- Arrangement fees:
Usually a percentage of the loan (around 2% is standard but may only be 1% if the loan is particularly large).
- Valuation fees:
Valuation must be carried out on the security property/asset. Some lenders will handle this on your behalf, but others may expect you to foot the bill, especially if more than one security is being put up. The cost will vary based on the property/asset’s value, the type of valuation and the location.
- Exit fees:
Some lenders will waive this, but others may bill you for removing their charge from the security property. Around 1% is standard, added to the final amount when the loan is redeemed.
- Solicitor fees:
Lenders may expect you to foot the bill after the solicitors have carried out their legal due diligence, and this will be on top of your own legal costs. The exact amount payable can vary across the spectrum.
Can I use a bridging loan to pay inheritance tax?
Yes, personal bridging loans can be viable options for footing inheritance tax bills.
HMRC requires an inheritance tax payment six months on from the deceased’s passing and will only grant access to the assets of the estate after this has been made. With this in mind, you could use a bridging loan to foot this bill and the inheritance itself could cover the exit.
The lender will want to see evidence that the inheritance is due to enter your account within a certain timeframe, and that it will pay off the debt in full.
One thing to be mindful of is that using inheritance to settle up is considered a ‘non-standard’ exit, and in these cases, lenders may change interest daily rather than monthly.
Can bridging loans be secured against a pension fund?
Some lenders may allow you to secure bridging finance against a pension fund that’s due to pay out, but this would also be classed as a non-standard exit, and therefore you may be charged interest daily rather than monthly.
The provider will also need proof that the funds are due to enter your account within the required timeframe.
Can UK Limited Company borrowers get bridge finance?
Yes, there are bridging loans for Limited Companies in the UK and the loan to value ratio is usually no different for borrowers who trade this way.
Bridging loan applications from Ltd Companies are treated similarly to Ltd Company buy to let applications, so the lender may request personal guarantees from the business’ directors.
It may help your cause if the Ltd Company is a Special Purpose Vehicle (SPV) by increasing the number of approachable lenders, but there are providers out there who are willing to offer bridging loans to non-SPV Limited Company applicants.
Can I use a bridging loan to pay Stamp Duty if I’m buying another home?
Yes, and this has become more common since 1st April 2016 when a 3% Stamp Duty fee was added to the price of properties bought by those who already own a home. Perhaps you’re a residential buyer looking to buy a new home before you’ve sold your previous one.
The inflated Stamp Duty presents a roadblock for property buyers who are unable to afford the higher charges, but a bridge loan can be used to complete the transaction by covering the 3% fee, and the exit strategy could be the sale of the home you’re moving from.
Can I use a bridge finance loan for any purpose?
You can use a bridging finance loan for almost any legal purpose, although their most common use is property and land transactions. One thing they cannot be used for is to repair adverse credit. Both regulated and unregulated providers are prohibited from lending for this purpose at the regulator level, which is why some lenders are wary of dealing with customers who have bad credit.
Are there peer-to-peer bridging loans?
P2P bridging loans exist but on a very small scale. It can be done on certain peer-to-peer platforms, but it’s important to speak with a whole-of-market advisor like the ones we work with before you proceed, to make sure you’re getting the best deal.
What are the alternatives to bridging finance?
There are a number of possible alternatives to bridging loans that borrowers could consider, but whether they are viable depends on how much time you have to play with, and how much you need to borrow.
Here are a few of the other potential options…
- A buy to let mortgage:
If you’re considering a bridging loan because you want to secure an investment property quickly, it’s worth keeping in mind that some lenders can arrange buy to let mortgage relatively fast, if your application is straightforward (e.g. no adverse credit or non-standard income). Some lenders can have BTL deals finalised within a month, so if you have that long to play with, this may be a more cost-effective option than a bridging loan.
- Unsecured loans:
If you need fast funds but are unable to secure them against a property/asset, an unsecured loan might be a more realistic option than bridging finance. Some lenders offer these over short-term periods (as little as 12 months) and they can be set up relatively swiftly, but interest rates are typically high.
- 0% money transfer cards:
If the amount you’re hoping to borrow is relatively small – a few thousand pounds or so – some bridging lenders may turn you away but a 0% money transfer credit card could be an option. These allow you to transfer funds into your bank account and borrow interest-free for around three years. You will be required to pay a fee levied as a percentage of the loan amount.
These are merely a few of the other options available to short term borrowers, but the advisors we work with would be more than happy to discuss every possible course of action with you.
If you decide to go ahead with bridging finance, they can also connect you with the lender most likely to offer favourable rates to somebody in your circumstances.
Speak to an expert bridging finance broker
For further bridging loan information about finding a broker and get the ball rolling on your application for one, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry online.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t change a fee and there’s no obligation or marks on your credit rating.