Article – What is a Bridging Loan?

A Bridging loan is a short-term loan to ‘bridge the gap’ when you want to make a purchase before you receive the funds, such as when you sell a property. Bridging loans can be deemed as a quick property finance solution.  

Bridging loans are a secured type of loan meaning that an asset, such as a property, must be secured against it. The bridging loan term length is typically 1 month up to 2 years long. It can typically be against first or second charge security over property.

What is a Bridging Loan used for?

Bridging loans tend to be used for buying a new property before selling an old one. Such as property renovations, releasing funding against the property along with a wide range of solutions.

Property investors and developers, as well as homeowners and landlords, may use it for things such as:

• Property development
• Buying property
• Investing in buy-to-let opportunities
• Tax payments

Types of Bridging Loans:

Open/Closed Bridging Loans

1. Open bridging loans

• When there is no exit strategy defined
• No fixed repayment date, only when funds are available
• Typically expected within a year

• Closed bridging loans

• Exit strategy is clearly established, security for both parties
• Fixed repayment date, based on when you know funds will be available
• Usually cheaper, as less flexibility around repayment

What are First Charge/Second Charge Bridging Loans

The charge that the lender will take its repayment from if the loan is failed to be paid off.

1. First Charge Bridging Loan

• If there are no other loans secured on the property (i.e. it is owned outright).
• If you fail to repay the loan and the property is already sold to pay off the debt, the bridging loan lender will receive its payment first.

• Second Charge Bridging Loan

• If there are one or more loans secured on the property (e.g. a mortgage)
• If you fail to repay the bridging loan and the property is already sold to pay the debt, the bridging loan lender will receive its payment after the mortgage provider has taken theirs.

How much can be borrowed with a bridging loan?

Bridging loans can range from £5,000 to £25m+, the amount available will depend on the borrower’s current financial circumstances and credit history.

Most lenders will allow you to borrow up to 75% of the value of the property.

How much does a bridging loan cost?

As bridging loans are a short-term loan, companies will generally charge monthly rates rather than annual percentage rates (APR) and they tend to be more expensive than other types of loan.

As a result, a small difference in the monthly interest rate can have a high impact on the overall cost of your loan. E.g. a 1% monthly interest rate equates to 12.7% APR (with compound interest) and 2% monthly interest rate equates to 26.8% APR.

Some companies may not charge monthly, and borrowers may find the loans payments are deferred or rolled up (interest is not paid until the end of the agreement).

What are the Eligibility Criteria for a Bridging Loan?

Two Main Requirements:

1. Exit plan -> lenders will want to know how the loan will be payed back.
2. Security -> Offer of something of value if you cannot pay the loan back.

What are the Advantages of a Bridging Loan?

• Speed

Loans can be processed and borrowed quickly, keeping property transaction plans on track

• Large loans

Availability of very large sums

• Flexibility

Repayment terms can be adjusted to fit with plans

• Extra Options

Possibility to secure lending on properties where high street lenders decline to lend

What are the Disadvantages of a Bridging Loan?

Secured against property

As bridging loans are a secure type of loan, an asset is put up against the loan. Therefore, there is a risk of losing that asset if you can’t repay the loan.

Higher rates

Due to the fast, flexible nature of a bridging loan, a higher rate is charged.

Fees

There are a range of extra fees that add onto the bridging loan basic charges, such as arrangement fees, admin fees, legal fees, and valuation fees.

What are the Alternatives to Bridging Loans?

Secured Business Loan

A secured loan allows a larger amount of money to be borrowed compared to personal loans and usually charge lower interest rates than bridging loans. However, an asset secured against the loan is still at risk if payments are not completed.

Unsecured Business Loans

A unsecured business loan is where a loan is lent to an business against an personal guarantee only with no requirement for charges over property. They typically will attract an higher interest rate and short term than secured business loans or bridging loans.

How to get a Bridging Loan:

1. Work out exactly what you are looking for; how much you would like to borrow and how long for. Bridging loans are expensive, so the shorter term the cheaper it will be.

• Have all your deal information ready to go. Prepare the answers to questions such as: how much is the property worth? Do you hold a mortgage – and how much is left to pay?  How much equity do you have in the project? What is your monthly income and expenditure?

Contact us – the Best Finance Group

If you are interested in securing a bridging loan (or any other form of business finance), our dedicated and knowledgeable team are here to guide you throughtout the process. Please contact us for an informal chat with any questions or queries, we look forward to hearing from you. 

If you would like a quote immediately, you can receive live rates from over 100 UK Bridging Loan Lenders, just by entering a few details into our online comparison tool. Click ‘Get a quote’ below and see the best rates now:

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