Your Complete Guide to Bridging Loans for Mortgages

If you need finance quickly to secure your dream home then you may need to turn to short-term finance, such as a bridging loan.

Bridging loans are often used when there is a gap between the date you sell your property and the date you buy a new home. They can also be used in a range of other situations; for example, when buying at auction.

But what is a bridging loan? When do I need a bridging loan? And what is the cost of bridging finance? Keep reading for answers to these questions and more.

What is a bridging loan?

A bridging loan is a type of short-term finance designed to ‘bridge’ the gap between buying a new property and selling your previous home.

Bridging finance can also be used as a short-term loan in other situations where you need money immediately but have not yet sold an asset.

How does a bridging loan work?

There are two main types of bridging loan:

• Closed bridging – where there is a fixed repayment date
• Open bridging – there is no fixed repayment date.

In either case you have to demonstrate to the lender how you intend to repay the bridging loan. This may be from the sale of a property or other asset, or through alternative finance such as a mortgage.

When might I need a bridging loan or bridging finance?

There are several scenarios where bridging loans are commonly used:

• Where you need to complete on the purchase of a new property but the sale of your existing home hasn’t gone through yet.
• When you’re buying a property at auction and you need finance quickly.
• When you want to buy a property and sell it on quickly (for example, if you’re carrying out a renovation).

Putting in an offer on a property before you have sold your home can be a risk. Some vendors won’t accept your offer unless they know your property is sold, but if you do need to move quickly and you’re under pressure to exchange contracts on the new purchase, you may need to consider a bridging loan to proceed.

How much does a bridging loan cost?

The cost of bridging finance depends on several factors including:

• The security that you are offering
• Whether it is a ‘closed’ or ‘open’ bridge
• The lender you choose.

Bridging loans are generally an expensive way to borrow. You can expect to pay around 0.75% to 1.5% of the loan amount each month, plus an arrangement fee in the region of 1% of the amount advanced.

If you need to borrow £200,000 for just a couple of months you could end up paying almost £10,000 in fees and interest.

Costs vary between lenders and so you should talk to an expert or shop around for the right deal for you. Speak to a specialist broker to discuss your requirements.

How do I repay a bridging loan?

All bridging finance is arranged on a short-term basis, typically up to a maximum of 12 months. It is therefore critical that you have a solid repayment strategy in place to pay back the loan.

The most common way of repaying bridging finance is through the sale of one or more properties. You need to make sure that you have enough equity to repay the bridging loan, and that the properties are likely to sell within the required time period.

Another common way of repaying a bridging loan is to take out an alternative form of finance. Typically, this would be through a mortgage. You would arrange a new mortgage on the property that you are buying and use this finance to repay the bridging loan.

In this situation your bridging lender may want to see proof of a mortgage offer to ensure that refinancing is available to you.

Some bridging lenders may accept other methods of repaying the loan. You may wish to repay the loan from an inheritance, or through the sale of other assets such as investments. You may also want to repay the loan through the sale of property or land outside the UK.

What’s the difference between a bridging loan and a mortgage?

There are several important differences between a bridging loan and a mortgage:

• Length of loan – bridging loans are normally for a period of a matter of days up to 12 months. Mortgages usually have a minimum term of 5 years and can run for 25 years or more.
• Security – a lender will generally only agree a mortgage on a property in a habitable condition. Bridging loans can be secured on all types of buildings and land, as well as properties with title issues that mortgage lenders would not generally consider.
• Underwriting – mortgage lenders go through a thorough underwriting process where they assess your income and affordability. As bridging loans often do not require monthly payments, the underwriting criteria can often be more relaxed. In addition, as the repayment of a bridging loan is generally through the sale of a property, you are more likely to be agreed if you’re income is difficult to prove or you have experienced credit problems in the past.
• Time – bridging loans can often be arranged within a matter of a few days, while it may take weeks or months for a mortgage to be arranged. Bridging loans are therefore useful if you need to move very quickly to secure a property.
• Flexibility – bridging loans often have lower minimum loan sizes and they can often be available up to 100% of purchase price, as long as you have other security you can offer. They also rarely have an age restriction and so can be useful for older lenders who are restricted by a mortgage lender’s maximum age limit.
• Payments – under a mortgage you’re committed to a monthly payment. The interest on a bridging loan generally rolls up, meaning you don’t have to make a monthly payment. You simply pay the interest and charges when you repay the loan.
• Penalties – bridging loans don’t normally have exit fees, and so you can repay the loan whenever you like. Mortgages often have early repayment charges for the first few years.