What is a Bridging Loan?

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October 2020

What is a bridging loan?

Can you take out a bridging loan to fund property investment purchases if you already have a mortgage on your own main home?

Do you have questions such as what does a bridging loan cost, how do you repay the loan, what conditions apply, and why not just take out another mortgage? 

We explain that here.

We cover the following below:

  • What is a bridging loan?

  • How do bridging loans work?

  • Terms of a bridging loan

  • How are bridging loans different to mortgages?

  • Bridging loan FAQs

What is a bridging loan?

A bridging loan, or bridging finance as it is also called, is a short term loan that helps cover the purchase price for a property that is for either regulated or unregulated (business) purposes. As Auction Finance operate in the unregulated market only, we focus on answering the above questions for the purposes of investment property only. 

Bridging loans are usually short term finance offers often used to cover the costs associated with buying a new or second house (purchase price, legal fees, solicitors). The normal term of a bridging loan can range from three to six months, however, in some instances, a bridge loan can be longer-term (up to 18 months).

This short term loan is a solution to help 'bridge the gap' for you if the property that you are looking at purchasing is;

  • at auction
  • non standard construction
  • unmortgageable
  • in a poor state of repair
  • require planning permission to renovate or convert from a commercial property
  • short leasehold property
  • Cashflow purposes for business reasons
  • Refinance of current bridging finance

How do bridging loans work?

You can apply for a bridging loan with any lender or bank, as if you were applying for a regular residential mortgage or, you can use a bridging loan broker to help you secure your loan at potentially a lesser rate than what a bank would charge you.

Most providers require a property or multiple properties to be used as security against the loan. At this point, a first charge is used, providing there are no existing loans or mortgages secured against it. A second charge could be used when there are outstanding charges against the property.

The cost of a bridging loan can vary and are often influenced by the interest rates that lenders apply to these short term loans.

The reason why bridging loans are usually short term is due to the high monthly interest and the reason for the loan. The quicker you're able to pay back the loan in full, the quicker the loan can end; meaning you avoid heavy recurring interest charges.

Contact Auction Finance to talk through your case and secure a great rate suitable bridging loan for you here.

Common terms for a bridging loan

LTV - Loan to value. This is the amount of funding as a percentage that the lender will lend to you for the purchase/refinance

BMV - Below market value. Lenders will typically go to 90% of the purchase price should the property be sold below the amount that it is currently worth. This can be a family sale, repossession or just a good deal! There are some lenders that will even go to 100% of the purchase price!

ERC- Early repayment charge. The majority of brdiging lenders do not charge an early repayment charge or exit fee, as it is often referred to. They do however, have a minimum term that they require the loan to be in place, this is typically 1-3 months. If you were to exit the loan within the 1-3 months then you maybe responsible for paying a minimum of 3 months interest, for example.

Broker free - a fee that covers the time of the broker to administer the case. Usually these fees are non refunadable as there is a lot of time and research that goes into sourcing the correct bridging loan

Proc fee - Procuration fee. Some lenders will pay the broker an introducers fee, also known as a proc fee. This is only on case completion and is either a set amount or a percentage based on the gross loan amount.

Gross loan - The amount that that lender agrees to lend you based on property, credit profile, term required and exit strategy. This is a percentage of the purchase price. Without additional security at current valuation, the maxminum at the moment is 80% LTV Gross.

Net loan - this is the amount that you, as the client, will receive to complete the purchase. The difference between the gross loan and the net loan is all the administration fees, legal fees and total interest payable are usually deducted.

Retained interest - Interest is calculated at the per annum rate and worked out over the term of the loan in comparision and DEDUCTED from the total amount borrowed

Rolled up interest - Interest is worked out and periodically added up or 'rolled up' and added to the loan - this can be a more expensive option for the client as the interest is compounded.

Serviced interest - this is where the borrower makes the monthly payments for the interest. Ultimately achieveing a higher net loan day but you are making monthly payments to cover the interest. A suitable option should you have the cashflow to support monthly payments are require a higher release of funds on day one.

How are bridging loans different from mortgages?

Bridging loans differ from longer term mortgages in the following ways:

  • They are typically more expensive
  • They are for short periods only
  • They are much quicker to complete
  • They are a very good solution for the reasons stated previously
  • They can be used for business casflow as well as property
  • The can be secured on any asset not just property

 

FAQs about bridging loans

What is a closed bridging loan?

A closed bridging loan is where a guaranteed date is agreed at the start of the loan term. It means borrowers can give lenders an exact exit date (when the loan will be repaid). Due to the lesser risk associated with a closed bridging loan, the interest rates and charges are often lower. This is the most common type of bridging loan in the UK.

What is an open bridging loan?

An open bridging loan does not have a guaranteed exit date. They are 'open - ended'. This is more of a risk for a lender, therefore the loan to values are generally lower and the rate s are typically higher.

What can I use a bridging loan for?

A bridging loan can be used for buying a property at auction, property development, quick purchases, renovations, solving short term cash flow challenges or being able to buy a house before you sell yours.

How long does it take to get a bridging loan?

A bridging loan can take as little as 48 hours to approve, however, depending on the circumstances, typical cases complete between 2-4 weeks.

We can help you find the best types of bridging loans available for your individual needs. We can help you understand how much you're borrowing, what term is possible, how to get the best value from lenders and much more.

 

We have a handy caluclator on our site that will give you a rough idea of how much a bridging loan will cost. Or if you are ready to apply, complete our online DIP to get the process started.

 

Bridging finance calculator

purchase price/property value
select your loan to value
gross loan
£0
arrangement fee - 2%
credit
term
net loan
£0
deposit needed
£0

Case Studies

See how we have helped people obtain finance for their auction purchases.

10 day bridging finance - auction purchase gone wrong on buy to let mortgage

Loan to value:
75%
Amount Raised:
£535,000
View Details

Development exit bridge with capital raise

Loan to value:
80%
Amount Raised:
£1,200,000
View Details

Japanese Knotweed BRR

Loan to value:
75%
Amount Raised:
£50,000
View Details

5 Day Bridging Finance

Loan to value:
55% LTV
Amount Raised:
£580,000
View Details

Ready to apply?