Bridging Loans

What is a bridging loan and how do they work?

A bridging loan is short term finance. The majority of bridging loans last around 12 months. They can go a bit longer, but not over 18 or 24 months even in very exceptional cases.

It’s there to bridge a gap. It’s short term finance to get a client out of a certain position. They then sell a property or refinance in a different way. It’s for scenarios that are time critical – like buying auction properties, or if a chain breaks. Some people use them to pay their tax bill.

One attraction for a lot of people is that the interest is rolled up. Instead of having to make payments during the loan, you can pay it off at the end. People like doing it that way.

Are there two types of bridging loan, commercial and residential?

Yes, that’s correct. Residential applies to anything where people live in the property including refurbishments or developments. Commercial is for business use – offices, shops, anything where no one will be living.

The commercial route is usually a little bit more expensive than the residential route, and the regulation can also be a bit different.

What are open or closed bridging loans?

Closed is essentially where there’s a clear exit strategy and a fixed repayment date. It might be an auction property where a sale has been agreed.

With an open loan there’s no fixed date, but you have to still repay it within a certain timeframe. It’s more flexible, but can be slightly more risky.

Can you have a fixed or variable rate bridging loan?

You can get both types, but the majority of cases are on a fixed basis. With bridging, where it’s a shorter term finance, you want to know what your payment is going to be at the end.

It’s rare I’d recommend a variable rate for a bridging loan, because most of them don’t carry early repayment charges anyway. Even with a fixed rate, you can repay early—say in six months instead of twelve—and only pay interest for the time you’ve borrowed. Variable rates are more useful on the mortgage side, where fixed deals often come with penalties for early exit.

Really I’d only recommend a variable rate on the mortgage side, because it means you can exit whenever you want.

Who’s a bridging loan for? What can they be used for?

It could be for anyone, but usually property investors, landlords and home buyers. You need an asset to secure the loan against, and it’s short-term finance. You will always need an exit strategy, which could be refinancing the property, selling it or perhaps using money that’s anticipated from another source.

As long as that’s understood, it could be used for anything – auction properties, refurbishments of Buy to Let properties or general refurbishments. It could be for building, paying tax bills, buying businesses or buying land. If you’ve got an idea, run it by me. We’ll see how we can help.

What is the exit strategy?

From a lender’s perspective, the exit strategy is one of the most important things. The lender wants to know how they will get their money back.

It could be selling the property, or refinancing with a residential lender to live in the property. You might refinance with a Buy to Let lender to rent it out. It’s popular at the moment to buy properties and use a bridging loan to refurbish them into something called a HMO – a house of multiple occupancy, which is a multi-unit let.

Some bridging loans are first charge and some are second. What does this mean?

A first charge is essentially a regular mortgage. A mortgage on the house you live in is a first charge. It essentially means that if you sold your house, that lender has the right to be paid back first.

If you’ve got a £100,000 property and a £50,000 first charge with Halifax, for instance, Halifax wants their £50,000 and then you can do whatever you want with the rest of the money.

A second charge lender basically sits behind the first charge lender. Here, on your £100,000 house you might owe £90,000 to Halifax but another £20,000 to a second charge lender. This is a negative equity scenario, but essentially you pay back Halifax and whatever’s left in the pot, the second charge lender takes.

It’s slightly riskier for the second charge lender, which means that it can be a little bit more expensive. But because they’re aware of that riskier position, they’re a little bit more flexible, which can often get around certain problems.

How long does it take to arrange a bridging loan?

It could take a week to three weeks. The situation might lead us to recommend certain lenders. Some lenders are good for certain things.

For instance, if you’re looking to bridge for an auction property, you often need to complete the payment within 28 days. Bridging lenders are aware of that and we’ll know which ones will get the money to you fastest.

What if I have bad credit? Can I still get a bridging loan?

Bridging is a little bit more flexible in this area than a standard mortgage. They’re not as hot on bad credit, because the arrangement is more focused on the exit strategy.

The lender wants to assess how risky the situation is – and how concrete is the exit strategy?

As long as they are comfortable with that, they’re less interested in your credit file.

Bad credit is still taken into account. If you’ve recently been repossessed, a bridging lender is not going to consider you. But they can be more lenient. The best way to work out whether a lender would consider you is to have a chat with us.

We’ll have a look at your credit report and pinpoint the deal for you. Bad credit is a very varied topic. It always depends on how adverse your credit file looks.