What is a bridging loan? Everything you need to know
To secure the best bridging loan lenders, interest rates and repayment plans, it helps to get to grips with the essentials.
Here is a complete guide to bridging loans to help access the best bridging finance for your needs.
What is a bridging loan?
As the name suggests, a bridging loan is a loan designed to “bridge the gap” until a payment comes in. It is often used in real estate.
For example, if a buyer wants to purchase a new home before their current property has been sold, they may take out a bridging loan. Once their property has been sold, they can pay back the bridging loan.
What is bridging finance?
Bridging finance is another way of saying “bridging loan”. It is a loan designed to tide borrowers over and keep the flow of finance moving, usually until their property has been sold.
What are the different types of bridging loan?
There are two types of bridging loan:
- Closed: There is a fixed repayment date, which has been agreed between you and the lender. This usually applies when you are waiting to receive the money for a property you’re selling and have already signed the sale contracts.
- Open: There are no fixed repayment dates agreed with the lender, the repayment schedule is more open. However, since bridging loans are short-term, the repayment is usually made within one year.
How much money could you borrow with a bridging loan?
The amount of money you can borrow with a bridging loan depends on the lender, your circumstances, and the value of your property. Normally you can borrow up to 75% of the property’s value. So, for example, if the property is worth £500,000, you could probably borrow up to £375,000.
Bridging loans can be as low as £25,000 and can go upwards into millions of pounds. It all depends on your lender and your unique circumstances. You can find your ideal lender with our free, online directory.
One thing that often affects how much you can borrow is whether you have a mortgage. This will affect what type of agreement or “charge” you can make.
What is a charge?
A charge is an agreement that prioritises lenders or creditors in a certain order.
- First charge: If you do not have a mortgage and own your property outright, your bridging loan lender can have a “first charge” agreement. This means that the lender will be prioritised first if you do not make your repayments, and your property needs to be sold. Bridging loan lenders tend to prefer this, and you may be able to access better terms for your interest and repayments.
- Second charge: If you have a mortgage, then your mortgage lender already has the “first charge” contract. And so, your bridging loan lender would have the “second charge” contract. This means that if you cannot make your repayments and your property needs to be sold, the mortgage provider can collect their money first. Then the bridging lender can collect their money second.
How can you use a bridging loan?
There are many ways you can use a bridging loan, often they revolve around property, land, or another significant asset.
Here are some examples of how you could use a bridging loan:
- If you want to buy a new property before your current property has been sold
- If you’d like to purchase land or property at auction
- If you’re interested in purchasing a buy-to-let investment property
- If you’d like to develop a property as an investment
- If you want to expand or develop a business venture
- When you need to pay a tax bill, and are waiting for invoices to be cleared
- If you need to pay money upfront as part of a divorce settlement
A bridging loan is a secured loan, and so you’ll need to have property, land, or another significant asset to access it.
What is a commercial bridging loan?
A commercial bridging loan is a short-term loan which is secured against a commercial property or venture.
To qualify, the overall property normally needs to be at least 40% commercial. So, for example, if you were wanted to secure a loan for a pub which has private living quarters upstairs, the pub would need to be at least 40% of the property’s overall value.
What are bridging loan interest rates like?
Bridging loans and commercial bridging loans are designed to be short-term and so interest is usually charged monthly. This is different from other longer-term loans such as mortgages, where interest tends to be charged on yearly. Because of this difference, the overall amount of interest you’ll to pay tends to be more with bridging loans.
The amount of interest you’ll pay depends on your unique situation, whether you currently have a mortgage, and the lender you select. The interest rate normally ranges from around 0.4% to 2% per month.
Bridging loan interest rates can be fixed or variable
Just like a mortgage, the interest on bridging loans can be either fixed rate or variable.
- Fixed rate: Your monthly payments will be agreed in advance, and they should be the same each time.
- Variable rate: The amount of interest you’ll pay can go up and down. The lenders will set the rate, normally in line with the Bank of England
Bridging loan interest on repayments can be monthly, rolled-up or retained
When it comes to paying the interest on your bridging loan, most lenders will opt for monthly payments. These can be fixed or variable interest rates and are usually proportionally higher than long-term loans such as mortgages.
Depending on your lender and your situation, however, you may have the option to pay the interest when you finish paying your loan.
This can be done in one of two ways:
- Rolled-up (or “deferred”) or retained interest: You’ll pay all the interest due at the end of your loan. This would apply for an open loan when there is no fixed repayment date agreed.
- Retained interest: You’ll pay all the interest due at the end of your loan. This would apply for a closed loan when there is a fixed repayment date agreed.
Some lenders will combine options to work around your unique circumstances. Find your ideal lender in the free online bridging loan directory.
Are bridging loans expensive?
While bridging loans are normally more expensive than long-term loans, each loan depends on the unique circumstances of the lender and borrower.
In addition to the repayments and interest:
- You will probably have to pay one-off set-up fees
- You may also need to pay fees to the lender on a monthly basis
- If you miss a payment, there are also likely to be late fees.
Before you agree to a bridging loan, it is important to understand what your financial obligations will be. Ensure that you have read all the terms and conditions and feel comfortable before going ahead.
To keep the costs down, it can be useful to shop around to get different quotes from lenders. This may help you to explore the options available, and even empower you to negotiate better.
Explore your options with the free online bridging loan directory.
If you are looking into getting a bridging loan but are unsure of the fees, use our bridging loan calculator to help you figure them out before you get started.
While this article is intended to be helpful, it is not advice. Always ensure that you understand the terms and conditions of your loan before you commit. We are not responsible for any of the transactions which take place after reading this content.