What is a Bridging Loan, Why You Might Need One?
What is a bridging loan, and why might you need one? Here’s everything you need to know.
What is a Bridging Loan?
A bridging loan or ‘bridge loan’ is a type of short-term finance. The loan will need to be secured on something you own, such as a property or land.
This type of borrowing is typically used if you want to buy a new home before selling your old one. It ‘bridges the gap’ between your sale and purchase.
You can usually borrow a minimum of £5,000 on a bridging loan, and up to £10m (sometimes more). Exactly how much you can borrow will depend on the value of the property you put up as security.
Why would I need one?
Typical reasons for needing one include:
- Buying a property quickly
- Buying a property at auction
- Property development
What is an exit plan?
When you take out a bridging loan you will need to have a plan as to how you will pay it off. Bridging finance tends to be quite expensive so if you don’t repay the debt quickly the costs can really add up.
An exit plan or ‘exit strategy’ is the method by which you will pay back the loan, this requires you to have an exit plan.
Common exit strategies include:
- Selling a property you currently own
- Refinancing to a traditional or buy-to-let mortgage
- Selling a business or business asset
- Money from an inheritance or divorce
Types of bridging loans
There are two main types:
- Open bridging loan
- Closed bridging loan
Open bridging loans don’t have a fixed repayment date although you’ll usually need to pay off the debt within a year. Due to their flexibility, open ones are quick to set up but are usually more expensive than closed ones.
Closed bridging loans require you to have an exit plan at the outset. These are usually for a few weeks or months.
First and second charges
Bridging loans are secured loans, with a property you own put up as a security. The lender will place a ‘charge’ on your property. This is a legal agreement which means the lender can pursue the sale of your property if you fail to pay the loan as agreed. First and second charge loans denote the order in which lenders will be paid.
If you own your property outright, the bridging loan will be a first charge lending. If you have a mortgage on your property, the bridging loan will be a second charge lending. In the event that you don’t pay your debts and your property is sold, the mortgage lender will be paid first, and the bridging lender will be paid second.
How much does a bridging loan cost?
They can be quite expensive compared to mortgages and other loans. Interest rates can be fixed or variable.
You’ll normally have to pay a set-up fee of about 2% of the loan amount. There might also be valuation fees, legal fees and broker fees.
Interest rates are expressed monthly, rather than annually, as most people take out bridging loans for a few weeks or months, not years.
Interest is typically 0.5% to 1.5% per month. When calculated as an annual percentage rate (APR) this equates to between 6% and 20%.
Advantages
- The money will be transferred to your account quickly
- You can borrow a large sum of money
- Flexible repayment terms
- Bridging finance can prevent a property buying chain from collapsing
Disadvantages
- You risk losing your home if you can’t repay the debt
- Interest rates and fees can be very high
- A personal loan might be cheaper
How to get a bridging loan
Bridging loans are usually offered by specialist lenders. You can go directly to a lender or via a broker who can help you find the best deal. You can also compare online.
If you buy a property at an auction, there will often be bridging lenders present in the auction house and you can arrange same-day finance.
We can connect you with an award-winning loan provider. Get a loan quote below.
Last Updated: November 1st, 2024
