Do You Need a Deposit for a Bridging Loan?

Key Takeaways

• No cash deposit is required for a bridging loan—unlike standard mortgages.
• However you can only borrow up to 80% of the value of the property (or combined properties used as security).
• For loans exceeding 80% of a property’s value, you must also secure the loan against an existing property.
• Note that your loan value includes fees and interest, slightly reducing the total borrowable amount.
• Use a bridging loan calculator to understand how much you can borrow and assess eligibility (ours is below and is free to use).

Do You Need a Deposit for a Bridging Loan?

The simple answer is no, you don’t need a cash deposit like you would for a mortgage. However, there’s a key caveat: you can only borrow up to 80% of the value of the property (or properties) being used as security.

This means:

1. If you want to borrow 100% of the purchase price, you’ll need to secure the loan against another property you own.
2. The loan amount will also account for fees and interest (i.e., gross bridging loan), reducing the actual borrowable percentage.

To see if you’ll be eligible for a bridging loan, try our calculator tool to get an initial understanding. If you’re still unsure, just give us a call.

Why Don’t Bridging Loans Require a Cash Deposit?

Bridging loans are asset-based, meaning lenders assess the loan based on the value of the property (or properties) being used as collateral. This contrasts with traditional mortgages, which rely on income and affordability assessments.

Because the property acts as security, lenders are less concerned with upfront cash contributions and more focused on ensuring the loan-to-value (LTV) ratio remains below 80%.

How Much Can You Borrow with a Bridging Loan?

The amount you can borrow depends on:

1. The value of the property: Bridging loans typically max out at 80% of the property’s market value.
2. Additional security: Offering more properties as security increases the total borrowable amount.
3. For example, if you’re buying before selling, you can secure both the property you’re purchasing and the property you’re selling.

To determine how much you could borrow, use our bridging loan calculator. This tool factors in property value, loan term, and fees, helping you assess whether a bridging loan suits your needs.

What Are the Alternatives to a Deposit?

If you’re unable to provide cash, here are two common alternatives:

1. Using Another Property as Security

If you own another property, you can use it to secure the loan, allowing you to borrow up to 100% of the target property’s value. This is particularly useful for investors or homeowners with significant equity in their portfolio.

2. Reducing the Loan Amount

Opting to borrow less than 80% of the property’s value avoids the need for additional security. Keep in mind that fees and interest are included in the gross loan value, so your actual borrowing capacity may be lower than expected.

Understanding Loan-to-Value (LTV) Ratios

Loan-to-value is a critical concept in bridging finance. The LTV ratio represents the total loan amount (including fees and interest) divided by the value of the secured property or properties.

Why It Matters:

• Lower LTVs often result in lower interest rates, saving money overall.
• Higher LTVs may limit lender options and increase borrowing costs.

Most lenders cap LTV ratios at 80%, ensuring sufficient equity remains in the property to mitigate risk.

Fees and Costs: What You Need to Know

When borrowing a bridging loan, you’ll encounter several costs that reduce the total amount available for your purchase:

1. Interest Rates: Typically 0.6%-1.5% per month, charged on the gross loan amount.
2. Facility Fees: Around 1.5%-2% of the loan value, charged by the lender.
3. Valuation Fees: The cost of valuing the property, averaging £950 but varying based on property size and location.
4. Legal Fees: You’ll need to cover the lender’s and your own solicitor fees, typically £1,000-£1,500.
5. Broker Fees: Some brokers charge a flat fee, while others, like Bridging Finance, offer fee-free advice.

Advantages of Bridging Loans Without Deposits

• Flexibility: Using property as security allows borrowers to access funds without upfront cash.
• Speed: Loans can be approved within days, making them ideal for time-sensitive purchases.
• Increased Buying Power: Borrowers can act as cash buyers, strengthening their position in competitive markets.

Considerations Before Taking Out a Bridging Loan

While bridging loans offer unmatched speed and flexibility, it’s essential to consider the following:

• Repayment Risks: Your property is at risk if you fail to repay the loan.
• Exit Strategy: Ensure you have a clear plan to repay the loan, whether through property sales, refinancing, or other means.
• Costs: High fees and interest can quickly add up, so calculate the full cost before committing.

When Is a Bridging Loan the Right Choice?

A bridging loan without a deposit is ideal for:

1. Purchasing Auction Properties: Meet tight deadlines and secure properties needing renovation.
2. Breaking Property Chains: Buy your dream home before selling your existing property.
3. Investment Opportunities: Acquire undervalued properties quickly for refurbishment and resale.

FAQs

Can I Borrow 100% of a Property’s Value?

Yes, but only if you secure the loan against another property. Without additional security, you’re limited to 80% of the property’s value.

Do I Need a Good Credit Score for a Bridging Loan?

No, lenders prioritise the value of your secured property and your exit strategy over credit history.

Can I Repay a Bridging Loan Early?

Yes, most bridging loans have no early repayment penalties, allowing you to save on interest costs.