How Does a Bridging Loan Work?

Key Takeaways

• Bridging loans are short-term financial solutions that help you secure property quickly, often before other funds are available.
• They are particularly useful for breaking property chains, purchasing unmortgageable properties, or buying at auctions.
• Bridging loans come with costs, including interest rates, facility fees, and valuation fees, but they offer flexibility and speed.
• They are typically repaid within 12 months through a pre-defined exit strategy, such as the sale of a property or securing long-term financing.

How Does a Bridging Loan Work?

The Application Process

1. Initial Research: Start by assessing your financial situation and exploring potential lenders or brokers. A bridging finance calculator can help you estimate costs and eligibility – you can try out ours for free.
2. Broker Consultation: Engaging with a bridging finance broker is highly recommended. Brokers simplify the process by navigating paperwork, comparing lenders, and securing competitive rates. Many brokers, including us at Bridging Finance, offer fee-free services.
3. Decision in Principle: Obtain a decision in principle to show sellers and estate agents that you have access to the necessary funds. This step can often be completed within 24-48 hours.
4. Official Application: Once your offer on a property is accepted, submit a formal application with your broker’s assistance. The application involves property valuations and legal processes, which can be expedited for urgent transactions.
5. Funding Release: Upon approval, funds are released-often within 72 hours. You’ll then start accruing interest on the loan amount until it’s repaid.
6. Repayment: The loan is repaid through your exit strategy, such as selling your property, securing a mortgage, or refinancing. Interest typically stops accruing on the day the loan is fully repaid.

Costs Involved in Bridging Loans

While bridging loans offer speed and flexibility, they come with specific costs that borrowers should be aware of:

Interest Rates

Interest rates for bridging loans range from 0.68% to 1% per month. These are significantly higher than traditional mortgages but reflect the short-term nature and risk profile of the loan. Interest is often rolled up into the loan amount, meaning you don’t need to make monthly payments during the term.

Facility Fee

Lenders charge a facility fee, typically 1.5% to 2% of the loan value. This fee is a one-time cost paid at the start of the loan.

Property Valuation Fees

Properties involved in the transaction require valuations, with fees averaging around £950, depending on the property’s value. Some lenders offer desk-based valuations, which can be quicker and more affordable.

Legal Fees

Borrowers must cover both their own and the lender’s legal fees. Expect to pay around £1,000 for a property worth £250,000. However, you can often offset this slightly by using joint representation – we’ll facilitate this for you where it’s possible.

Redemption Fees

Most lenders charge a small administrative fee of £100-£150 to remove the legal charge on your property once the loan is repaid.

The best way to get a good understanding of the costs for your purchase and your eligibility, is to use our bridging loan calculator:

Eligibility and Loan-to-Value Ratios

Eligibility for a bridging loan depends primarily on the loan-to-value (LTV) ratio, which compares the loan amount to the value of the property (or properties) used as security. Here are the key points:

• Maximum LTV: Most lenders cap LTV at 80%, including existing mortgage debt.
• Exit Strategy: A clear plan to repay the loan, such as selling a property or securing a mortgage, is crucial.
• Income and Credit Score: These are less important than for traditional loans, as repayment relies on the exit strategy rather than long-term affordability.

Common Uses of Bridging Loans

Buying Before Selling

If you need to secure a new home before selling your current property, a bridging loan provides the necessary funds. This approach helps you avoid property chains and makes you a more competitive buyer.

Purchasing Unmortgageable Properties

Bridging loans are ideal for properties that traditional mortgage lenders consider unmortgageable, such as those requiring extensive renovations or missing key facilities. You can then remortgage once you’ve got them up to scratch.

Auction Purchases

With tight deadlines to complete purchases, auction buyers often turn to bridging loans to secure properties quickly. Again, you can remortgage in good time once you’ve secured the property, and we can work with you to secure your AIP on the other side for your bridging lender.

Investment Opportunities

Investors can use bridging loans for projects like property flips or transitioning to buy-to-let mortgages after refurbishments.

Advantages and Disadvantages

Pros

• Speed: Funds can be available within days.
• Flexibility: Suitable for various property-related needs.
• No Early Repayment Penalties: Most lenders don’t penalise early repayment, reducing overall costs.

Cons

• Higher Costs: Interest rates and fees are higher than standard mortgages.
• Risk of Repossession: If you fail to repay the loan, your property may be repossessed.

FAQs

Do I Need a Salary for a Bridging Loan?

No, as repayment relies on your exit strategy rather than ongoing income.

How Quickly Can I Get a Bridging Loan?

Some loans can be arranged in as little as 72 hours, but the average timeframe is 3-6 weeks.

What Happens if I Can’t Repay My Loan?

Failure to repay may result in repossession of the secured property. Lenders generally work with borrowers to avoid this outcome.

Is Bridging Finance Safe?

Yes, provided you have a clear exit strategy. Using a broker ensures you fully understand the risks and terms.