A bridging loan is a short term secured loan. Bridging loans are usually secured against one or more properties that you own or will own. This type of loan is very useful if you need to borrow money for a short period of time to ‘bridge the gap’. A bridging loan can be used to fund the purchase a new home before you have sold your existing home.
A bridging loan can also be very useful for the following scenarios:
- Purchasing a property at an auction as your first home.
- Purchasing an investment property that you intend to refurbish and then sell on to make a profit.
- A property purchase as a buy-to-let investment.
- Or finally, you could have found your next home via an auction, and you are yet to have sold your existing home.
- Whatever the purchase type, there is a short-term lending option for almost all instances, subject to the lenders criteria and purchasers credit history.
Different types of Bridging Loans
There are effectively only two types of bridging loans available; an ‘Open Bridging Loan’ or a ‘Closed Bridging Loan’. Here is a brief explanation of how they differ:
What is a Closed Bridging Loan?
A Closed Bridging Loan is a short term secured loan which has a fixed repayment date. This type of bridging loan is more commonly used when you may be further down the conveyancing line with a property purchase. You may have already exchanged contracts and nearing completion, however, completion has yet to take place on the existing home you are selling, delaying your purchase.
What is an Open Bridging Loan?
With an Open Bridging Loan, there is no fixed repayment date, however, the maximum term you can have the loan is usually 12 months, at which point the full loan must be repaid.
Open bridging loans tend to be the more flexible option and used much earlier in the purchase journey.
These types of bridging loans can usually be repaid at any point during the loan term. This provides borrowers with the flexibility and ability to repay the loan as soon as possible, therefore minimising the overall costs incurred.
Paying off a bridging loan
Each type of bridging loan, taken for whichever reason, will require a clear ‘exit strategy’. This is a repayment plan for how you intend to repay the loan. Repaying the loan could be from the equity you will receive from the sale of your current home, or simply a mortgage on the new home to repay the bridging loan. Whichever exit strategy presented, it will need to be plausible and evidenced to the lender. It is also prudent to have a ‘back-up’ plan if your primary strategy breaks down.
How much does a bridging loan cost?
The way that the cost of bridging loans is calculated is based on monthly costs rather than annual. This is because although the maximum term tends to be 12 months, a bridging loan is for a short period which may be less than 12 months. Therefore, monthly costs are only payable up to the point you pay the loan off in full, not for the full loan term period.
In comparison to a residential mortgage, a bridging loan can seem a fair bit pricier. However, consideration needs to be given to the fact that a bridging loan can do what a residential mortgage simply cannot – fast, short-term lending.
Monthly costs on bridging loans can vary between 0.40% and, in some cases, 1.5% on the amount borrowed. For example, a £100,000 bridging loan at 0.40% per month would result in monthly payments of £400 (£100,000 x 0.40%). This makes the APR equivalent to approximately 4.8% at 0.4% monthly, or 18% APR at 1.5% monthly.
The repayment flexibility of bridging loans is such that the loan can be ‘serviced’, which means you pay the monthly payments each and every month until you repay the loan in full.
Another option, which tends to be the more popular option amongst borrowers, is that the monthly costs are ‘rolled up’. This means that the monthly costs are rolled up and added to the total repayable amount at the point of which the loan is repaid. For example, if you held the loan for 6 months and the monthly payments were £400, the total amount of ‘rolled up’ costs would be £2,400. This would be added to the final redemption figure for your bridging loan. This would be subject to maximum loan amounts and maximum loan to value restrictions.
Are there any other fees payable on bridging loans?
Other fees are also involved with bridging loans, these can include:
- Lender arrangement costs – usually around 2% of the loan amount
- Valuation fees – which can be a multiple if you are using more than one property as security
- Broker fees – if using a professional mortgage broker
Closed bridging loan fee options
More commonly used with a closed bridging loan is the option of ‘Retained Interest’. This is where the lender retains the full amount of interest payable and deducts it from the loan. For example, if you were to borrow £100,000 for 12 months at 1% per month, interest payable would amount to £12,000. Therefore, £100,000 - £12,000 provides a net loan of £88,000. If you required a net loan in your hand of £100,000, you would need to take a higher gross loan amount so that once the retained interest is deducted, you would be left with a net loan facility of £100,000.
What does secured loan mean?
Bridging loan lenders lend money by securing the loan against property. This is done by a ‘charge’ being placed on the property or properties. This is registered on the Land Registry and is a legal agreement which provides lenders security if in the event that you default on your repayments and therefore their charge would be prioritised and be paid back first.
This can be registered as a ‘First Charge’ or a ‘Second Charge’.
A First Charge is where the bridging loan lender takes the primary charge on the Land Registry and is the ‘First’ charge that is registered. Meaning that if you failed to meet your repayments and your home needed to be sold to pay off your debts, the lender would be paid off first.
A ‘Second Charge’ comes in to play if you currently already have a mortgage on your unsold property and wish to purchase a new property with a bridging loan. The bridging loan lender will typically place a ‘Second’ charge on the Land Registry and it is the second charge that is registered. Meaning that if you failed to meet your repayments and your home needed to be sold to pay off your debts, your mortgage lender would be paid off first. If your home was owned outright and had no mortgage, subsequently the bridging loan would be a First Charge.
How much can you borrow for a bridging loan?
The minimum amount usually sits at around £25,000 with a maximum anything up to £25m for much larger projects. Lenders will have maximum LTVs that are applicable. This is a Loan to Value ratio and usually capped at 75% of the property’s value. However, if you are serving up more than one property as security, this will mean up to 75% of the total combined property value, giving you more flexibility and scope for borrowing.
I would welcome a chat should you have any questions about a future bridging loan requirement. I’ve worked with a number of clients in and around Hitchin that have required both bridging loan advice and an expert bridging loan broker to arrange low cost bridging loans.
Cade Somerville
Senior Mortgage Broker in Hitchin
