Whai is a bridging loan?
A bridging loan serves as a temporary financial solution to assist in overcoming the
delay between the desire to make a purchase and the availability of funds,
particularly when awaiting proceeds from the sale of another asset.
What can I use a bridging loan for?
Bridging loans are often used by people who want to buy a new home before
selling their current one.Landlords, homeowners and property investors use them to help with things like:
Buying property
Property development
Investing in buy-to-let
opportunities
Tax payments
- Buying Property
- Investing in-buy-to-let
- Property development
- Opportunities
- Tax Pay
Types of bridging loan
Open bridging loans
- This loan category lacks a predetermined repayment deadline, allowing you to settle the debt whenever your financial resources permit. Nevertheless, lenders typically anticipate the debt to be repaid within a year. While some may provide extended repayment options, such instances are uncommon.
Closed bridging loans
- A closed bridging loan comes with a predetermined repayment date, typically aligned with the anticipated availability of funds, such as the completion of a house sale. This loan variant generally offers lower costs compared to an open bridging loan, as it provides less flexibility regarding repayment terms.
What are ‘first charge’ and ‘second charge’ bridging loans?
When you take out a bridging loan, the lender will place a ‘charge’ on your property. This means that if you fail to repay the loan, they’ll take their repayment from the sale of the property.
In the absence of existing loans secured on the property, such as owning it outright, the bridging loan in question would be classified as a ‘first charge.’ In the event of non-repayment leading to the sale of your home to settle the debt, the bridging loan lender would have the priority to receive their repayment before any other claims.
If you have existing loans secured against your property, such as a mortgage, a bridging loan in this scenario would be classified as a ‘second charge.’ In the event of non-repayment leading to the sale of your home to settle the debt, the bridging loan lender would receive their repayment after the mortgage provider has received theirs.
Second charge loans typically come with higher costs compared to first charge loans, primarily due to the increased risk for the second charge lender in case you are unable to meet repayment obligations. Additionally, obtaining a second charge loan necessitates the approval of the first charge lender, typically your mortgage provider.
How much can I borrow with a bridging loan?
Bridging loan amounts typically range from £5,000 to £25 million, contingent upon your current financial situation and credit history. The borrowing limit is often determined by allowing you to borrow up to 75% of your property’s value. Additionally, lenders generally permit a higher borrowing limit for first charge bridging loans compared to second charge loans.
How much does a bridging loan cost?
Due to their brief duration, bridging loans often incur higher costs compared to other loan types. Monthly charges, as opposed to annual percentage rates (APR), are typical in this scenario and can vary between 0.4% and 2%.
The monthly billing approach amplifies the significance of even slight differences in interest rates, significantly impacting the overall loan expense. To illustrate, a 1% monthly interest rate corresponds to a 12.7% APR when factoring in compound interest. Similarly, a 2% monthly interest rate translates to a 26.8% APR.
It’s worth noting that not all companies apply monthly interest charges; some may opt for deferred or rolled-up payments, where interest payments are postponed until the conclusion of the agreement.
Arrangement fee
Usually around 1-2% of the total loan amount
Legal fees
Companies tend to charge a set amount to cover their legal costs
Valuation fees
The cost of sending a surveyor to value your property.
Exit fee
The cost of paying your loan early. Not all companies charge an exit fee, but those who do charge around 1% of the total loan amount
Administration/
Repayment fees
This is the cost of the paperwork at the end of your loan period. The amount will differ from company to company
Some lenders may have other fees too, so don’t forget to take these into account when you’re choosing a loan.
Can I get a bridging loan with bad credit?
Some companies may still entertain the idea of lending to individuals with ‘bad credit,’ but such applicants are typically perceived as higher risk, leading to potentially higher loan costs. Prior to applying, it’s advisable to review your credit report to understand your current credit history. If you find unfavorable credit, taking steps to improve your credit score can be beneficial.
What alternatives are there to a bridging loan?
A bridging loan is designed specifically for when you need a short-term loan, but it isn’t the only option available. Here are a few others to consider
Remortgage
- Contemplating the option of remortgaging your existing home as a means to unlock funds is a viable consideration. However, exercising caution and thoughtful deliberation is paramount before proceeding. Remortgaging is a decision with long-term implications, necessitating careful reflection on potential scenarios such as fluctuations in interest rates or a potential decline in income. If any uncertainty arises, seeking guidance from a qualified professional is strongly advisable.
Let-to-buy
- In the process of let-to-buy, individuals opt to convert their current mortgage into a buy-to-let mortgage. The released equity is then utilized to acquire a new property, while the original home is transformed into a rental property instead of being sold. Despite its potential benefits, there are inherent risks involved. For instance, difficulties in securing tenants or the financial strain of managing two mortgages, particularly if interest rates fluctuate, are crucial considerations. It is highly advisable to seek professional advice when uncertainties arise in order to make informed decisions.
Secured loan
- Secured loans enable borrowers to access larger loan amounts compared to personal loans and typically come with lower interest rates than bridging loans. However, it’s important to note that, similar to bridging loans, your home is at jeopardy if you fail to meet the repayment obligations.
Personal loan
- Certain lenders provide personal loans with a maximum limit of £50,000, although £25,000 is a more frequently encountered threshold. Opting for a personal loan might serve as an alternative if your financial need is relatively modest, such as for a bridging loan. Personal loan interest is assessed on an annual basis, not monthly, which typically results in more affordable repayment amounts. Additionally, these loans are not secured by your property, mitigating the risk of home repossession.
Some lenders may have other fees too, so don’t forget to take these into account when you’re choosing a loan.
Get clear on what you need from your loan
Calculate the precise amount you require and determine the duration for which you need it before proceeding. Bridging loans come with high costs, so it’s crucial to ensure that you can repay the loan within a relatively brief timeframe.
Know your situation
No matter which lender you opt for, be prepared to provide information about your situation. Anticipate questions such as: What is the current value of the property? Do you currently have a mortgage, and if yes, what is the outstanding amount? What is the equity in the property? What is your monthly income and expenditure? Have all these answers ready when engaging with a lender.
Do your research
It’s crucial to avoid hastily choosing the first loan you come across, given the multitude of options available. Consider utilizing the services of bridging loan brokers who can thoroughly research the market on your behalf. These brokers often have access to exclusive rates and deals, although it’s important to note that they typically charge a fee for their services.
Read the small print
Make sure to thoroughly review the included fees before committing to any agreement. Additionally, consider applying for loans that align with your likelihood of approval. While Experian doesn’t assess bridging loans, we do compare personal, secured, and guarantor loans. Utilize our service to check your eligibility rating when comparing loans. It’s important to note that we act as a credit broker, not a lender†. Our role is to assist you in discovering deals, but we don’t extend credit or make approval decisions.