What is a Bridging Loan?
A bridging loan is used to borrow money for a short period of time, usually for less than 12 months. Although bridging finance can be arranged for many reasons, it is typically used to ‘bridge the gap’ so you can buy a new home before you have sold your current property.
There are Two Types of Bridging Loan, Closed and Open
With a closed loan, you have a fixed repayment date. You would generally use a closed loan when you are waiting for your property sale to complete and have a completion date, but you must buy the onward property in the meantime.
With an open loan, there is no fixed repayment date. This gives you more flexibility to complete a sale, but the loan should be repaid as soon as possible, to minimise the cost.
The lender will want to see evidence that your repayment plan is feasible, for example, you will receive enough money from the sale of your current property to enable repayment of the loan. The lender will normally also want to see details of the property you are purchasing including the purchase price and evidence of the sale of your property. It is a good idea to have a back-up plan, such as a refinance, in case your initial plan fails.
When taking out a bridging loan, a ‘charge’ will be placed on your existing property in the same way as a standard mortgage charge. This is a legal agreement that prioritises which lenders will be repaid if you fail to repay your loan. Both a first and second charge bridging loan can use your existing property as security.
If you have a mortgage on the existing property, the bridging loan will be a second charge, meaning if you failed to repay the bridging loan and your home had to be sold to repay the debt, your mortgage would be paid first from the proceeds and the bridging loan second, from any remaining equity.
If you own your existing property outright, or you were taking out a bridging loan to repay your mortgage, you will take out a first charge bridging loan. This means the bridging loan would be repaid first if your repayments fell behind.
Bridging loan providers will usually lend above £25,000. You will be able to borrow a maximum loan-to-value of 65 to 75% of the value of the security on offer once any current borrowing is deducted. For example, the maximum LTV including current borrowing, bridging loan, fees & interest will not normally exceed 75% of the value of the securities, based on the loan running for the full term. If you were taking out a first-charge loan, you will usually be able to borrow more than a second charge loan.
Amongst many other reasons, bridging finance is good for people requiring short term cash or buying a rundown or uninhabitable property. As bridging loans do not usually require monthly payments, the interest generated during the term of the loan is added to the loan and repaid, along with any fees, when the loan is repaid. This makes bridging finance a good option if you are asset rich but cash poor.
It’s a good idea to speak to an independent broker to get impartial advice on taking out a bridging loan.