Bridging Loans - the complete guide
If you’re looking for flexible, short-term finance and want to understand exactly what’s involved in applying for a bridging loan then you’ve come to the right place. In this complete guide to bridging finance we’re looking in depth and everything you need to know to get your finance in place, from the sort of interest rates you can expect to pay through to credit checks and how they impact your application.
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What's in this article?
By the time you’ve read this article, you should have a full and clear understanding of how bridging loans work, where they can be useful and how to find the best bridging loan lenders. If you have any further questions or want to take the next steps in finding a bridging loan then get in touch and one of our expert brokers can help you.
What is a bridging loan?
First things first, let’s set out exactly what we mean when we talk about a bridging loan.
A bridging loan, as the name suggests, is a specific kind of short-term finance designed to ‘bridge the gap’. It’s normally taken for around 12 months, sometimes slightly shorter, sometimes longer. Bridging loans can be for as little as ten of thousands right up to millions of pounds depending on what you need them for and your circumstances.
Most bridging loans are made by specialist lenders rather than mainstream banks and building societies, although some banks do include bridging loans in their range of products.
How is a bridging loan different to a mortgage?
There are quite a few big differences, (and some smaller ones!), between a bridging loan and a mortgage.
The key difference is really the duration. Mortgages are designed to be long-term, serviced over decades rather than months or years. When you take on a mortgage you know it’s going to be a regular monthly commitment for the next 20-30 years, and that becomes a part of your normal monthly expenditure.
Bridging loans on the other hand are only meant to be a short-term cash flow fix. They are set up on an interest only basis, which means that you don’t repay any of the capital until you close the loan at the end of the term, (or sooner if circumstances allow.) In many cases you don’t need to make any regular repayments at all on a bridging loan, instead you can choose to pay the interest up front as an addition to or deduction from the loan amount, or you can roll it up on a month by month basis and add it to the capital amount to pay at the end.
Bridging loans tend to have a lot more flexibility than mortgages, with a wider range of uses. For example, residential mortgages have strict eligibility criteria in place around habitability. Unless the property you are buying means some basic standards such as being weatherproof, having a kitchen and bathroom, and good drainage and sewerage, you won’t be able to get a mortgage to buy it. You wouldn't have this same restriction with a bridging loan, meaning you’ve got a lot more in the way of options when it comes to the type of property you buy and its condition.
Bridging loans are quicker to arrange than mortgages, especially large commercial mortgages, and this too gives you more flexibility if you need to act quickly on a purchase or investment. That said, you pay a premium for this flexibility and speed - interest rates on bridging loans are higher than on a traditional mortgage, and costs can add up quickly, especially if you are rolling up your interest on a month by month basis.
Eligibility criteria are different for a mortgage than a bridging loan too. Although some of the basics will apply to both - lenders will almost always want to check your credit history for instance - checks carried out by mortgage lenders tend to focus more on affordability and your ability to service the debt. For a mortgage, lenders will want to see proof of income and other financial commitments, to make sure you can afford your monthly repayments.
With a bridging loan the focus is more on your ability to repay the loan at the end of the term, as you won’t need to be making monthly repayments and so don’t need the same guaranteed income. Instead lenders want to see an exit strategy - a plan for how you are going to pay back the capital plus interest when the loan term is up.
I’ve heard the term 'bridging mortgage’ - what does this mean?
If you’re researching bridging loans online or talking about them with friends or colleagues you may notice different terms being used, such as bridging finance or bridging mortgage. This can feel a little confusing, but it really isn’t. In fact, they all mean the same thing - the terms can be used interchangeably and are just different ways of describing this particular type of borrowing.
You may find the term 'bridging finance’ more commonly used to describe the concept, and bridging loans or bridging mortgage being used to refer more to the product, but they all refer to the same thing.
Residential versus commercial bridging finance
When you’re reading about bridging loans and researching bridging loan lenders you’ll find that finance options typically fall into two categories - residential and commercial.
Residential bridging finance is used for properties that are going to be lived in, so that could be a primary residence, a second home or a holiday home. It also includes buy-to-let where you will be renting a property as a residence.
Commercial bridging loans by contrast are for anything related to and benefiting a business. This could be specific business premises such as a shop, restaurant, pub or care home, or it could be office buildings or manufacturing plants.
While the basic product is essentially the same, it’s the purpose of the loan that is different and as such there may be different terms and conditions attached. For example, commercial projects often involve higher sums so you may find that the lending limits are typically much higher on commercial bridging loans than on residential ones.
Along with these higher limits and large products come higher risk, so hand in hand with this you’ll find that commercial loans attract higher rates of interest. At the time of writing for example, (April 23), Octopus Real Estate were offering residential bridging loans with monthly interest rates starting at 0.55% pm compared to commercial bridging loans starting with monthly rates of 0.75% pm.
There’s also a difference between the two types of finance in terms of regulation, but we will cover this in more detail further down.
Semi-commercial bridging loans
We’re clear on the difference now between a residential bridging loan and a commercial business loan, but what do we mean by a semi-commercial bridging loan? A property is classed as semi-commercial if it combines an element of both residential and commercial use.
How a bridging loan can be used
Still not sure about when or how exactly a bridging loan can be used?
It’s any scenario where you need money more quickly than the mortgage process will allow, or when you don’t meet eligibility criteria for a mortgage and need finance that’s a little more flexible.
Let’s think about some of the practical applications:
- You want to buy a new home before the sale of your existing home has gone through and need short-term cash during the overlap.
- You’re buying a property as a buy-to-let investment, but it needs renovating and doesn’t meet habitability requirements for a buy-to-let mortgage yet.
- You’re selling and buying a new home but your chain has collapsed because your seller has pulled out.
- You want to release some equity to carry out some refurbishments but don’t want to remortgage before the end of your fixed rate period and pay the early repayment charges.
- You want to buy a property and auction and know that you’ll need to get finance in place quickly for the transaction to go through.
- You’ve had a business opportunity come up that needs a quick response and you know you won’t be able to organise a commercial mortgage in time to secure the deal.
- You want to buy some land and build your own home, and need finance for the purchase and building costs until you can mortgage the property.
These are just a few simple examples. In practice bridging loans have a vast number of applications, making them a very flexible form of finance.
How long do bridging loans take?
If you need large amounts of money in a hurry then bridging loans are the finance for you - their main benefit is the speed that you can go through the whole application process compared to mortgages.
Most bridging loans can be in the bank within weeks - normally two weeks on average. Depending on your circumstances, broker, lender and solicitor, you can sometimes have finance agreed and received within a matter of days.
How much do bridging loans cost?
There’s no getting away from the fact that bridging loans are not a cheap form of borrowing. They are certainly a lot more expensive than a standard mortgage, but for the higher rates you get the increased flexibility and the ability to purchase properties that a mortgage might not otherwise allow.
Remember too that interest rates on bridging loans will be displayed as monthly rates rather than the annual rates that you’ll see with regular mortgages. This can make them hard to compare, but your broker will be able to calculate projections for you to show you how much your loan will cost.
Let’s take a look at an example calculation to give you an idea of how much a bridging loan can cost in interest and fees.
Imagine you’re looking to borrow £650,000 secured on a property worth £1 million, giving you an LTV of 65%. If you take the loan out over 12 months with a monthly interest rate of 0.7%, typical for this size of loan and LTV at the time of writing, this will accrue just over £52,000 of interest over the year, calculated daily.
Aside from interest, the biggest cost associated with a bridging loan is the arrangement fee, charged by the lender for setting up the loan. These fees are typically 1-2% of the total loan amount depending on the lender and the loan, so in our example you would expect to pay an arrangement fee of between £6,500 and £13,000.
There will be other fees you may need to factor in too, including legal costs, valuation fees, broker fees and title indemnity fees where applicable. Because bridging loans can be expensive it’s important that you’re very clear on all of the costs and understand how interest will accumulate over the term.
Some lenders will offer incentives such as free valuation fees, although these are small in the grand scheme of things so it’s better to see this as a perk rather than a reason to choose one lender over another.
One cost you won’t have to consider is an early repayment charge (ERC) and most bridging loans have these set to zero. This means that if you are able to pay back your loan early, you won’t face any charges. This is different to most mortgages - unless you are on a lender’s standard variable rate then you will normally be subject to ERCs based on the balance of your loan and the time left in your rate period.
How do you pay the interest?
You have three choices when it comes to repaying the interest on your bridging loan depending on whether or not you want or are able to make monthly repayments and how you want your interest to be calculated and charged.
Rolled-up interest
One way to avoid having to make any regular monthly interest payments is to let your interest roll up over the course of the loan. The benefit of doing it this way is that you don’t have to pay anything back at all until the end of the term, but the downside is that you end up paying not just the interest on the capital amount, but interest on the interest that’s added every month.
We can see what this means in practice in the example below. This is based on a £500,000 initial loan, a monthly interest rate of 0.49% pm and with a 1.25% arrangement fee added to the capital amount. As you can see, under a rolled-up interest model the interest added every month increases.
| Month | Interest payable | Loan balance |
| 1 | £2,481 | £508,731 |
| 2 | £2,493 | £511,223 |
| 3 | £2,505 | £513,728 |
| 4 | £2,517 | £516,246 |
| 5 | £2,530 | £518,775 |
| 6 | £2,542 | £521,317 |
| 7 | £2,554 | £523,872 |
| 8 | £2,567 | £526,439 |
| 9 | £2,580 | £529,018 |
| 10 | £2,592 | £531,610 |
| 11 | £2,605 | £534,215 |
| 12 | £2,628 | £536,833 |
Retained interest
Another way to avoid monthly repayments is by paying retained interest. Retained interest is calculated as the interest due for the whole loan, paid upfront. If we look at a very simple example of this, we can get a better understanding of how this works.
Ignoring other fees for the purposes of illustration, let’s say you borrow £200,000 at a monthly interest rate of 0.5% pm. The monthly interest would be £1,000, so over a 12 month term that would be £1,000 x 12 = £12,000. The interest is deducted from the loan amount, meaning you receive £192,000 in the bank. At the end of the term the full £200,000 is repayable.
With retained interest, if you repay the bridging loan more quickly than planned, interest is rebated.
Serviced interest
Under a serviced interest structure, interest is paid monthly rather than being allowed to accumulate. Although this is more expensive and relies on some cashflow over the term of the loan, it works out cheaper overall than letting interest roll up.
If you look back to our rolled up interest example, the interest paid every month would be a flat £2,481 and the balance outstanding would stay at £506,250 throughout the course of the loan. Where the total payable with rolled up interest was £536,833, the total paying serviced interest would be £506,250 plus 12 monthly payments of £2,481 - £536,022, a saving of £811.
Although this might seem like a small amount, this is based on a relatively small loan amount and a low interest rate, so it’s always worth doing the sums to work out what works best for you.
Can you get a bridging loan with bad credit?
Yes you can, but it may not be as straightforward. Any kind of lending and borrowing is assessed on the basis of risk, and lenders will use a variety of tools to assess how big a risk it would be to lend you money. If you have a history of bad credit, this makes you a higher risk customer and so can exclude you from some lenders.
The good news is that most bridging loan lenders will take an individual view on your credit history - they won’t be taking a simple score and immediately discounting you. Context will be important, as will be the timings and amounts involved on any defaults, CCJs, missed or late payments.
The best thing to do if you are worried about your credit history is to check your credit reports before you make an application. The UK has three main credit reference agencies - Equifax, Experian and TransUnion. All offer a free trial service, allowing you to get free copies of your credit files, or you can use a service like Checkmyfile that pulls information from all three agencies.
Once you’ve got copies of your reports, share these with your bridging loan broker, flagging any potential issues. If there are any black marks, your broker will be able to assess the relevance of these and target their research on the lenders that they know are more tolerant of bad credit issues. As tempting as it can be to bury your head in the sand about credit problems, you will save yourself valuable time and a lot of stress by laying all your cards on the table from day one.
Exit strategies and why you need one
‘Wait and see’ is definitely not an approach that’s popular with bridging loan lenders - having a clear and robust exit strategy is absolutely key when it comes to securing the cash you need. But what exactly do we mean by an exit strategy?
An exit strategy is evidence of how you’re going to be able to pay the loan back at the end of the term. It’s the proof that a lender needs that you are a safe bet when it comes to them getting their money back, so it really is important to make sure your plan is viable and secure.
For residential property purchases an exit strategy is usually either the sale of another home or getting in place a traditional mortgage. Let’s say you’re taking out a bridging loan to patch a chain break for example - you don’t want to lose out on the house you want to buy, but your buyer has fallen through, so you need something to bridge the gap. Your exit strategy would be the sale of your existing home.
If you’ve already had plenty of interest and are confident that you can secure a sale quickly, this would be a viable exit strategy. If your home has been on the market for two years and this has been the only offer you’ve had so far, lenders might be more cautious about the certainty of a sale. Your broker can help you assess the viability of your exit strategy before you submit your application.
Applying for a bridging loan - a step by step guide
So you’ve done your credit checks, you’re happy with your exit strategy and you’re ready to proceed. Where exactly do you start and what can you expect at each stage?
Each application may vary slightly, but the key steps when applying for a bridging loan will include:
- The initial enquiry to a broker. Look for one with good reviews with specific experience in securing bridging loans.
- Fact finding - your broker will gather information about you, your financial situation and what you need from your loan. They can also look at your exit strategy.
- Lender research. Once your broker has a good understanding of your requirements they can research potential lenders and identify the best matches for you.
- An agreement in principle - this isn’t a must with every application, but may be part of the process for you.
- The lender considers your application in full and if they are happy, they will give you a conditional offer, subject to a valuation.
- The legal bits. This is where you sign on the dotted line, once due diligence has been done and you’re happy with the deal.
- The release of funds. You get the money in the bank - this happens via your solicitor.
The final stage then of course is repaying the loan. If you are concerned that you won’t be able to repay the loan then contact your lender immediately. A bridging loan is secured on your property and if you fail to pay it back then your property is at risk of being repossessed and sold to cover the bill.
Regulated versus unregulated bridging loans
You may notice bridging loans being advertised as either ‘regulated’ or ‘unregulated’, but what does this mean? Regulated loans fall under the protection of the Financial Conduct Authority (FCA), which means you will have more protection should anything go wrong. The FCA are concerned with how you are sold your loan and how it is managed while you have it. The regulation of bridging loans was introduced to protect people’s homes, so regulation applies when the property that you’re securing your loan against is where you live.
If any property other than your home is the subject of the loan, it will be unregulated. This includes all commercial property. Even if you don’t currently live in the property, if you have in the past or there is a chance that you will in the future, this still falls under the regulated category.
The only exception to this is when the bridging loan is a second charge on your home. In this instance it is unregulated.
Why you need a broker
By this point in our guide you might be feeling pretty confident about your knowledge when it comes to bridging loans, and may be thinking that you feel able to go it alone researching and choosing a lender.
While it’s certainly possible to apply directly for a bridging loan without help, for most people it makes sense to use a specialist bridging loan broker. There are a lot of benefits to using a broker, and even though there will be a cost involved, a good broker should make it a sound investment by ensuring you get the lowest rates possible.
A good independent broker will have access to the whole of the market and be able to compare lenders that you might not otherwise be able to find. As well as being harder to find, some bridging loan lenders will go as far as to say that they only accept applications via an intermediary. If you really want to get the best deal then it makes no sense to close yourself off to the full range of options, so using a broker is the solution.
Not only does it give you wider access to lenders, using a broker saves you time, money and stress. Buying a property is a hugely stressful, expensive and time-consuming activity, so anything you can do to reduce this has to be the sensible option.
How to choose the right lender
Hopefully you will have a bridging loan broker in place and so won’t need to think in too much detail about how to choose the right lender, but it doesn’t hurt to have an understanding of what you’re looking for so you can see why your broker may be recommending certain routes.
One of the main things you’ll be looking at of course in the interest rate you’ll be charged, but your broker will also be factoring in:
- The size of the loan you need
- How long you want the loan for
- What you need the loan for
- The complexity of your circumstances
- The lender’s arrangement fee
- Any other fees or incentives being offered by the lender
- How quickly you need the loan agreed
- Your credit history
- How you want to repay the interest
- Whether the loan will be regulated or unregulated
All of these factors and more than influence your choice of lender as each will have different terms and eligibility criteria. Your broker will balance your needs with the deals on offer and help you choose which lender is the right match for your situation.
Conclusion
If you’ve read and digested all of this information then well done!
You should now feel a lot more confident about bridging loans, how they work and when they can be useful for both residential and commercial purposes. If you are looking to secure a bridging loan, for any purpose at all, then do get in touch. We have a team of experts ready to help you.
Ready to talk? Speak to an expert today: 0800 077 8980
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