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What is a Bridging Loan

If you’re thinking about buying or selling a new home, or have ever chatted about property ownership with a friend, you may have come across the term ‘bridging loan’.

What is a bridging loan?

Although a bridging loan is a relatively common form of borrowing, not everyone is clear on exactly what it means, so if you’re thinking to yourself ‘what is a bridging loan?’ then you’re definitely not alone.

In this article we’ll explain exactly what people mean by a bridging loan, and give you some examples of how they work and when they might be useful. Once you’ve had a good read through you should be much clearer about what bridging finance involves.

Where does the term bridging loan come from?

The derivation of the term bridging loan is actually very simple. Visual a bridge across a river - what’s the purpose of the bridge? It gets you from one side of the river to another right? Not only that, but it does it quickly and efficiently, without the need to travel a long way up or down each bank.

A bridging loan works in much the same way, getting you from one financial position to another with the minimum amount of time and trouble as possible. A bridge is quick to cross, so is a short-term solution, just like a bridging loan is a short-term finance option. Once you’ve crossed the bridge and are safely on solid ground on the other side, you don’t need it any more and can move on to the next stage of your journey.

Okay, I get the metaphor, but how does this work with property?

Let’s take a real life example of bridging finance in action to help you understand how our bridge across the river metaphor relates to real life.

Let’s say you’ve found the home of your dreams. It has everything on your property wishlist - it’s detached, has a good sized garage, and even that pantry off the kitchen you’ve always longed for. It’s in a brilliant catchment area of good local schools, and is an easy commute to work. You can’t believe it - these properties hardly ever come up for sale and it’s perfect.

There’s one problem - although your current home is on the market and has had a lot of interest, the offer you’d accepted has fallen through, causing a break in the chain. You’re confident that you’ll be able to find another buyer, but you don’t want to miss out on your dream home and the vendor is looking for a quick sale.

This is where a quick bridging loan could come in. Rather than your chain break meaning you miss out on the property you love, you could take out a bridging loan to cover the gap between buying your new home and selling your old one. It means that you effectively become a cash buyer on your new home, repaying the bridging loan in full once you sell your home and are able to take out a mortgage on the new one.

Let’s think about another example. Let’s say you have sold a house in this instance, or even that you didn’t have anything to sell in the first place, but you’re struggling to get a mortgage on your new property because of its condition. Most banks and building societies will only agree to mortgages on homes that are considered habitable, which means:

  • having a functioning kitchen and bathroom
  • a reliable water supply
  • good drainage
  • being weatherproof

This is a far from exhaustive list, so it’s important to check on anything that could make your future home ineligible for a mortgage, such as issues with the heating system, roofing or specific problems like Japanese knotweed.

If you’ve bought a property to refurbish then, and it isn’t considered to be livable for the purposes of a mortgage, a bridging loan could be one way to fund the purchase. Once you’ve carried out some or all of the work to bring it up to a habitable condition, you can then apply for a traditional mortgage and repay the bridging loan in full.

In this example you’d need to show your bridging loan lender that you had a solid plan in place for completing the necessary works in a timely and costly manner so that you can get the mortgage you need and repay the loan. This is called an ‘exit strategy’ - a plan that shows you have a secure way to repay whatever you borrow. In our first example, the exit strategy would be selling your existing home.

You can get bridging loans for personal use and for commercial use, depending on your circumstances and the lender. If you’re not sure what type of bridging loan or which bridging lender might be best for you, it’s a good idea to talk to a broker. With bridging loans this is even more important than with mortgages as it's very hard to find the best deals on your own. Many lenders will only accept applications through third party experts, so if you want the best offers and prices it pays to get expert advice and support.

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Is a bridging loan the same as a bridging mortgage?

Yes. You may find bridging loans being called a variety of different things, including bridging finance or a bridging mortgage, but as confusing as this might seem initially, they all mean the same thing - a short term loan that helps you bridge the gap between two places.

All of these different terms for a bridging loan can be used interchangeably, so don’t be worried that you’re getting different products confused - it’s the word ‘bridging’ that’s the key to identifying what it is you’re talking about.

Do you pay interest on a bridging loan?

Yes, a bridging loan is similar in structure to an interest-only mortgage, but normally is more expensive as it’s designed to be a short-term solution and is higher risk for lenders.

Interest on a bridging loan is often quoted as a monthly rather than an annual rate, so make sure that you remember this and understand the difference.

The actual bridging loan interest rate that you will qualify for will depend on a range of factors. This will include but is not limited to:

  • The amount you want to borrow
  • Your loan to value ratio (LTV)
  • The term of the loan
  • Whether it’s for commercial or personal use
  • Your credit history

You have a choice when it comes to how you prefer to repay the interest, and this will influence which lender is right for you, as the approach isn’t the same across them all. One option is to pay the interest off on a monthly basis throughout the term of the loan. This will give you less to pay back at the end, but could be prohibitively expensive if you are still paying out on your mortgage and cash flow is tight.

Another option is to have the interest ‘roll up’ on a monthly basis, meaning that every month it gets added to the total amount of the loan, and capital and interest become repayable together at the end of the loan. A bridging loan broker can help you decide which might be the best course of action for you, and which would be the most affordable.

How quickly can you get a bridging loan?

The speed at which you can arrange your finance is one of the key benefits of a bridging loan, and is why they are so popular with people who need to move quickly on a home or business purchase.

Of course it will depend to some extent on your personal circumstances and the complexity of your situation but as a rule bridging loans are much quicker to organise than a more traditional mortgage. In fact, with the right preparation and support you can sometimes secure bridging finance in a matter of days. This is especially useful if you are buying a property at auction.

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Is a bridging loan a good idea?

It’s impossible to say without understanding your situation whether or not a bridging loan would be a good idea for you. What we can say is that bridging finance can be a very useful tool in a lot of situations, and that it certainly comes with advantages if you’re looking for a quick to arrange finance option that plugs a short-term gap.

The easiest way to decide whether or not a bridging loan is a good idea for you is to talk to a financial expert. Someone with a good understanding of the full range of loan and lender options available will be able to help you assess whether bridging finance is a good fit for you, and help you secure the best deals.

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