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Bridging loan pros & cons

Over the last few years, the UK has seen the bridging finance market grow, expand, and diversify like never before. But what exactly is a bridging loan, and what are the benefits of this type of funding option when compared to more traditional financial products?

The table below briefly outlines the main pros and cons of a bridging loan.

How bridging finance works

It is important to know how bridging finance works before you choose this as your option. We have all the expertise to assist you in securing the right type of financing for your requirements. You should consider the following facts:

• Bridge loans are routinely secured against existing land or property. Proof of income and good credit scores may be required by the lender to be approved.
• Applicants can typically borrow up to a maximum gross loan (net loan + all fees and interest) of 75% or 80% of the value of the property they wish to purchase. This will vary from lender to lender, with most willing to negotiate.
• Bridging brokers with access to the ‘whole of market’ will be able to search and compare bridging lenders across the UK, finding you the best deal for your circumstances.
• Bridging finance is generally repaid in full at the end of the term, usually up to one year, including all interest that has been incurred.

What else do I need to know?

The bridging loan will need to be repaid within 12 months at the end of the term. There are no monthly payments made for this type of loan. Interest is only charged for the length of time that the finance is used. There are no early repayment charges if the loan is paid early.

Before approving you for funding, the lender will most likely require an exit strategy. This will outline exactly how you intend to repay the loan.

Bridging loan lenders use a few different calculations when determining whether to approve a loan application and how much to lend. These calculations include:

• Loan-to-value (LTV) ratio: This is the amount of the loan compared to the value of the property used for security.
• Interest rate: The interest rate for a bridging loan is usually higher than a traditional mortgage. This is because it is a higher-risk short-term loan.
• Repayment plan: Lenders will want to know how the borrower plans to repay the loan.
• Affordability: Lenders will want to ensure that the borrower can afford to make the monthly interest payments; typically, the interest is retained, meaning there are no monthly payments. However, the lender will still have access to your income to make sure of this. They will typically look at the borrower’s income and expenses to determine whether they can comfortably make the payments. We generally do no credit check, unless deemed required in exceptional cases.

Proof of income requirements

Proof of income for a bridging loan is usually less crucial compared to traditional loans. Since bridging loans are secured on property and often repaid in a lump sum, lenders focus more on the value of the asset and your exit strategy (how you’ll repay). However, some lenders might request income documentation to assess your ability to cover interest payments or for future business with you.

Borrowing money against your own house to buy another property

Yes, borrowing against your house to buy another property is possible. It’s achieved by leveraging your home’s equity—the difference between its value and what you still owe on your mortgage. There are ways, like remortgaging or taking out a second mortgage, to access this equity. But remember, this increases your debt and puts your home at risk if you can’t repay.

Repayment of a bridging facility

Bridging loans typically don’t require monthly payments like a traditional mortgage. You’ll usually repay the entire loan amount (principal + interest) in a lump sum at the end of the term, which is often short, around 1 year. However, some bridging loans may require monthly interest payments, so be sure to clarify the repayment structure with your lender before you borrow.

Failure to pay back a loan

Missing payments on a bridging loan can be serious. It can lead to hefty late fees, higher interest rates, and damage to your credit score. In more severe cases, the lender could repossess the property used as security for the loan or even take legal action to recover the debt. If you’re struggling to repay, it’s crucial to communicate with your lender early to explore options like extending the loan or finding alternative solutions.

The risk involved

Bridging loans involve significant risks. While they offer fast access to funds, they come with high interest rates and short repayment terms, putting pressure on you to repay quickly. They’re secured on assets like property, so failure to repay could lead to repossession. A solid exit strategy, like selling a property, is crucial to avoid getting stuck in debt.

Impact on your credit score

Yes, bridging loans will typically show up on your credit report. This includes both successful applications and unsuccessful ones. Having a bridging loan on your report isn’t inherently negative, but it can affect your credit score, especially if you have multiple applications or delinquencies. Make sure you understand the impact on your credit score before taking out a bridging loan.

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