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
A closed bridging loan means the exit strategy is clear from the outset. For example you already have a buyer in place and you have accepted an offer. The bridging loan will have a fixed repayment date.
An open bridging loan is more flexible due to there being no certain buyer in place. This would allow you to purchase a property whilst your property is on the market. 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. The bridging loan can either be a first of second charge on the security property.
If you have a mortgage on the existing property, the bridging loan will be a second charge. This means, 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 a property with no mortgage, or the security property is one you are purchasing, this will be a first charge bridging loan. This means the bridging loan lender would be repaid first upon sale.
The minimum loan size is currently £25,000. The maximum loan to value is up to 75% of the current value or the purchase price of the security on the offer. The maximum loan to value is always gross, therefore this takes into account any existing mortgage borrowing, fees added to the loan and interest. This means the NET loan received will be lower than 75%. If you were taking out a first charge loan, you will usually be able to raise more than a second charge bridging loan. Use our bridging loan calculator to find out more.
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.