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Bridging Loans - The Revolution Guide
UK bridging loans are an alternative form of short-term financing that has many applications.
In this guide, we'll look at what bridging loans are used for, who is eligible, and how to get the lowest rates!
For more help comparing bridging finance to other options, contact the Revolution Brokers team on 0330 304 3040, or drop us a message to [email protected].
Bridging Loans: The Basics
Here's a short guide to how bridging loans work:
- Short-term loan secured against a property.
- Used to bridge gaps in longer-term financing.
- Very fast to organise.
- Higher interest rates than mortgages.
- More flexible terms and easier to qualify for.
- Often used for fast auction property purchases.
- Popular for developments.
- Can be used to buy properties ineligible for a mortgage - for example, because they don't have a working bathroom or kitchen.
- Usually require no monthly payments, with interest rolled up into the loan balance and repayable in full at the end of the term.
- Last for a year or less in most cases.
The significant factor is your exit strategy - this is short-term finance, and you must have a viable way to pay back the loan.
Most of the time that is by remortgaging the property or selling it.
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When Do People Take Out Bridging Loans?
Let's take a look at some examples:
- Property auctions usually command a 10% deposit and the balance to be paid in 28 days; which is not enough time to finalise a mortgage. Bridging finance takes just a few days so can be used to pay the balance while you get a mortgage in place.
- Buyers who have been rejected for a mortgage can often qualify for a bridging loan. If you expect to become eligible for a mortgage soon (for example, an adverse credit issue is due to expire from your record), a bridging loan is a short-term alternative.
- Dilapidated properties are often unmortgageable because they can't be lived in, in their current state. Bridging finance allows you to buy the property, renovate it, and then remortgage or sell it at a higher value.
Bridging loans are very flexible and can be used by private residential buyers or businesses, to buy commercial properties or land, and pretty much anything else provided there is a good exit strategy in place.
What are the Eligibility Criteria for a Bridging Loan?
Most lenders primarily care about the exit strategy - if there is a rock-solid way to repay the loan, they won't be as concerned about your income or credit rating. However, anything that makes the loan riskier will push up the interest costs.
Key criteria include:
- Having a strong exit strategy that proves you will be able to repay the debt. If you plan to remortgage, an agreement in principle is suitable proof, for example.
- You need to offer security - an asset that the loan is secured against and sold in a repossession scenario. The higher value the security, the better your chances of approval.
- Credit scores do matter, in that the better your credit rating, the safer a loan it is for the lender. If you have severe credit issues, you may need to apply to a specialist bad credit lender.
- Property experience is a bonus, mainly if you apply for a loan to renovate a rundown property. Some lenders require a minimum experience, but others do not.
- Your deposit is also crucial, and most lenders will offer up to 75% as a maximum LTV - so you'll need at least a 25% deposit. If you can put down 40% or higher, you will get the most competitive rates.
What is involved with Applying for a Bridging Loan?
One of the biggest selling points is that a bridging loan takes just a few days to organise, conditional on a valuation being carried out.
The application process is simple:
- Contact Revolution Brokers, discuss your circumstances and what you wish to borrow, and we'll advise whether a bridging loan is the best option.
- We'll assess your exit strategy and recommend the best lenders to apply to.
- Initially, we might seek an agreement in principle, or if you're ready to go, we can proceed with a full application on your behalf.
- The lender issues a conditional offer, which you can choose to accept or reject - the condition is usually the property's valuation.
- From there, everything works like a mortgage. The paperwork is sent to the solicitors, legal checks carried out, and signatures collected.
- Completion can then proceed - and the entire process usually takes under a week!
What is the Difference Between Regulated and Unregulated Bridge Loans?
Regulated bridging is the type of loan required for a residential home. These loans are regulated by the Financial Conduct Authority, which protects homeowners from bad advice or inappropriate selling.
Every other type of bridge loan is unregulated - which means it is bespoke to the applicant. There is nothing untoward about an unregulated bridge loan, but it isn't a standard product and is highly flexible.
Any application for commercial premises, buy to let, or business use would be considered unregulated.
What are Open Bridge Loans and Closed Bridge Loans?
Open bridge loans have a finite end date but are more flexible, so you have more breathing room. You'll still need a robust exit strategy and repay the debt by the end of the term, but it is a timeframe, rather than a static date.
Closed bridge loans are cheaper because the lender knows precisely when you will repay them.
There is no flexibility to change the date without an agreement with the lender - which will usually carry additional fees, and be at their discretion.
What are the Interest Charges on Bridging Loans?
As bridge loans are shorter term, the interest is higher - and lenders can charge interest in several ways:
- Monthly interest is paid as you go, the same as an interest-only mortgage.
- Rolled up interest isn't paid back, but added to the loan total. The capital plus the compounded interest are payable in full at the end of the term.
- Retained interest is fixed at the start of the loan, and acts as if the applicant is borrowing the interest from the lender.
How Much Can I Borrow on a Bridging Loan?
There is no fixed maximum, and commercial bridge loans can be for many millions of pounds.
Most lenders will stipulate a minimum, which can be from £10,000 but is more likely to be £30,000 or £50,000.
What Terms Can I Get on a Bridge Loan?
Short-term bridge loans typically run for a few months, or up to a year. You can get a term of between 18 months and two years in some circumstances, or as long as three years with a niche lender for a specific project.
What Deposit Do I Need to Be Approved for Bridging Finance?
The typical Loan to Value is capped at around 70% to 75%, so you need a deposit of at least 25% to be approved.
In some cases, if you don't have a large deposit, you can leverage security in other assets in lieu of a deposit.
Where the loan is considered riskier, you will need a higher deposit, which can be as much as 50%.
There are 100% LTV bridge loans out there, but this is a specialist product and requires substantial security to offset the lender's risk and the valuation costs for every asset used instead of a deposit.
What Can I Use a Bridging Loan For?
There are few limitations! You can purchase land, although not all lenders will offer this since land is seen as riskier than property. You usually need a deposit from 45% to 50% for a land bridge loan, and exit strategies might be:
- Developing the land and selling it at a profit.
- Self-building a property and remortgaging.
- Using development finance to pay for a construction project.
- Taking out a standard remortgage to pay back the bridge loan.
You can also use bridge loans on any number of property types, including:
- Residential homes.
- Buy to let rental investments.
- Commercial premises.
- Properties otherwise unmortgageable.
Why Would I Use a Bridge Loan to Buy a Residential Home?
There are lots of situations where a bridge loan might solve a problem:
- Homebuyers can solve short-term cash flow issues with a residential bridging loan.
- You can use a bridge loan to finance a property purchase if you are in a chain and waiting for your existing home to sell.
- Properties considered unmortgageable, such as those without a kitchen or requiring extensive renovation, can be financed through a bridge loan and remortgaged when the repair work is finished.
- In some cases, you can even use a bridging loan for a deposit - although must have a stable exit strategy to repay this.
How Do Bridging Loans Work on Buy to Let Investments?
Bridge to let loans mean using a short-term bridging loan to buy a rental property. If this needs renovation, you can use the bridge to pay for the investment and repairs, and then remortgage at cheaper rates when the work is finished - and the property is worth more.
You will still need a 25% deposit as a minimum.
With bridge to lets, the remortgage is agreed in principle with the same lender, and kicks in when the work is finished, the property revalued, and it becomes eligible for a mortgage.
Can I Use Bridging Loans for a Commercial Investment?
Commercial property bridging loans carry similar rates and terms to residential finance, so you'll need a similar deposit level.
Some lenders exclude specific building types, such as restaurants and petrol stations, if they deem them higher risk.
For non-standard properties, it is still possible to find a bridge loan, but it is essential to use an experienced broker to negotiate the terms on your behalf.
Can Bridging Loans Have a Second Charge Security?
They can, although this is less common. If you have an existing mortgage secured against the property, you will pay higher interest rates for a second charge bridging loan, and the deposit minimum will be at least 30%.
You can also take out a bridging loan as a third or even fourth charge, although this is very much a specialist product and the eligibility criteria would be stricter.
Can I Get a Bridging Loan for a Property Anywhere in the UK?
Business finance broker work with lenders across the UK, and the rules and terms in England and Wales are very similar.
In Scotland and Northern Ireland, you'll find fewer local bridge lenders, and there can be restrictions on development financing projects in particular postcodes and areas of the Highlands.
- Faster to arrange.
- More flexible than other forms of financing.
- Reliant primarily only on your exit strategy.
- Higher interest rates.
- Less flexibility around late payments.
- Higher fees and penalties for late payments.
If something goes wrong, the worst-case scenario is that the lender repossesses your home and any other security offered to recoup their debt. Most lenders will consider extending the term if there is only a slight delay but can charge expensive fees for the privilege. You can also consider refinancing through another product or lender.
Theoretically yes, although this would be unusual. The exit strategy is the key - so if you have a stable way or proving without a doubt that you will repay the debt on time, you would possibly be approved.
No! Swing loan is another name for bridge loan - they are the same thing.
Typically, providers will set an age limit, usually of around 80. Others have no age restrictions at all, so if you can demonstrate your ability to pay back the loan, you can get a bridge loan at any age.
You will need a few documents and pieces of information to complete your application:
- Valuation of the property - although in most cases the lender appoints their own surveyor to do this.
- Proof of ID and income in some cases.
- Business plan for commercial bridging loans.
- Evidence of your exit strategy - such as an agreement in principle.
- Proof of your experience for property development applications.
As well as the interest, you can expect to pay:
- Arrangement fees - around 1% for larger loans, or 2% as an average.
- Valuation fees on the property, and any other assets offered as security.
- Exit fees in some cases.
- Legal charges for the solicitor’s paperwork.
In some cases, bridging loans can be used to pay an inheritance tax liability. Usually, this tax is payable within six months, and the recipient cannot sell the assets inherited until they have paid the tax. Bridge loans can be used to pay the tax charge, and the inheritance is then released to the beneficiary and used to pay back the loan.
Possibly, but that would be considered a non-standard exit strategy, and not accepted by all lenders. You might also incur interest on a daily, rather than a monthly basis.
You sure can - limited company bridging loans are available at similar rates to any other bridge finance. Many lenders will require a personal guarantee from the company directors. Some businesses set up a Special Purpose Vehicle to manage development projects, which is a less risky prospect for a lender.
Yes - Stamp Duty can be a high cost, and many homebuyers use a bridge loan to pay that cost. In most cases, the loan is used to pay the stamp duty, and then the existing property sale is used to pay it back.
Yes, but they are quite rare. For more information about P2P bridging loans, get in touch with the Revolution Brokers team.
Indeed there are! There are thousands of lending products available against property purchases and developments:
- Buy to let mortgages are ideal for rental investments, and don't take as long to arrange as most residential mortgages.
- Unsecured loans can be a fast funding option and are available for lower values than most bridging loans.
- Zero % money transfer cards are an option for small borrowing requirements.
If you're interested in learning more about bridging loans, or any alternative form of financing, contact the Revolution Broker team. We are a whole-of-market broker, with full independence and accreditations, so can advise on any form of home loan. Give us a call on 0330 304 3040 or drop a message to [email protected].
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.
We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.