When we think about buying a home, we often believe that only residential mortgages are available to finance the costs - but there are many different options!
Bridging loans are most commonly used for property development projects or investors, but there can be circumstances when a bridge is the best choice for a residential property purchase.
Here we'll explain when they might be useful - and what criteria apply. For more information or help with a new application, give us a call on 0330 304 3040, or drop a message to email@example.com.
How Are Bridging Loans Used for Home Purchases?
Bridging finance is a short-term loan, secured against a property, and usually runs for less than a year.
They are interest-only, so you pay back only the interest element each month, or this might be rolled up into the loan and be repayable at the end of the term.
Your loan is secured against the property, and you can find fixed-rate loans or tracker loans, as with a typical mortgage.
If you hear the term bridging mortgage - this isn't precisely a mortgage, but a bridging loan used to purchase a residential property.
The critical difference is that a bridging loan is much faster to arrange, and more flexible, but does carry higher interest rates. Lenders won't be so concerned with what you earn, as they will with how you plan to repay the debt - called your exit strategy.
What Bridging Loan Do I Need for a Residential Property?
There are two core types of bridging loan, and if you're buying a home to live in, you need a regulated loan.
Regulated means that the loan is overseen by the Financial Conduct Authority's standards, who set rules around factors such as receiving advice.
Unregulated bridging loans are aimed at non-residential purchases, such as commercial investments or buying a rental property.
When is a Bridge Loan Appropriate for a House Purchase?
As we say, bridging loans are fast - they can take just a few days subject to conditions.
If you need to move quickly with a move, want to move into your new property while waiting for your old one to sell, or want to purchase a property that needs significant renovation and is considered uninhabitable, a bridge loan is a short-term solution.
Auction purchases are also commonly financed by a bridge loan. Usually, you pay a 10% deposit on the day and have to pay the balance in 28 days - or risk losing your deposit, and the property.
Therefore, a bridge loan can be arranged quickly and used to pay for the balance while you work through getting a residential mortgage in place to refinance the debt.
Some homeowners use a bridge because they have been turned down for a mortgage. For example, if you have a bad credit rating due to an issue that is due to expire from your record in a few months, you might use a bridge to buy the home now, and then remortgage when you can secure better mortgage rates.
Can I Use Bridging Finance for a Buy to Let Property Development?
You can use a bridge loan to buy a rundown property that isn't eligible for a mortgage. One option is to consider a bridge to let loan, whereby you agree on a remortgage deal with the same lender, to kick in when the renovation work is complete.
Bridge loans are also used if you wish to buy a property and sell it for profit. This is known as flipping a property and might apply if there is a low-priced property for sale, or you are offered a property at below market value.
Renovations are commonly financed through a bridge, either as a first charge if you have a mortgage-free property, or a second charge if you have sufficient equity.
When the work is complete, you can either sell the property or remortgage at the new valuation.
Can I Get a Bridging Loan for a Self-Build Home Project?
There are many different ways you can use a bridging loan - they are very fast to organise, and have lower eligibility requirements.
Self-build projects usually mean buying land or property, which is not currently eligible for a traditional mortgage. Bridging loans are one way to secure that investment.
The caveat is that you must have a viable exit strategy, and show the lender how you will repay the debt at the end of the term. This is usually through selling the property or remortgaging.
Do I Need a Specialist Lending for a Residential Bridging Mortgage?
Likely, yes. Bridge loans are a more niche product than a standard mortgage. If you fall outside of any standard criteria, it is highly advisable to seek guidance from an independent broker.
Examples, where specialist lending is almost certainly required, include:
- Complicated developments or build projects.
- Unusual properties that aren't currently mortgageable.
- Problems with an adverse credit history.
- Low deposit requiring an LTV of over 70/75%.
- The security offered is a second or third charge.
What Deposit do I Need for a Bridging Loan to Buy a House?
Generally, lenders cap bridging loans at 70% or 75%, so you'll need a deposit of 30-35%.
You can get a higher Loan to Value bridge loan but will need to offer substantial security to offset the lender's risk.
What are the Eligibility Criteria for a Home Bridging Loan?
Lenders will assess several factors before approving an application, with the exit strategy being the primary decision-maker.
- Your exit strategy is key, as the lender needs to have the assurance, you can pay back the short-term loan. While most borrowers plan to remortgage or sell the property, some lenders will accept non-standard exit plans such as inheritance or an investment.
- Credit checks have an impact, and if you have a clear credit history, you will be offered lower interest rates. If you have severe credit issues, you may need to use a specialist bad credit lender.
- The security offered is the backstop for the lender - they would sell this should you be unable to repay the debt, in a repossession scenario. High valued properties of standard construction that would be easy to sell present the best security.
- Your development experience can also be a factor if you are taking out a bridging loan to finance a renovation project.
Are There Alternatives to Using Bridging Finance for a House Purchase?
There are thousands of lending products - if you're not sure which one is the best option, get in touch with the Revolution team at any time to discuss your circumstances.
- Buy to let mortgages are usually used for rental investments, and take around a month to arrange on average.
- Secured home loans release equity from a property, and are lower interest than bridging loans - but do take several months to complete.
- Other options to release equity include remortgaging.
Expert Advice on Residential Bridging Finance
If you're unsure if a residential bridge loan is the best option, or would like to compare the costs of alternative lending, get in touch with the Revolution Brokers team.
Our independent, accredited team of consultants offer whole-of-market brokerage services to ensure you get the most competitive deals, suited to your borrowing requirements.