For most traditional forms of lending – mortgages, credit cards or personal loans – your credit score plays heavily into a lender deciding whether or not to approve you.
This means that if you’ve had some issues making repayments in the past, other lenders may see you as higher risk and may be less keen on lending money to you.
What Is a Bridging Loan Secured Against?
As a bridging loan is secured against your property, you’re less likely to be rejected if you have a poor credit history, as the loan is guaranteed to be repaid from the sale of your property.
The same doesn’t necessarily apply to bridging loans. As repayments typically work a bit differently, lenders may be less concerned by a poor credit history.
Read on to find out why you may still be able to get a bridging loan with bad credit.
We update all our guides regularly. If you are researching bridging loans and we haven’t got an exact guide that helps you, keep coming back as we update daily.
What Is a Bridging Loan?
A bridging loan is a way of raising funds for a short amount of time. It’s a loan that’s secured against your home just like a mortgage is, so if you can’t pay it back then the lender can repossess and sell your home to get their money back.
Bridging loans are typically used to plug the gap between buying a new house and selling another. In this case, the loan and its interest will be paid off when the old house is sold. If there’s enough equity tied up in the security property, bridging loans can also be used to:
- Pay for renovation or development works on a property
- Pay for property development, investment or buy-to-let opportunities
- Pay off an outstanding tax bill to HMRC
- Stop a property from being repossessed if the mortgage is in arrears
- Raise funds quickly to stop bankruptcy proceedings
As some of these are sensitive situations, it would be best to speak to an expert to discuss which options are available to you before making any firm decisions.
How Do Bridging Loan Repayments Work?
Bridging loan interest is charged monthly. But instead of monthly payments throughout the term of the loan that chip away at it over time, bridging loans are typically paid off all in one go at the end.
There are two ways to repay them:
- Through the money raised from selling the property the loan is secured against
- By securing longer term funding such as a mortgage at the end of the term
If the repayment falls through, lenders will typically try to work with borrowers to find a mutually agreeable solution. As a last resort, a lender can force the sale of the property the borrower secured the loan against and recover their losses from that.
What Do You Need to Know When Borrowing With Bad Credit?
Just because some lenders are willing to overlook bad credit doesn’t mean all are. To give yourself the best chance of being approved for a bridging loan with bad credit, you need to consider the following information.
Lenders Will Likely Still Do Credit Checks
Bridging loan lenders still do credit checks. This allows them to spot anything more sinister like fraud markers which are usually a no-go in terms of lending. A credit check also lets the lender see the severity of bad credit. For example, a couple of missed energy bill payments or one late mortgage payment are likely to be far less damning than filing for bankruptcy.
It also helps if the mark has been on your file a while – the further in the past it is, the better.
A Strong, Realistic and Viable Exit Strategy Is Key to Approval
How you’ll pay off the loan (your exit strategy) is the most important factor. If you’re planning to raise the money through a house sale, a lender is more likely to overlook any late or missed payments, CCJs or IVAs in your credit history. Here your ability to make monthly payments is irrelevant as you’ve promised the lender their money back through the sale.
If your exit strategy involves a remortgage, it’ll be trickier to get a bridging loan with bad credit. This should be something you look into ahead of time. You might even want to go as far as trying to get a mortgage agreed in principle before you apply for your bridging loan.
There are some lenders who may accept other exit strategies, like cashing in investments or inheritance. These are likely to be few and far between, but they can still be an option where bad credit may otherwise stop you from being approved for remortgaging.
Cases Where Bad Credit Can Stop You From Being Approved
Generally, the less risky you can prove yourself to be, the more likely you are to be approved for a bridging loan. This means putting up a larger deposit upfront or having a solid business plan in place for commercial borrowing can help push your application over the line.
However, sometimes even things like that won’t be enough to tempt a lender to take a risk. If you already have a mortgage secured on the property you want to use against the bridging loan, for example, this can make things much trickier. This is a second charge bridging loan.
Second or even third charge bridging loans are not typically approved for those with bad credit – even those with a flawless credit history may struggle for approval here.
This is because the lender would not be first in line to recover their losses if you couldn’t meet your repayments and your home had to be sold – not a place any lender wants to be in.
Can Businesses With Bad Credit Get a Bridging Loan?
In theory, yes. But the circumstances have to favour the lender. As is the case with personal bridging loans, you’ll need to prove you’ve got the means to offer the lender security. This might mean having valuable assets such as buildings or vehicles to secure the loan against.
If you’re worried that bad credit is holding back your ability to get bridging finance, speak to a professional. They’ll be able to discuss your options with you and may even be able to point you in the direction of a lender who specialises in borrowers with poorer credit histories.
Quick Bridging Loans FAQs
There will be higher interest rates attached to bridging loans, up to as much as 1.5% per month, equating to potentially as much as 20% annually.
The lending criteria and conditions around bridging finance is stricter than a normal mortgage. Lenders will usually consider lending between £25,000 and £25,000,000 depending on the properties involved, their values as well as the timeframes and the nature of the arrangement.
Bridging finance will be used to finance the purchase of a second property before the sale of a primary one or in order to make a property purchase very quickly. Other uses are;
- Property Auctions
- Property and Land Development and Investmenta
- Business Purposes
With a closed bridging loan, there will be a date by which the borrower will be able to pay off the bridging loan.
An ‘open’ bridging loan is one in which there is no set date or timeframe in which the borrower will repay the bridging loan.
More often than not, the exit for the borrower will be the sale of the first property, which then enables them to refinance their second property to repay the bridging loan and refinance more affordably.
Typically, bridging finance borrowers are;
- Will be a homeowner and will have to own a property in order to use a bridging loan to purchase another property
- Will be working to very specific time constraints, for example as a result of an auction purchase where they will have a maximum period of 28 days in which to pay for the full property purchase
- Will be in a position where they need to unlock capital (for or from a property) quickly
- Will need the money quickly in order to purchase another property or land for development and investment purposes
How Can Money Savings Advice Help You With Bridging Loans?
Here at Money Savings Advice, we have partnered with some of the UK’s leading Bridging Loans brokers. They have already helped thousands of people get the best Bridging Loan deal and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.