Typically used in property and housing, a short-term bridging loan can help with money management. Whether you’re buying a new build property or stuck in a chain, you can use a bridging loan secured against the value of your property.
What Is a Bridging Loan?
Bridging loans let you borrow large sums of money when you’re transitioning between properties. The loan is secured against your home and is repaid when it is sold. If your sale falls through, you’re still liable to repay the loan.
In order to properly benefit from a bridging loan, you’ll need a start and an end goal in sight. Bridging loans are not designed as a long-term form of borrowing. You’re using the loan to build a bridge from your current situation to your next one, for example if you want to move house before you’ve sold your current property.
Bridging loans are ideal when your money is tied up elsewhere. They’re used in situations where you already have the funds, but they may be wrapped up in the property. Your funds might also be held up elsewhere, like during divorce proceedings.
You can apply for a bridging loan if the money is already yours, but you’re unable to access it immediately.
Read on to find out more about how a bridging loan works.
What Is a Bridging Loan?
A bridging loan is a secured loan, usually secured against the value of the property you own. It’s most commonly used in housing chains if you want to buy a new house before the sale of your old one is complete. You can borrow against the value of your home, knowing that you’ll soon have the money you need for repayment.
Bridging loans are also popular with those that are purchasing new builds. You might need the money to pay for new property before it’s ready to live in. Then, once your new home has been built, you can sell your existing home to repay your bridging loan debt.
There are other less common reasons to apply for bridging loans, like waiting for your divorce to go through or buying stock for your business.
How Does a Bridging Loan Work?
Bridging loans are regulated by the Financial Conduct Authority (FCA). They’re secured against your property and can be approved quite quickly, but often come with high-interest rates. Bridging loans can be approved quickly because you already own the property that you’re securing your borrowing against.
Bridging loans are only intended to be a short-term solution. In some cases you’ll be given a strict repayment date, and in others you might get a flexible bridging loan with no specific payment deadline. Flexible loans are called open bridging loans, with the others (unsurprisingly) called closed loans.
In order to have your bridging loan approved, you’ll need to have an exit route. The exit route states exactly how you’ll be able to repay your loan. Your exit route might be the upcoming sale of your new house, or another upcoming financial event like a divorce settlement.
Before you apply for a bridging loan, your exit route should be clear. If you haven’t found a buyer for your house, can you be sure that it’ll definitely sell for the money you need by the deadline?
How Much Are Bridging Loans For?
When offering bridging loans UK lenders will consider the value of your property. They’ll usually lend up to 80% of this value.
You may not be offered as much money if you’ve got other loans against your property, like an existing mortgage.
As well as the money you’ve borrowed, you’ll be expected to pay interest and several different fees. You’ll likely have to pay separate solicitor fees, valuation fees and arrangement fees.
Just like many other types of loan, bridging loans can be fixed or variable. A fixed loan will have the same amount of interest applied every month. With a variable loan, the interest rate may change and your payments may go up or down.
How Long Can You Have a Bridging Loan For?
In most cases, bridging loans are for a maximum of one year. Sometimes, they may be offered with longer terms up to 18 months. It’s unusual for a bridging loan to be offered for longer than this. Many bridging loan debts are paid off much sooner, sometimes within a month or two. This is because they’re only needed whilst a property sale is processed.
You may pay interest by the month, or interest may be added to the final amount that you owe. If your interest is added to the final amount, you won’t pay any monthly charges. When interest is added to the value of your loan, it’s often said to be ‘rolled up’. When interest is rolled up you won’t pay through the loan term but will have more to pay at the end.
If you choose a bridging loan without monthly interest payments, this might help you to get through times when money is tight. If you’ve chosen a loan where interest is rolled up, you must be prepared for your final payment to be significantly higher than your borrowing.
Bridging Loans Explained
You can apply for a bridging loan directly or through a broker. You can even search for bridging loans online, comparing them before you apply.
Your application for a bridging loan may be approved, in principle, in less than 24 hours. This doesn’t mean that you’ll get the money straight away. A property valuation needs to take place before the money is transferred. Usually, borrowers wait 2-4 weeks for their funds. Once you’ve received your bridging loan, you can use it as you’ve agreed.
You’ll repay your closed bridging loan by a specific date, or may have an open bridging loan with no clear repayment deadline. If yours is a closed loan, you may be charged for early repayment of your loan. Not all lenders charge for early repayment, so you’ll have to check the terms of your agreement when you apply.
As bridging loans are secured against your property, they’re important debts to stay in control of. Falling behind on payments, or not repaying your loan, could cause you to lose your house.
Example of a Bridging Loan
|Amount remaining of mortgage||£50,000|
|New property value||£250,000|
|Bridging Loan available||£100,000|
In the above example, the customer wants to buy a new home that costs £250,000 and they don’t want to miss out, but they’re still waiting to finalise the sale of their £350,000 home.
They’ve already got £150,000 saved through other means, but need £100,000 to complete the purchase of the new home – the lender will be prepared to lend this secured against the current property. Once the current property sells, the customer will have enough to pay off the mortgage and the bridging loan, and cover the interest from the profits made on the sale.
Alternatives to Bridging Loans
If you know exactly how and when you’ll get the money, a bridging loan could be ideal. They’re easy to apply for and can be approved quite quickly. Bridging loans are an option if you have existing property and something to secure your loan against.
Bridging loans aren’t your only option. You could consider a personal loan or think about remortgaging a property. Your reason for borrowing is an important factor in the decision to apply for a bridging loan.
If you need money quickly but won’t need it for long, a bridging loan may be right for you. With our financial guides, you can find out more about bridging loans and your alternatives.
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.