Guide to Bridging Loans in the UK
Introduction to Bridging Loans
Bridging loans, sometimes called bridge loans, are short-term finance solutions designed to 'bridge' a gap in funding, typically used for property purchase before the sale of an existing property.
What are Bridging Loans?
Bridging loans are a type of secured loan, which means they're backed by a physical asset, usually a residential or commercial property. They are particularly favoured by property developers as a flexible property finance tool for a range of purposes including auction purchases.
Why would you take short term finance?
There are a number of reasons why you may use short term financing. These include:-
Auction purchases where a deadline is set
Looking to refurbish a property. This includes properties that need renovation in order to improve their Energy Performance Rating (EPC) to comply with legislation that is coming in 2025.
Capital raising
Chain break
Bridging Finance and Property Developers
Property developers often use bridging finance to fund development projects or to quickly secure a property at auction. The speed at which funds can be accessed often makes bridging loans more attractive than a traditional mortgage.
Open Bridging Loans vs Closed Bridging Loans
There are two types of bridging loans: open bridging loans and closed bridging loans. Open bridging loans have no fixed repayment date, while closed bridging loans have a fixed repayment date typically linked to the sale of an existing property.
Bridging Loan Cost and Interest Rates
The cost of a bridging loan can vary significantly based on the interest rate and other fees. Interest rates on bridging loans are typically higher than on personal loans or traditional mortgages, reflecting the short-term nature and risk associated with these loans.
How Interest Rates Impact Bridging Loan Cost
Interest rates on bridging loans can be charged monthly or as a lump sum at the end of the loan term. It's crucial to understand how these interest rates can affect the overall cost of your bridging loan.
Understanding Valuation Fees in Bridging Loans
Valuation fees are a common cost associated with bridging loans. These are fees charged by the bridging lender to assess the value of the property you're using as security.
Legal Fees in Bridging Loans
Legal fees are another common cost associated with bridging loans. These are fees charged by the bridging lender's solicitor to handle the legal aspects of the loan.
Other Fees in Bridging Loans
Apart from valuation fees and legal fees, bridging loans may come with other fees such as exit fees, administration fees, or broker fees if you use specialist bridging loan brokers.
How to Compare Bridging Loans
When looking to borrow money through a bridging loan, it's important to compare bridging loans from different bridging lenders. Look not just at the interest rates but also the fees and the terms of the loan.
The Role of Bridging Loan Brokers
Bridging loan brokers can help you compare bridging loans and find the best bridging loan for your needs. They have access to a wide range of products and can negotiate on your behalf.
How Bridging Loans Work
Bridging loans work by providing you with the funds you need for a new property purchase while you're waiting for the sale of your current property. You then repay the loan once the sale of your property is complete.
Secured Loans and Bridging Loans
Like other types of secured loans, bridging loans are secured against your property. This means if you fail to repay the loan, you risk losing your property.
The Charge in Bridging Loans
The 'charge' in a bridging loan refers to the legal claim the lender has over your property until the loan is repaid. There can be first charge bridging loans, where the bridging loan is the only loan secured against the property, or second charge bridging loans, where the bridging loan is secondary to an existing mortgage.
Understanding Loan Amount in Bridging Loans
The loan amount you can borrow with a bridging loan typically depends on the value of your property, your credit history, and how much equity you have in your property. Bridging lenders will also consider your exit strategy – your plan for repaying the loan – when determining how much to lend.
How Much Can You Borrow in Bridging Loans?
The loan amount in bridging loans can vary significantly depending on the bridging lender and your individual circumstances. It's not uncommon for property developers to borrow several million pounds using bridging loans.
Impact of Credit History on Bridging Loans
Your credit history can impact your ability to secure a bridging loan and the interest rate you're offered. Some bridging lenders may still lend to individuals with bad credit, but this could come with a higher interest rate.
Determining Equity for Bridging Loans
Equity refers to the value of your property minus any loans secured against it. To understand how much equity you have, subtract your outstanding mortgage balance (if any) from the current value of your property.
How Bridging Loan Lenders Calculate Interest Rates
Bridging loan lenders calculate interest rates based on the risk they perceive. If you have a bad credit history, if the property you're securing the loan against is in a weak market, or if your exit strategy is uncertain, you may face higher interest rates. The loan to value is also factored in as the greater the loan to value the greater the risk.
Monthly Interest Payments in Bridging Loans
With some bridging loans, you're required to make monthly interest payments. These monthly interest rates can be substantial given the nature of bridging loans, so it's crucial to factor these payments into your budget.
What is Retained Interest in Bridging Loans?
Retained interest is where the interest for the term of the bridging loan is calculated up front and added to the loan amount. You then repay this along with the principal at the end of the loan term.
Understanding Charge Loans in Bridging Loans
A charge loan is another term for a secured loan. In the case of bridging loans, the charge refers to the lender's right to take possession of the property if you fail to repay the loan.
How Bridging Loans Benefit Property Developers
Property developers often use bridging loans as a short-term solution to meet immediate property development costs. The flexibility and speed of bridging loans can be crucial in a market where timing is everything.
The Risk of Bridging Loans
While bridging loans can provide quick access to funds, they also come with a level of risk. If your property sale falls through or your exit strategy fails, you risk losing your property.
Bridging Loans and Exit Strategy
A well-planned exit strategy is crucial when taking out a bridging loan.
All bridging & short term loans should start with the exit in mind. You need to think about how are you going to pay the lender back their money in the given time period. You should also consider what contingency plans you have in place.
Your exit could come from the sale of a property, the receipt of funds from another source, or the conversion of the bridging loan into a traditional mortgage.
Open Bridging Loan vs Closed Bridging Loan
In an open bridging loan, there's no fixed repayment date. This provides flexibility but can also lead to uncertainty. On the other hand, a closed bridging loan has a set end date, usually tied to a known event like the sale of a property.
The Importance of Bridge Loan Lenders
Bridge loan lenders play a crucial role in the process. They're the ones who provide the funds, assess the risk, and set the terms of the loan. Different lenders may offer different terms, so it's important to shop around.
Cheap Bridging Loans - Are They Worth It?
While it might be tempting to look for cheap bridging loans, remember that cost isn't everything. A loan with a lower interest rate but high fees or unfavorable terms could end up costing you more in the long run.
Bridging Loans vs Personal Loans
While bridging loans and personal loans can both provide access to funds, they serve different purposes. Personal loans are often used for smaller, personal purchases, while bridging loans are typically used for larger, property-related expenses.
Understanding Regulation in Bridging Loans
In the UK, some bridging loans are regulated by the Financial Conduct Authority (FCA), while others are not. Regulated bridging loans generally offer more protections for borrowers, while unregulated bridging loans may offer more flexibility.
Regulated vs Unregulated Bridging Loans
A regulated bridging loan is usually associated with residential properties, while unregulated bridging loans are often used for commercial properties or investment properties. It's crucial to understand the difference before taking out a bridging loan.
Bridge Loan Rates in the UK
Bridge loan rates can vary significantly between different bridging lenders. It's essential to compare bridge loan rates as part of your decision-making process.
Bridging Loan Application Process
The bridging loan application process typically involves a property valuation, a review of your credit history, and an assessment of your exit strategy. This information is used by the bridging lender to decide whether to approve your application.
Monthly Interest Rates in Bridging Loans
Bridging loans often come with monthly interest rates. This means you pay interest on the loan each month, in addition to repaying the principal at the end of the loan term.
Understanding Exit Fees in Bridging Loans
Exit fees are charges that you may have to pay if you repay your bridging loan early. Not all bridging loans have exit fees, but it's important to check before you take out a loan.
Understanding Property Sale and Bridging Loans
Bridging loans are often used to facilitate a property sale. For example, if you want to buy a new property before your current property is sold, a bridging loan could provide the necessary funds.
Bridging Loans Work Best When...
Bridging loans work best when there's a clear exit strategy in place. This could be the sale of a property, the completion of a property development, or the receipt of funds from another source.
How to Find the Best Bridging Loan
Finding the best bridging loan involves comparing different bridging lenders, considering the interest rates and fees, and assessing the terms of the loan. Remember, what's 'best' will depend on your individual circumstances and needs.
Small Differences in Bridging Loans
While all bridging loans serve a similar purpose, there can be small differences between different loans. These could be in the interest rates, fees, loan terms, or lender's requirements.
The Role of Development Finance
Development finance is a type of loan designed for property developers. It can be a useful alternative to bridging loans for larger, longer-term property development projects.
The Importance of Timing in Bridging Loans
Timing can be crucial when it comes to bridging loans. If your property sale is delayed or your exit strategy fails, you could face higher costs or even risk losing your property.
Conclusion
Bridging loans can be a useful tool for property purchases and development projects, but they come with risks. It's essential to understand these risks, compare different bridging loans, and have a clear exit strategy before taking out a bridging loan.
Who pays the lender's legal fees?
The borrower will usually pay their own legal fees as well as those of the bridging loan lender.
Can I get a short term loan to buy an investment property?
Yes, bridging is viewed as a short term finance solution for those looking to borrow money. Typical exit strategies include the sale of the property to repay the debt or refinancing it onto a term loan.
Do you need to be a UK national to get bridging finance?
Not necessarily. There are lenders who will consider applications for non-UK applicants subject to stringent checks.
What are refurbishment buy to let products and how do they differ from conventional short term loans?
The Refurbishment Buy to Let Loan is a novel hybrid product that seamlessly blends a short-term loan for refurbishment purposes with a term loan upon completion of the renovations.
But how does this differ from employing a traditional bridging loan for a renovation project, which is then followed by the arrangement of a standard term loan to repay the bridge once the work is done?
While the differences may be subtle, they are significant. In the case of a hybrid product like the Refurbishment Buy to Let Loan, a single underwriter is often assigned to handle both the bridging and term loan aspects of the transaction. This ensures a clear exit strategy from the beginning.
Moreover, these types of loans can be more cost-effective, as the legal fees, valuation fees and arrangement fees are usually lower than those incurred when handling two separate, unrelated transactions.
I want to convert a standard property to a House of Multiple Occupancy (HMO) or a Multi-Unit Block (MUB), can bridging be used for this purpose?
Yes, this could be a valid reason to take out short term financing. Considering the current climate for landlords, many investors are looking for ways to maximise their return on their portfolio. Converting conventional properties into HMO or MUB is one way to do to maximise yield. When the works have been completed, the loan can be refinanced onto a term product.
I have a limited company special purpose vehicle (SPV). Can I still get financing?
Most lenders are comfortable lending to limited companies as long as they are comfortable with its structure.
This article is for information purposes and does not constitute advice. R3 Mortgages does not accept liability for any errors or omissions. Readers should speak to a suitably qualified professional to discuss their own financial circumstances.