A bridging loan is a form of financing, primarily used in property buying, that allows you to borrow money on a short-term basis in the gap between buying a new home and selling your old one.
If you are wondering what is a bridging loan and why is it different from a mortgage, the answer is that bridging loans are used for short-term borrowing and have higher interest rates than regular mortgages. The application process can be quicker as well, as these are designed for people who need money in a hurry.
A bridge loan helps to 'bridge' the gap between selling one property and buying the next. It can be useful in a situation where you might need money immediately to buy a new property but may not necessarily have the funds available as it is already tied up in your current or old home.
This could be most useful when buying a property at an auction where you are required to put a deposit down as soon as the hammer confirms your bid to be the winner.
However, as you might expect, bridging loans can be more expensive than a regular loan and should only be used as a last resort or for specific, short term scenarios.
Bridging loans are a form of short-term financing, often aimed at homeowners who are hoping to complete the purchase of a new property before selling their current home. In order to complete the purchase of a new property, you may need to have the money immediately, such as in an auction, but if you cannot wait to sell your current home, a bridging loan can help finance the deposit you need in the interim.
However, as with all other kinds of short-term financing, bridging loans come with a higher rate of interest than what you might get from more traditional forms of borrowing. Bridging loans often come with expensive administration fees, so it's important to do your research or risk paying more than you need to.
Typically, you might pay around 11% APR for a bridging loan and a further 2% arrangement fee, so you can see that this type of finance works out much more expensive than a traditional mortgage.
If you are thinking of comparing a bridging loan with a traditional mortgage and you want to know whether a bridge loan would work for you, think about how long it will realistically take you to repay the loan.
If you have already secured a buyer for your home and you hope to complete within a couple of months, then a bridging loan might be a short-term solution. You will need to budget for the costs of the arrangement fees and interest.
Once you have worked out the total cost, you may decide that another form of borrowing, perhaps a personal loan or traditional mortgage, may be a better option, depending on your circumstances.
Bridging loans can be useful for a number of situations:
If you want to buy a new property before you have sold your existing house
If you are a landlord and you want to invest in a buy to let property
If you have completed a property development project and you are waiting to sell one project while you begin another
If you are buying property at auction and need a deposit immediately
As a loan is for a set period of months, the interest rates are higher but you will be paying them for a shorter period of time than a traditional mortgage. Also, some types of bridge loan can be accessed much more quickly than it takes for a traditional mortgage application to be processed and approved.
You may be wondering whether bridging loans are regulated by the Financial Conduct Authority (FCA), the money watchdog. The answer is that the FCA regulates bridging loans in the same way as it does regular mortgages.
Bridging finance loans can also be useful to bridge the gap in the home buying 'chain' that occurs when moving home. Between the sale and completion dates, while waiting for the home seller to complete buying their new home, you may need financing to quickly confirm buying your new home before you can even begin selling your own one.
Since the financial crisis, UK banks, which have been hit with tougher regulations on borrowing, have been much more strict about who they lend to and under what circumstances they will approve an application.
As a result, the short-term financing industry has grown, filling in a gap for many people who are struggling to get lending at a moment's notice or who may not always have a good enough credit rating.
Bridging loans are primarily for homeowners and small-scale property developers, including people renovating homes and aiming to complete transactions quickly, and people buying homes at auctions where you need to pay the deposit immediately.
Bridging loans can be quite expensive and carry a bigger risk. They are sometimes used by people with low credit scores and those who are struggling to finance a short-term property debt.
However, bridging financing is also occasionally used by people with good credit scores as well as those rich in assets, often simply as a means to get a loan for a mortgage deposit as quickly as possible.
A bridging loan can help with covering the necessary financing for housing development, property investment and buy-to-let properties.
There are two main types of bridging loans, often referred to as 'open' and 'closed'.
Closed bridging loan: With a closed bridging loan, you will be given a fixed date to repay the loan. If you are waiting for a sale to be completed and will be able to repay the loan as soon as the house sale money comes through then this might be an option for you.
Open bridging loan: With an open bridging loan, there is a bit more flexibility, as this lets you repay the debt at a later date. This can be useful if you are not certain over when the sale will go through. However, you would still usually be expected to repay the debt within a year.
Open bridging loans:
No fixed repayment date
You will probably need to repay within a year
Useful if you are not sure when a sale will be completed
Closed bridging loans:
Fixed repayment date
Used when waiting for a property sale to complete
Bridging loans lenders, regardless of whether you take out an open or closed financing option, will also need to see evidence of the property you are buying, a clear strategy to repay the debt, and the plans you have to sell your own property.
Bridging loan applications are different from traditional mortgage applications as they can be processed in a shorter time. However, you do need some documents and evidence that are specific to this type of short-term house loan.
What you need to have ready:
A clear repayment plan (equity or mortgage or other finance)
Evidence of the property you plan to buy with the loan and the price you are expecting to pay for it
Proof of intent to sell your property and how you will do it
A backup plan in case the sale falls through
Bridging loans can be quite expensive so you should have a backup plan ready in case you cannot afford to repay the debt. For example, if your house sale falls through after you have taken out the loan, how would you plan to repay the bridging loan company?
Bridging loans often include a set-up fee and interest rates are high, so you should only go ahead with the loan if you are absolutely sure you can repay it, and confident that you will be able to repay it in a short time.
Bridging loans generally work off the assumption that you will be able to repay the debt because you plan to sell your home. So if your home sale falls through, you would need to have another way to repay the loan.
Buying a home is not always a guaranteed transaction either and the administration costs of setting up a bridging loan can be a risk itself.
There are several kinds of bridging lenders on the market, but it is best to opt for one regulated by the Financial Conduct Authority (FCA).
If you are unsure about what kind you need, whether it is open or closed – plus there are several other factors to consider, including the interest rate and set up fees – it is best to speak to an FCA-regulated financial adviser or broker. They will be able to recommend a suitable bridging loan for you.
If you are struggling to get enough money together to bridge the gap between selling your current home and buying a new home, then you may wish to consider the alternatives.
If you take out a let to buy mortgage, you could release some equity in your home – possibly enough to finance the purchase of your new home – and let your home and use the rental income to continue paying the mortgage.
Otherwise, you may wish to consider letting go of the idea of buying a new home. Weigh up the costs and the risks, and look at the alternatives, before taking out a bridging loan.
Another option is to port your mortgage, which is essentially moving your current mortgage deal over to your new property. However, there are some difficulties in doing this and it may not give you the kind of financing you need.
Most mortgage providers have made their deals 'portable' as standard. You would need to check the terms of your agreement on your current mortgage. But even if it is, you would still need to re-apply for the mortgage.
Mortgage lending rules have become more stringent, so you may not qualify with the same circumstances you initially did.
More importantly, you may not be able to borrow more. If you are already borrowing the maximum or close to the maximum of what the bank was willing to lend you, it is unlikely to give you more for a new property.
It is possible to use a personal loan if you need money to improve or do up a property or buy to let property. However, a lender is unlikely to allow you to use a personal loan as a deposit for a property, as they will deem you as high risk.
Therefore, a personal loan will not work as an alternative to a bridging loan. In general, personal loans are usually available only for small amounts, up to £15,000, so this would not be enough to finance a house purchase.