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Bridging loans for mortgages

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.

The loan, therefore, helps to ‘bridge’ that gap, 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.

Moving home mortgages

Compare specialised mortgages designed for those moving home

Moving home mortgages

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.

What is bridging finance?

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.

These types of 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.

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. What’s more, bridging loans often come with expensive administration fees, so it’s important to do your research or risk paying more than you need to.

Who is bridging finance for?

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.

Although bridging loans can be quite expensive and carries a bigger risk, it is therefore more likely to be used by people with low credit scores and those who are struggling to get the money together.

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.

How does bridging finance work?

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’.

With a closed bridging loan, you will be given a fixed date to repay the loan. This would normally be taken out if you are just waiting for a sale to be completed and have complete control over when the house sale money will come through.

With an open bridging loan, there is a bit more flexibility, as this lets you repay the debt at a later date – 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
  • Used if you’re 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.

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 can’t 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?

There’s also a set-up fee and high interest rates to think about, so only go ahead with the loan if you are absolutely sure you can repay it, and confident that you won’t need it for a long time.

Where can you get bridging finance?

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’s 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.

Risks of bridging loans

As mentioned earlier, bridging loans are expensive. So in that case, the biggest risk is that you won’t be able to repay the loan in 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.

Alternatives to bridging finance

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 the new home. Weigh up the costs and the risks, and look at the alternatives, before taking out a bridging loan.

Want to just move or ‘port’ your mortgage?

You could 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.

Moving home mortgages

Compare specialised mortgages designed for those moving home

Moving home mortgages

Read more…

  • Moving home tips – Read our guide to moving home and ensure you don’t leave anything behind
  • Remortgaging guide – Our guide to remortgaging can help you decide if switching from your current mortgage deal is right for you