Accessing a short-term loan for a quick-fix solution to a temporary problem can be a lifeline for many. A bridging loan, originally designed to help borrowers get access to money quickly when trapped in a property chain, could be the answer.
Bridging finance can be used in lots of different ways – it’s not just for property. Many are used for business ventures, paying a tax bill and even for divorce settlements. Here’s everything you need to know about bridging loans.
What is a bridging loan?
It’s typically a short-term agreement – usually offered for between one and 18 months, with the loan repayable in full at the end of the term.
Bridging loans are secured loans, unlike a standard bank loan which is unsecured. This means the loan is secured against your home.
Once approved, a charge will be applied to your property which means that you have entered into a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loan.
What uses are there for a bridging loan?
If you're struggling to find a buyer to purchase your house, bridging finance can help you move into a new home before selling your existing one.
Loans are also used to fund auction purchases if you don’t have the capital upfront. Developers can use them to pay for refurbishments on rentals as well as converting commercial property.
Outside property, you might consider a bridging loan for a business start-up or paying a tax bill while you wait for invoices to be paid. You can even use one for a divorce settlement. The majority of legal divorce proceedings are centred around the division of assets, which can be difficult when assets need to be liquidated to be proportionately divided.
Bridging loans are also helpful if you have blemishes on your credit file as lenders might be less concerned by poor credit history or arrears, since the monthly payments can be added to the loan balance.
How do bridging loans work?
There are several types of loan. There’s an open-bridge loan where there is no end date for repaying the amount borrowed. This works well if you have found a house you want to purchase but haven’t yet found a buyer for your existing home. It might also help if you’re a property investor and need to fund a renovation project before selling it and repaying the bridging loan.
A closed-bridge loan will have a settlement date on which you must repay the loan in full. This is suitable if you have bought a new home and already have a buyer for your old home and simply need to wait for completion to happen.
A bridging loan can come with a first charge or second charge loan – this refers to the priority of repayment if you default on the loan.
Your mortgage is the first charge, but if you take a bridging loan to pay off your mortgage, the bridging loan becomes the first charge loan.
Unlike other forms of borrowing the monthly interest is often rolled into the loan, meaning there are no repayments to make during the term of the loan.
How much can I borrow?
The amount you can borrow depends on the value of the property you are securing the loan against. You might borrow as little as £5,000 up to several million pounds for developments. Typically the amount is limited to a maximum loan-to-value ratio of 75% of the value of your property.
If you are taking out a first charge loan, you’ll typically be able to borrow more than if you were taking out one with a second charge attached.
What do they cost?
Bridging loans are more expensive than a normal residential mortgage.
You can expect to pay between 0.5% and 1.5% per month. The equivalent annual percentage rate (APR) on a bridging loan is between 6.1% and 19.6% – far higher than many mortgages.
Just like standard home loans, bridging loan rates can be fixed or variable. There are also administration fees to pay - around 2% of the value of the loan.
What are the disadvantages?
Aside from one of the major downsides of a bridging loan being how expensive they are, because bridging loans are secured, should you default, you could lose your home – or any other asset it is secured on.
How do you find the best deal?
Bridging loans are specialised financial products and aren’t usually offered by high street banks.
You will need to speak to a specialist broker. If doing your own research and comparing products from different providers, always consider the total cost of the loan, rather than just the interest rate. Many lenders charge exit fees, management fees and other hidden costs that it’s important you understand before signing on the dotted line.
What are the alternatives to a bridging loan?
Consider all your options before signing up to any loan. If you decide the risks and costs of a bridging loan are too great, then you can explore alternatives.
You could look at remortgaging to raise some extra cash.
A personal loan from a bank might be the answer, depending on the amount you need to borrow. You can compare interest rates and monthly costs on a comparison site to ensure you get the best value loan on the market.
You might also make use of a temporary extended overdraft. Speak to your bank if you think this might help your situation.