How Do Bridging Loans Work – What Is A Bridging Loan UK?
How Do Bridging Loans Work – What Is A Bridging Loan UK? When you are in the process of buying one property and selling another, it can be difficult to match the dates so that both transactions are completed on the same day. Or maybe you buy at an auction and don’t get the money on time. Although it is a risky option, a bridging loan can help with this. We explain bridging loans, when they are used, advantages and disadvantages, costs and how to apply for them.
What Is A Bridging Loan Uk?
Bridging loans are a way to borrow money in the short term. They can be used to “fill the hole” if you need to buy one property before selling another. Unlike mortgages, bridging loans can be arranged quickly if speed is important.
Here are some examples of when you might consider a bridging loan:
- You are in a real estate chain that has collapsed and you don’t want to lose your dream home.
- You buy a property at an auction and need to raise money quickly.
- When buying a non-mortgage property. You are planning to make it habitable or rentable so that a traditional mortgage can be taken out.
- Bridging loans are secured loans, which means you have to secure an asset against them, usually a property or property. Since there is a risk of losing your assets, bridging loans are sometimes referred to as the loan of last resort.
How Do Bridging Loans Work?
There are two types of bridging loans: ‘closed’ and ‘open’.
Closed Bridging Loans
With a loan taken out, there is a fixed payment date – you usually receive this type of loan when you have exchanged contracts but are awaiting the completion of the sale of the property.
Opening bridging loans
With an outstanding loan, there is no fixed payment date, but you are usually expected to repay it within a year.
Whatever type of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using the equity in the sale of real estate or taking out a mortgage.
They will also want to see evidence of the new property you are buying and the price you are willing to pay for it, as well as evidence of what you are doing to sell your current property, if relevant.
You should also have a backup plan in case your repayment strategy fails.
With a bridging loan, you can borrow between € 50,000 and € 10 million. The amount depends on how much capital you have available. The maximum loan, including interest, is normally limited to 75% of the loan amount. The loan is then secured on the property or can be taken out on multiple properties to raise the necessary funds. Unlike a mortgage, a bridging loan is not directly linked to your income.
The bridging loan is repaid by selling the property or obtaining financing through a traditional mortgage method.
You can learn about How Long Does It Take To Get A Bridge Loan in 2022 here.
What are first and second charge bridging loans?
When you take out a bridging loan, a “levy” is placed on your property. This is a legal agreement that prioritizes which creditors will be repaid first if you default on your loans.
Both the first and second charge bridging loans take your property as collateral if you default.
If you still have a mortgage on your property, the bridging loan is usually a second-rate loan, meaning if you default on your payments and your home is sold to pay off your debts, your mortgage will be paid off first.
But if you owned your real estate or were taking out a bridging loan to pay off your mortgage in full, you would take out a prime bridging loan. This means that the bridging loan will be repaid first if you are in arrears.
What are the advantages and disadvantages of a bridging loan?
Be sure to weigh the pros and cons before applying for a bridging loan.
Benefits of bridging loans
- You can quickly borrow the money to keep your real estate transaction on track.
- It is possible to borrow large sums of money.
- Refund terms can be flexible to fit your plans.
- It is possible to take out loans for properties where major lenders cannot.
Disadvantages bridging loan
- Bridge loans are a safe form of borrowing, so you must place an asset against the loan. This means that you run the risk of losing that asset, for example, real estate, if you are unable to repay the bridging loan.
- You pay for the convenience of fast, flexible financing at a higher interest rate.
- Bridging loans can come with a range of fees that increase your expenses.
Bridging Loans Interest Rates
Interest rates tend to be higher on bridge loans because you’re paying for the privilege of borrowing a lot of money quickly. Since bridging loans are often short-term, interest is charged daily rather than annually. You can expect to pay anything from 6% APR to 20% APR, depending on the loan. That’s much higher than the mortgage interest you’ll pay with the best mortgage deals on the market today.
Unlike a traditional mortgage, there are 3 ways to charge interest on a bridging loan;
- Monthly – Similar to an interest-only mortgage, where you pay the interest every month and it is not added to the loan.
- Rolled Up – Interest payments are added to the loan and paid when the bridge loan is settled.
- Withheld – You borrow the interest upfront for an agreed-upon period and when the loan is repaid, the unused interest is paid back to you.
Bridging loan costs
In addition to the interest rate, there are other bridging loan fees that you may have to pay. These include:
- Settlement fees paid to lender – usually 2% of the loan and added to the loan.
- Administration Fee – can be paid in cash.
- Attorney’s Fees – part to be paid upfront to your freight forwarder and the rest on completion.
- Appraisal fees – range from £900 to £2,000 depending on the lender and how quickly you need the money.
- Brokerage fees – payable on receipt of the mortgage offer – from a flat fee of £500 to a % of the loan.
How do I get a bridging loan?
You can request a bridging loan from a specialized broker or directly from the lender. There are several things that lenders will consider when deciding whether or not to approve your application.
The lender will usually require at least one property to be used as collateral against the loan. This will likely need to be a different property to the property you are selling, so you may need to own more than one property to get a bridging loan.
The lender will also want your exit plan. This is how you repay the loan and when. For example, if you need to take out a traditional residential or rental mortgage on the property to be renovated or purchased, you must provide proof from the mortgage lender that the mortgage is being delivered. They will either run standard affordability checks on regular mortgages or look at the rental income you will generate. This is to convince the lender that you can get a mortgage and make the required payments for the new loan.
As there are unregulated products on offer, we recommend that you go through a specialist broker such as Chartwell Funding who can monitor the market for you and advise you on all your bridging loans.
Bridging Loan Examples
Here’s an example of how a bridging loan works. You want to buy a property for £500,000 before you can sell your existing £450,000 property with a £50,000 mortgage against it. That means you’ll need to borrow the full £500,000 and a 12-month bridging loan to give you plenty of time to sell. And get a mortgage on your new home to cover the shortfall.
Bridging Loan Calculator UK
How much you can borrow with a bridging loan depends on the value of your properties and your finances. The maximum loan amount, including any interest withheld or accrued, is normally limited to 75% of the loan amount (may cover multiple properties).
The bridging loan may also be limited depending on the condition of the property, your credit history, any necessary work on the property, or the level of financing available for refinancing.
|Monthly Interest Rate:||0.64% (Annual APR – 9%)|
|Interest Amount:||£40,602.01 (Assumes full term of 12-months, calculated daily)|
|Gross Loan Amount:||£550,922.01|
|Net Loan Amount:||£500,000.00|
|Loan Term (Months):||12|
|Loan to Value:||63.25%|
|Valuation Fee (Inc. VAT):||£860.00|
|Arrangement fee Fee:||£10,000.00 (Added to loan)|
|Telegraphic Transfer Fee:||£25.00 (Added to loan)|
|Administration Fee:||£295.00 (Added to loan)|
Who offers bridging loans?
Before the 2008 financial crisis, bridge loans were a more common loan product offered by major banks such as Nationwide, Halifax and Santander. At that time, bridging loans were used by people who did not want to lose their dream home.
However, many stopped offering them after the credit crunch. Currently, only Lloyds Bank offers bridging loans to its private banking customers. Today, professional or experienced investors make use of this facility.
Currently, bridging loans are usually offered by alternative lenders rather than major banks such as United Trust Bank, Precise Mortgages, MT Finance or some regional building funds such as Harpenden.
A bridging loan is specialist financing and you should seek independent advice as this is considered a last resort. You should find out if there are more suitable alternatives available and if specialist brokers (such as Chartwell Funding) are experienced in helping arrange these loans if and when needed.
Alternatives to Bridging Loans
There are several other options you can consider instead of a bridging loan to finance your home purchase. You can take out a personal loan or a secured loan, transfer a home or take out a second mortgage on your home.
Another option could be a rental mortgage. This is where you transfer your property to free up enough money to pay the down payment on your new home. You then rent your current home and use the rental income to cover the mortgage so that you can get a new mortgage for your new home.