Bridging Loans: The Ultimate Guide

Types of Bridging Loans

Open bridging loans

These loans do not have a fixed date for repayment, allowing the borrower to pay the loan back whenever funds are available. However, lenders often expect the repayment to be within one year of the loan.

Closed bridging loans

These loans are the opposite and are often cheaper than open bridging loans due to being less flexible. They have a fixed date, based on when the funds will be available. For example, the loan’s term can be for when the borrower’s house sale goes through.

First and second charges

When using a bridging loan to secure a new property, the lender puts a charge on the borrower’s property that is being sold. If the borrower fails to repay the loan, the lender takes the repayment straight from the property sale.

A bridging loan would be a ‘first charge’ loan if the property is owned outright, meaning there are no other loans on it. If the borrower fails to repay this loan, the bridging loan lender receives their payment before anyone else when the property sells.

A ‘second charge’ bridging loan will occur if the property already has a loan (or more), like a mortgage. In this case, if the borrower fails to repay their loan, the mortgage provider would take their repayment first, then the bridging loan lender. ‘Second charge’ loans can be more expensive than ‘first charge’ loans. This is because there is more risk for the lender not to receive their money. Also, in the case of a ‘second charge’ bridging loan, the ‘first charge’ lender (in this case, the mortgage provider) must consent to the loan.

Frequently Asked Questions

Who can get a bridging loan?

Property developers and investors, homeowners, and businesses can take out a bridging loan. Anyone (individuals or companies) who needs to cover a gap with short-term finance can apply for a bridging loan. 

How much does a bridging loan cost?

Costs include an arrangement fee (1-2% of the loan amount), monthly interest (0.45%-2.%), a possible exit fee (1-2%), plus valuation, legal, and administration fees. In addition, there is a 25% deposit of the property’s value.

Are bridge loans expensive?

Due to interest rates of up to 1%, people deem bridging loans as expensive. However, because they are short-term, flexible, and often alternatives for those not qualifying for a mortgage, they are often more desirable. This is reflected in their rates. Providers see a higher risk in bridging loans, so increase their rates. However, the cleaner the credit and the higher the asset’s value, the better the costs. 

Are Bridging Loans a Good Idea?

Every loan, whether long-term or short-term financing, comes with risks. It is just having the right information and guidance on what is the best route for you. It always depends on a person’s circumstances.

With the outlook of 2024’s property market and the forecast for rental prices for the next 5 years already predicted, investors are in a better position to make long-term goals. A bridging loan acts as a great middle-ground for investors who may not have the immediate funds to buy upfront with cash and cannot get a mortgage.

In the world of buy-to-let properties, investors and landlords may apply for a bridging loan to expand their investment portfolios to bigger or renovated properties. Otherwise known as a ‘bridge-to-let loan’, landlords can, for example, sell an existing BTL property and use a bridging loan to cover the gap between developing the new property and generating rental income from its new tenants. The rental income can repay the loan or, simply when the property is ready to let, it can be refinanced into a longer BTL mortgage now that it qualifies.