Join CityClub Today to Receive:

  • Priority access to exclusive off market investments
  • Below market value pricing
  • Out of hours investor support chat
  • Allocated solicitor for hands free conveyancing

    What Are Bridging Loans?

    A bridging loan is a quick, short-term financing option. The loan ‘bridges the gap’ between the borrower wanting to purchase an asset and the borrower waiting for something of theirs to sell to have the necessary funds for it. They can be used for buying or developing a property or making a buy-to-let investment. This loan is quick and flexible, perfect for below-market value opportunities and buyers wanting a quick sale. Between banks and specialist lenders, there are over 100 bridging loan providers.

    These loans are far more short-term than mortgages, which can span over 35 years or more to repay. They can be the perfect in-between for cash buying and a traditional mortgage. No matter the type of bridging loan, lenders must see a detailed ‘exit plan’. This consists of details of how the loan will be paid back.

    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.

    How to Get a Bridging Loan: The Process

    1. Apply detailing the property in question and plans for it (like renovation or expansion to then take out a regular mortgage once it is complete and qualifies for one).

    2. Provide the likes of ID and proof of address, alongside details of the costs for the work.

    3. The professional lender will evaluate the property and the intended work. An Independent Monitoring Surveyor (IMS) may be involved, which you would pay for.

    4. You will receive your official loan offer, if approved, along with T&Cs.

    5. Accept the offer and complete the necessary legal work. This will be from the lender and the borrower’s side, who would each have separate lawyers, both of which the borrower would pay for. Once everything is in order, signing contracts and transferring the money will follow.

    Criteria

    Just like any loan and mortgage, prospective borrowers must have specific requirements to be considered. Before applying for a bridging loan, or any short-term finance, applicants must:

    • Have a definitive exit plan, detailing how the loan will be repaid (selling or refinancing).
    • Provide assets of high value to cover the loan, like property or jewellery.
    • Have a minimum lending requirement. While bridging loans can cover any sized payment, providers are more interested in loans of £100,000 and above.
    • Have a good credit history. While it is not as important as for mortgage applications, seeing as bridging loans rely on exit strategy and loan security, lenders still check this. Having a good credit score and a clean credit history can help towards better interest rates.

    Other ways are not necessary but can help boost the loan application. Offering a bigger deposit of 40% or higher can help the borrower gain better rates. Also, as bridging loans rely on the value of the asset and a strong exit strategy, proof of income may seem unimportant. However, providing such can help boost your application.

    Pros and Cons of Bridging Loans

    Pros

    • Are much quicker than traditional mortgages, taking a few days to a few weeks compared to the months mortgage applications can take to complete.

     

    • Can be advantageous when purchasing below-market value properties, as sellers often want a quicker sale.

     

    • Opens more opportunities for those not having the available funds to quickly enter the property market and can sooner profit from rental income.

     

    • They are flexible. If a property does not qualify for a standard mortgage for the likes of renovation, a bridging loan can help to secure the property and make the improvements, to then be re-mortgaged.

     

    • Many of them do not come with early repayment fees. This offers much more flexibility in repayment to borrowers.

    Cons

    • As assets the borrower owns (eg. property, jewellery) are used as collateral to create security in paying back the loan, the borrower is at risk of losing these assets if they fail to repay.

     

    • The loan-to-value (LTV) can be very high. The option for a larger loan can lead to higher interest rates.

     

    • Interest rates are higher than standard loans because of their higher risk for lenders and their short-term nature.

     

    • If the property market fluctuates too much, it could affect the borrower’s exit strategy if it relies on selling or refinancing.

     

    • As with any mortgage, there is a risk of not securing one to repay 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. 

    How much can you borrow?

    In terms of property, lenders can let someone borrow up to 75% of its value. In general, the borrowing amount can range between £5,000 and £25 million. However, the amount available to the borrower depends on their financial circumstances, credit history, and exit strategy. Borrowers can often be leant more for a first charge bridging loan than a second charge loan, too.

    How long does a bridging loan take?

    From applying to closing, a bridging loan can take as little as 3 days to a few weeks. Paying the loan back is more flexible and determined at the application. It may be by a fixed date, like the day the property sells. However, generally, a bridging loan can be paid back between 1 month to 12.

    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.

    CityRise Verdict

    BMV properties may be the best property investment to use a bridging loan for. Resale properties can be up to 20% or even 30% below market value. Also, with most already tenanted, a bridging loan can get an investor towards generating rental income much faster. All investors need are experts in property sourcing to help them find the best BMV deals.

    While we cannot offer financial advice, CityRise works closely with several partners who are experts in this field. If an investor is curious or unsure of which direction to take, it is always best to use an investment agency instead of going alone.

    Schedule a call with one of our property consultants to discuss your options!

    Related Articles

    • Reasons to Invest in Huddersfield

      Reasons to Invest in Huddersfield

      Huddersfield is a rising town for buy-to-let investment, with the average property prices being more affordable and many selling points to tenants....

      Learn more
    • Buy-to-Let Opportunities with CityRise

      Buy-to-Let Opportunities with CityRise

        Buy-to-let (BTL) investing is becoming increasingly popular due to the amazing returns investors can see if they invest in the right...

      Learn more
    • Average UK Buy-to-Let Yield Jumps to 5.8%

      Average UK Buy-to-Let Yield Jumps to 5.8%

      Average UK Buy-to-Let Yield Jumps to 5.8% The average rental yield in the UK was 4.75%, however, it has now increased to 5.8%. This is due to the...

      Learn more
    • Factors That Affect Capital Appreciation 

      Factors That Affect Capital Appreciation 

      What Is Capital Appreciation?  What does capital appreciation mean? Capital appreciation, also referred to as capital growth, is the rise in the...

      Learn more

    Explore our Investment Guides

    Take a look
    Explore our Investment Guides
    Chat to us