A Quick Guide to Bridging Loans
If you are looking to purchase property in the UK but need financing faster than traditional mortgages then a bridging loan may offer the rapid solution you need.
What is a Bridging Loan?
Bridging loans provide short-term borrowing that can quickly help you secure a property. It is a type of finance often used by property investors, developers, business owners and individuals requiring short-term cash to bridge a funding gap until other funds are available or until a long-term finance solution, such as a BTL mortgage, is in place.
Unlike traditional mortgages which can take weeks or months to arrange, a bridging loan allows you to complete your purchase much faster.
Borrowing Based on Property Equity
With a bridging loan, you borrow against the equity in a property you own. The loan will be a percentage of the property’s value as determined by the lender. The property acts as security – if you fail to repay, the lender can repossess and sell it.
Flexible Repayment Structure
Bridging loans usually involve interest-only payments, meaning you only pay the interest charges monthly and not the principal amount. At the end of the term, you repay the full loan amount as a lump sum via refinancing, selling the property, or accessing other funds.
Bridging Loans Enable Speedy Completion
With a bridging loan, you can move forward with acquiring a property even if you haven’t yet sold your current home or do not have the full funds immediately accessible. The bridging loan “bridges the gap” and enables swift completion on your new purchase.
Faster Approval Compared to Mortgages
While getting a mortgage approved can drag on for weeks or even months, bridging loan lenders can often provide a faster turnaround. Pre-approvals are sometimes possible within 24 hours
Secure Your Dream Home or Investment Quickly
The rapid approval timeline of bridging loans makes them ideal for purchasing your dream home or investment property that needs quick decisions.
Real-World Examples
Lender case studies show bridging loans helping buyers move fast to purchase before other financing was arranged. For example, one first-time buyer used a bridging loan to swiftly buy their desired family home for £220k before selling their current flat. The bridging loan enabled them to compete in a bidding war and not miss out.
Understand All Costs Involved
Factor in all interest payments, set-up fees, and exit penalties to determine the total cost. Read the fine print to avoid surprises.
By researching lenders, planning your exit, getting valuations, choosing regulated lenders and understanding costs, you can be well prepared when applying for a bridging loan in the UK. Careful preparation will help ensure a bridging loan provides the first finance unit.
If you need fast financing for a property purchase, a key question is – how much can I actually borrow with a bridging loan? Here are some key factors:
Loan-to-Value (LTV) Ratio
The LTV ratio offered by the lender determines the percentage of a property’s value you can borrow. Typical LTVs are 30-70%. Higher ratios allow you to borrow more.
Loan Amounts
Bridging loans range from smaller loans of £10,000 up to over £50 million for higher value properties. The amount you can borrow depends on the equity in the specific property.
If you have a poor credit history, getting approved for a bridging loan may be more challenging but options exist. Here are some tips:
Harder Approval with Low Scores
Lenders will scrutinize your application more with defaults or CCJs on your credit file. Be prepared to explain past issues.
Larger Deposit May be Required
To offset higher risk, lenders may only offer lower LTV deals requiring you to put down a larger deposit.
Alternative Financing Routes
Secured loans using other assets as collateral or tapping home equity via remortgaging may be possibilities.
Get Agreement in Principle
Secure an agreement in principle for the bridging loan so you can make an offer on the new property with confidence.
Complete Purchase with Bridging Loan
The loan provides financing to complete on the new home purchase before selling your original one.
Sell Existing Property After
Having secured the new home, you can then focus on marketing and selling your current property.
Repay Bridging Loan with Sale Funds
Use the proceeds from selling your old house to repay the bridging loan at the end of its term.