Bridging loans offer a quick and flexible solution when you need money fast.
These short-term loans, typically lasting from 3-24 months, provide a financial buffer to help you secure a property, complete renovations, or seize a time-sensitive business opportunity.
Unlike a standard mortgage, you don’t pay the loan back monthly. In this guide we will explain how short-term finance works and the options you might have for paying back a bridging loan.
What is a Bridging Loan?
A bridging loan is a short-term loan that gives you fast access to the money you need, often within days. This loan is secured against a property you own or are buying, but other assets can be used too.
Benefits of a Bridging Loan:
- Quick Access to Funds: Get the cash you need within days, not weeks or months.
- Flexibility: Bridging loans can be used for various purposes, from buying property at auction or before your current home sells, to renovating your property, funding business ventures, or covering unexpected costs.
- No Monthly Repayments: In most cases, you only repay the loan and interest at the end of the term.
- Tailored Solutions: Lenders can customise bridging loans to suit your specific circumstances and financial goals.
They are available as a first charge, second charge and even third charge! If you need a fast, flexible financing solution, a bridging loan could be the answer.
How much can you borrow?
Bridge lenders generally go up to 80% LTV (loan to value).
This 80% is based on their assessment of the property value, not yours. It will be influenced by the property being used as the security and your exit strategy.
So, if the property is valued at £400,000 the maximum loan will be £320,000. (400,000 x 80%).
This 80% figure includes any other secured borrowing on the house.
Types of Bridging Loan
There are a few different variants of bridging loans that are useful to know about before you start applying for one.
Open or closed
A bridging loan can be set up as a closed loan or an open one.
Open loans offer maximum flexibility, with no fixed repayment date and you could agree an overall term up to 24-36 months.
Closed bridging loans have a predetermined repayment date, usually tied to a specific event, such as the sale of a property. The fixed repayment date reduces the lender’s risk, often resulting in lower interest rates.
First or second charge
All lenders will need to take a legal charge over property or properties that you own.
First charge loans take priority over any existing mortgages on the property. In the event of default, the lender has the first claim on the property’s value.
Second charge loans are taken out in addition to an existing mortgage. They rank behind the first charge loan in terms of priority, making them slightly riskier for lenders and can mean higher interest rates.
Regulated or unregulated?
In relation to consumer regulation, bridging loans can be regulated or unregulated.
Regulated bridging loans are secured against your primary residence or a property you intend to live in. The Financial Conduct Authority (FCA) oversees these loans to protect consumers, they also restrict the maximum term to 12 months. The loan size is restricted to 75% LTV for most regulated bridging loans.
Unregulated bridging loans are typically used for commercial properties or buy-to-let investments, properties that you do not live in. They offer more flexibility but very little consumer protection.
Read more: Are bridging loans regulated by the FCA?
Let’s talk bridging loans!
So How Do You Pay Back a Bridging Loan?
There are several routes to paying back a bridging loan, but it is important to remember that you need to repay it all as one lump sum. And this payment includes all of the interest that has accrued plus any fees.
‘How’ you pay back a bridging loan is known as your exit strategy, or exit plan.
A well-defined exit strategy is needed when taking out a bridging loan and lenders will carefully look at it to ensure its feasibility and minimise their risk. If it’s no good they will decline the loan.
When developing an exit strategy, consider factors such as:
Property Market Conditions: If your plan relies on selling a property, research the current market trends and assess the likelihood of achieving your desired sale price within the loan term.
Financial Situation: Ensure your income and other financial resources are sufficient to support the bridging loan repayment and any unexpected costs that may arise.
Contingency Plans: Have a backup plan in case your primary exit strategy doesn’t go as planned. This could involve alternative funding sources or adjusting your repayment timeline.
Read more: Bridging loan exit strategies: What makes a good one?
Common exit strategies
The most popular way to repay a bridge loan is via a long-term mortgage or through sale of the property.
- Sale of the financed property
- Refinancing to a long-term mortgage
- Sale of other assets/property
- Personal savings
- Equity release
- Business sale or profits
- Inheritance
Although it’s not strictly repaying the loan, it can sometimes be possible to get a rebridge loan. It’s essentially a new bridging loan that replaces your existing one, giving you additional time to execute your exit strategy or explore alternative options.
If you’re buying a commercial property a VAT bridging loan can fund 100% of the tax bill, with the HMRC refund as the exit strategy. Neat!
Repayment via a new mortgage
If your intention is to pay back the bridge with a more long-term mortgage then you’ll need to get organised beforehand.
Bridging lenders will frequently be repaid via a new long-term mortgage. But in assessing your loan application, and your exit plan, they will want to see some proof that you can actually get the mortgage you need.
At this point you won’t have applied for the mortgage but a recent Decision in Principle (DIP) from the lender would normally suffice.
This means that prior to applying for the bridge, you need to have selected the new mortgage company and requested a DIP. If your credit history is a little patchy you may have to investigate some of the mortgage specialist lenders that look at bad credit or adverse credit.
Your mortgage broker will be able to assist with this.
Alternatively, bridge to let finance combines a bridging loan with a buy to let mortgage. This packaged loan allows you to purchase a run down property, refurb it, then smoothly exit on to a long-term buy to let mortgage.
For property development opportunities it’s quite common for the developer to initially use planning gain finance to fund the land purchase, and then refinance to a property development loan once planning consent is received.
Related reading: Do Property Developers Use Bridging Loans?
Need some help?
If you need a short-term bridging loan, or have unanswered questions, then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To get matched with a specialist broker, please call us on 0330 030 5050.
