Bridging loans are incredibly flexible and can offer a cash lifeline, quickly covering financial gaps that traditional mortgages can’t.
A recurring question we get is: “Do I need a deposit for a bridging loan?“
The answer, while not always straightforward, is generally yes.
Bridging loans, while renowned for their adaptability and speed, aren’t a free-for-all. Lenders need reassurance and security, and that comes in the form of a deposit or existing equity in a property.
Understanding Bridging Loan Deposits
When buying a property with a mortgage, a deposit is your initial cash contribution towards the property’s purchase price.
It’s the portion of the property’s value that you will own outright, reducing the amount you need to borrow. This upfront payment signals to the lender your commitment and financial capability.
Mortgage companies generally need a minimum cash deposit of 5-10%, depending on your circumstances. Investment properties like buy to let and holiday will need a 25% deposit.
The deposit plays a vital role in reducing the lender’s risk.
By investing your own funds, you share the financial responsibility and it acts as a safeguard for them in case you face difficulties with repayments.
Bridging lenders are no different, they won’t lend you 100% of the price, you need to contribute a cash deposit to reduce their risk.
Typically, bridging loan deposits range from 20% to 25% of the property’s value.
However, this figure can fluctuate based on several factors, such as the lender’s specific requirements, the type of property you’re buying, and your financial situation. Some lenders may offer loans with lower deposit requirements, while others might ask for a higher deposit, particularly for properties or situations they deem to be higher risk.
Factors That Influence Deposit Requirements
The deposit required for a bridging loan isn’t completely set in stone.
It’s influenced by a combination of factors that lenders carefully consider, for them it’s all about mitigating risk. Let’s break down the key elements that can impact the size of your deposit:
Property Value
The value of the property you’re looking to purchase or use as security plays a significant role. As the deposit is a percentage (20-25%), the higher the property’s value, the larger the deposit you’ll need.
Exit Strategy
If your exit strategy is a bit vague or speculative, the lender may want a bit more of a buffer, by asking you to increase your deposit.
Read more: How Do You Pay Back a Short-Term Bridging Loan?
Loan Amount
The amount you intend to borrow also affects the deposit requirement. Lenders often have different criteria based on the loan size. Larger loans might necessitate a higher deposit to ensure the lender’s security.
Credit History
Your creditworthiness is a key factor in the lender’s assessment. A strong credit history can work in your favour, potentially leading to a lower deposit requirement. Conversely, a less-than-perfect credit score might mean you need to provide a larger deposit to offset the perceived risk. Bridge lenders are more amenable to credit issues, which means they are more likely to lend in certain circumstances than a main mortgage provider.
If a larger deposit is not possible then we might suggest looking at a non-status bridge lender, who doesn’t require a credit search.
The Legal Charge
A bridge loan is always secured against one or more properties. The lender will formally lodge these with Land Registry. If they can’t register a first (primary) charge, they will go for a second, or even third charge. Second charge bridge loans are widely available but will often have less LTV flexibility when compared to a first charge.
Lender’s Policies
Each lender has its own set of policies and risk appetite. Some lenders might be more flexible, offering lower deposit options, while others might have stricter criteria. It’s crucial to shop around and compare offers from different lenders to find the one that best suits your financial situation.
Remember, the deposit requirement is just one piece of the puzzle. It’s essential to consider other factors like interest rates, fees, speed and repayment terms when choosing a bridging loan.
Let’s talk bridging loans!
Comparing Lenders and Their Deposit Requirements
In the world of bridging loans, not all lenders are created equal.
Each has its own unique set of criteria, including deposit requirements. That’s why it’s important to use a broker who has access to many different banks and lenders.
While the deposit amount is a significant factor, it’s not the only one to consider. Interest rates, fees, and repayment terms can vary a lot. A seemingly attractive low deposit offer might come with higher interest rates or hidden fees, potentially increasing the overall cost of your loan.
Don’t just focus on the deposit; assess the entire package to ensure you’re getting the best deal possible. Remember, a slightly higher deposit with a reputable lender offering competitive rates and transparent terms could be a more cost-effective option in the long run.
In the end, it’s all a trade off. If the cheapest lender needs an extra 5%, which you don’t have, then your only real option is the next least expensive competitor, who will give you the loan you need.
Loan to Value Explained
‘Loan to value’ and ‘LTV’ are included in almost every mention of a secured loan, bridging loan or mortgage.
But what does loan to value mean?
When we talk about a bridging lender needing a 25% deposit, it means that the percentage they will lend you is 75% of the property value.
So 75% is the loan to value, or LTV.
If an LTV figure was 60%, then you could borrow 60% but would need a cash deposit of 40%.
Here are a few simple examples:
| Property Value | LTV% | Max Loan | Min Deposit |
|---|---|---|---|
| £400,000 | 90% | £360,000 | £40,000 |
| £400,000 | 85% | £340,000 | £60,000 |
| £400,000 | 80% | £320,000 | £80,000 |
| £400,000 | 75% | £300,000 | £100,000 |
| £400,000 | 70% | £280,000 | £120,000 |
| £400,000 | 65% | £260,000 | £140,000 |
| £400,000 | 60% | £240,000 | £160,000 |
100% LTV Bridging Loans: Are They Possible?
The prospect of securing a bridging loan without a deposit – often referred to as a 100% LTV bridging loan – might sound too good to be true.
And in many cases, it is.
While such loans do exist, they are far from common and come with specific requirements.
The core concept of a 100% LTV bridging loan is that the lender provides funding for the entire property value, eliminating the need for a borrower’s deposit.
However, to offset the lending risk, lenders will require additional security in the form of another property or valuable assets, to bring their overall LTV down to 75% or below.
This acts as a safety net for the lender, ensuring they have recourse in case of default. While you may only have one bridging loan, then lender will have placed charges on two or more properties to achieve your 100% funding aim.
It’s important to note that 100% bridging loans do come with higher interest rates and fees compared to traditional bridging loans. This is because the lender is taking on a greater level of risk by providing the full financing.
Read more: 100% LTV Bridging Loans
Deposit or Equity – What’s the difference?
Not a lot actually!
These terms are used interchangeably, and essentially mean the same thing. It is the percentage, or amount, of a property that you own outright.
If you already have a property, then the bit you own is your equity. Whereas if you were buying a house, your financial contribution would be the deposit.
In an example where the lender is offering 75% LTV, the remaining 25% could comprise of cash deposit and/or equity.
Need some help?
If you need a short-term bridging loan 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.
