The term bridging loan may be something that you’ve come across before but don’t know exactly what it is or how it works.
In this guide, you will find everything you need to help understand what a bridging loan is.
Bridging loans also known as bridging finance are termed differently in some countries.
In the USA they are known as bridge loans, in South Africa the common term is Bridging finance and in Australia and the United Kingdom the common name is bridging loans.
Other terms they are known for are Caveat loans and swing loans. Whatever the name they have a unique characteristic in the finance world.
Bridging loans are a short-term financial solution, used to bridge a gap of when you need to pay for a property but are waiting for funds to be available from the sale of another asset.
Some key features of a bridging loan are:
- Loans are typically available for 2 weeks and up to 12 months, however, some lenders may allow up to 18 months or longer to pay it back.
- They are available to anyone, you just need to carry out an assessment with the lender and get approved for the loan.
- Security is needed which is in the equity of your assets, for example, a property can be used for security. Most lenders will lend up 75% of the security you have, so the more equity in assets, the more money can be borrowed.
- Interest rate is paid back monthly or can be deferred and paid back at the end of repayment. The interest rate is around 0.40% and up to 1.5% monthly.
However, with a bridging loan, there are additional fees to be paid on top of this for things such as arrangement fees, legal fees and valuation fees.
These will be discussed with the lender and added on to the final payment amount, more on this later.
If you’re in need of some financial help quickly but can also pay it back within a short amount of time, then bridging loans are a great option for this.
The Uses Of A Bridging Loan
Bridging loans have great flexibility in terms of what they can be used for.
With some financial solutions and services, you can find yourself being restricted as to what they can be used for, but with bridging loans, they can be used for a wide variety of options.
- Fast property purchase-
If you come across a property that you want to purchase but can’t afford just yet, the bridging loan can be used to purchase the property and then when you go on to sell either an existing property or that property when renovated, the money can be used to pay the loan back.
- Buying a property at auction-
When it comes to buying a property at auction, 10% is needed as a deposit and then the rest needs to be paid off within 28 days of the purchase. Bridging loans are perfect for this situation as you can get the money, buy the property from the auction and then have a year to pay back the loan, rather than only having 28 days to pay it off at auction.
- Avoid repossession-
If you’re in the situation where the property may be repossessed, a bridging loan can be used to help pay back the money owed, instead of having things repossessed from you. Hopefully, by borrowing the money from the loan, this will pay anything off and then you all you need to do is a pay the loan off, which might be selling a property to be able to do so.
- Cash flow issues for businesses-
Businesses can use bridging loans to help with any cash flow problems they might experience and as a result from this, help keep the day to day running of the business as normal.
An example of a cash flow problem for a business may be that an invoice for a customer hasn’t been paid and a big amount was expected.
In this situation, the bridging loan can be used to keep the business running as normal and not affect any of the day to day running’s of it.
Then when the invoice has been paid, the money from that can be used to pay the loan off. They’re a great way for if a business was to come into any cash issues, to quickly prevent it effecting the business.
- Property development-
Bridging loans can be used to help fund a property development project and then once the project is complete, the property can be sold and the money used from this, is used to pay the loan off.
They’re a great way for if you need a kick start to a project or need helping finalising it as the money can be used to do this and then quickly paid off once the property is sold after the development project.
- Inheritance tax-
Something that isn’t nice to deal with when it comes to a bereavement and some people may not be aware of, is that you may need to pay inheritance tax.
As during this time, there will be a mix of emotions and the last thing someone wants to deal with is paying off tax.
Bridging loans can be used for this to help pay it off quickly, so it no longer needs to be dealt with straight away and then equity from the inheritance can be used to pay back the loan.
It’s a great way for if you find yourself in a situation that you didn’t expect to be in, to be able to quickly deal with it, whilst still knowing that you can pay the loan back within a year.
- Conversion, renovation and refurbishment of a property-
If you have a property that needs converting, renovating or refurbishing, then this can be quite a big job and require lots of money to be able to achieve it and give the property some value.
Bridging loans can be used for this type of situation to help with the property, add some value and get it ready to be lived in.
With these types of projects, they are usually renovated to be sold on again, so the money from the sale can be used to help pay the loan back.
- Sale chain-
It might be the case that you’re selling your house and looking for a new property to move into and one comes up that you would like to make an offer on.
However, with being in a sale chain when it comes to purchasing houses, you can find that things go wrong, resulting in you losing out on the property you wanted.
A bridging loan can be used in this case to pay towards the house you want, so you can secure it.
This way, you don’t need to worry as much about the chain and sale of your house, as you have secured payment.
Eventually, your house will be sold and then the money can be used to pay the loan back. It’s a good way to help secure a property you want to move into and not have to rely on the sale chain for it to all go through smoothly.
- Buy-to-let purchase-
You can purchase a property with the intension of then renting it out to people.
The bridging loan can be used to help purchase the property quickly and it can then be rented out straight away, meaning you get a monthly income of money.
This money can then contribute towards paying the loan off in a short amount of time.
- Buy stock and equipment-
For businesses, it may be that they need stock and equipment purchasing, but that it costs a lot of money to purchase it all at once.
A bridging loan can be used to buy all equipment and stock needed in one bulk and then the business pay it back over the year with the income they get.
- Paying Tax Bills-
A business can obtain a bridging loan to pay any business tax or VAT bills. The process works the same way, the business puts up a security, such as a property or industrial equipment and with a viable exit strategy.
- Settlement Of A Divorce-
An individual who has to pay a divorce settlement can obtain a bridging loan to do this.
Sometimes in a divorce the only option to settle the contract is by selling the home quickly and not obtaining the full price, but getting a bridging loan allows the borrower to settle the divorce terms and take their time on selling the home to get the maximum price.
Once again there must be a viable exit strategy to repay the loan.
Who Bridging Loans Are For
Bridging loans are available for both individuals and businesses, no matter what trade you’re in or what you need the money for.
Anyone can go to a lender to discuss what they need the money for and how much is needed and from this the lender will decide whether to accept or not.
How To Apply For A Bridging Loan
Applying for a bridging loan is a quick and simple thing to do. All you need to do is find the right lender, apply for a loan and then once accepted, the money is yours to use and then be paid back within the time agreed.
- Find a lender and apply for a bridging loan
- They may carry out an evaluation including how much needs to be borrowed, what the money will be used for, an exit strategy and what security you can offer in the equity in assets.
- Payment terms and prices will be discussed and agreed with the lender.
- Once agreed and accepted, the money is then available to use and can be paid back within the amount of time agreed with the lender.
It’s a really quick and easy process to do, all you need to make sure is that you find a good lender with a good deal and that you have a good exit strategy and security.
The Speed of The Application
Surprisingly, bridging loans are known to be approved very quickly compared to other, standard loans.
If you have correctly and accurately submitted an appropriate application, you should expect to receive approval and funding from between 5-14 days on average, from a typical lender.
However, this does depend on the lender- a cheaper lender will undertake a more thorough and in-depth application process- therefore, this can take anywhere between 14-21 days to get approved.
It would help if you understood, that while a bridging loan offers many different options and flexibility that can appeal to you, they may be a costly way to borrow money.
Therefore, ensure that you do not intend to take out this loan for a prolonged time.
Generally, bridging loans can be outstanding as it takes away the pressure of matching up settlement dates, such as the date you sell your home and receive your funds, to the date that you can pay for your new home.
It effectively allows you to sell your home without worrying about not being able to pay for your new one.
In general, anyone can apply for a bridging loan, so long as your credit history is complimentary, and you also have something such as property or land to use against your application as security.
Of course, as with most loans, you must be aged 18 years or over to be eligible for the loan.
In addition to this, your lender will need to view evidence of your income. As well as using a property or high-value asset as security for your loan, some lenders may also offer the option to use other personal possessions and assets as a security, if you are not purchasing a property with a large value.
This can include things such as cars, watches, antiques and artwork. In general, you can discuss any issues you may feel you can run into with your lender and discuss your options for what you can use as a security asset based on the amount of money you wish to borrow.
What Is An Exit Strategy and Security?
When applying for a bridging loan, an exit strategy and security is needed, to be able to be approved by the lender.
An exit strategy is how you plan to pay the loan back. For example, if you are using the money for property development or renovate a property, once complete, the property will be sold.
The money made from this can be used to pay the loan back in full. This selling of the property would be the exit strategy.
As long as you have one in place that can guarantee that you can pay the money back, you will more than likely get approved for the loan. Another option would be to get long term finance on the property and repay the bridging loan.
Security is the equity in your assets so things such as properties, cars etc. This is needed to ensure the lender that they have security so that if something did go wrong, they can use the equity in your assets so they don’t make a loss.
This is always needed when applying for a bridging loan and is something they will assess.
What Are The Costs Associated With A Bridging Loan?
The Interest Rate
When you borrow a bridging loan interest rate will be calculated on a monthly basis. The interest is charged is from 0.40% to 2% in the UK
Interest can be paid back in several ways, which include at the start of the loan, deferred at the end of the loan. Below we break down how bridging loans are charged.
You pay the interest monthly and in this case it will not be added to the loan.
- Deferred or Rolled-
In this option you pay the full interest at the end of the bridging loan, so there is no monthly payment.
With this option you borrow the money for the interest for an agreed period and settle it at the end of the loan term.
Some lenders will allow to mix the options above, this will be agreed with the lender at the start of the loan.
The lender will charge an arrangement fee, which works out to be anywhere from 0.5% to 2% of the total loan amount.
A valuation will be conducted on the property you want to buy or the property you own, or both, depending on what will be used as security against the loan.
The borrower is expected to pay the legal costs of the contract between the lender and borrower. The borrower is obliged to pay the legal costs on both sides.
Not all lenders charge an exit fee, but in some cases it is within the terms, if you were to pay back the loan early there maybe an exit fee of 1%.
Some lenders may charge an admin fee at the beginning or at the end of the loan term.
Sometimes a broker can be useful in getting a bridging loan, but there will be a fee associated with them and this is typically 1% of the loan amount.
When taking out a bridging loan it is wise to understand all the fees that are associated with the loan. There maybe other costs involved by the lender above what is mentioned here. Always get a breakdown of all the fees before taking the loan.
Below is an example of the costs broken down on a £500,000 bridging loan for 6 months.
|FEES||COST||TOTAL TERM COST|
|Interest Rate 1% Per Month||£5,000.00||£30,000.00|
|Arrangement Fee 1.5%||£7,500.00||£7,500.00|
Total cost for the loan over 6 months £41,300.00
Types Of Bridging Loans
There are two types of bridging loans, an open bridging loan and a closed bridging loan.
An Open Bridging Loan
An open bridging loan is when there is no clear exit strategy date, and the repayment date is open.
An open loan will generally be longer than a closed bridging loan and the interest rate is higher as the lender will consider it as a higher risk loan.
So for example if you are a property developer and you borrow the finance for the development of flats and your exit strategy is to sell the flats after completion, this may take some time to sell.
A Closed Bridging Loan
In this case the exit date is clear, you are expected to repay the loan at an agreed date. This type of loan is preferred by the lender and the interest rates are typically more favourable compared to a closed bridging loan.
Regulated Bridging Loan vs Unregulated
Regulated loans are loans for a property that you are living in or going to live in. For regulated loans, it’s expected that you use a property or high-value asset as a form of security against your application.
They are regulated by the FCA (Financial Conduct Authority), ensuring extra protection for consumers.
As it is mainly for residential usage, regulated loans ensure to give customers a higher level of protection against any faulty lenders or finance brokers.
An unregulated business loan is effectively not for individual use- these are most commonly used for corporate properties; Ones that you are not going to live in or use for other exceptional circumstances.
With an unregulated bridging loan, you can only use a second charge (explained below). If you are taking out an unregulated loan, as these are more for commercial use, these are not protected and do not have a high level of supervision.
Although this may mean you have more flexibility, you will not get much guidance on your repayment terms and may not be given a substantial loan.
The Pros And Cons Of A Bridging Loan
There are some advantages and disadvantages to consider before making a decision to apply, let’s break some of them down here.
- Fast access to money
- A simple process to apply
- Flexible loans
- Borrow large amounts of cash within days
- A competitive market in the United Kingdom
- Risky finance – if you miss payments the interest can get out of hand
- Expensive compared to other finance facilities
- Your security is at risk
- Lots of additional fees
- Not all lenders are regulated
Lenders From Around The World
Most lenders offer loans that can range from £20000 up to £10 million. (This of course heavily depends on your credit rating and the value and security of the property or land you are using to support your application and bridging loan.)
This also will have certain limitations to it. Such as You’ll typically only be allowed to borrow a maximum loan to value ratio of up to 75% of the value of the property- this is to avoid lenders giving out money that you may not be able to repay in the future.
Some Lenders In The United Kingdom
Some Lenders In The USA
Some Lenders in Australia
Some Lenders in South Africa
Bridging Loan Statistics In The United Kingdom Up To 2020
- Bridging lending grew £4.5 Billion in 2019 in the United Kingdom an increase of 19.7% from 2018
- The value of defaults also grew by 13.2% in the last quarter of 2019
- Applications in Q4 Fell by 10.7% (a record) and due to the UK elections
- Average LTV is 60%