What is a bridging loan?

A bridging loan is a short term loan used to ‘bridge the gap’ between buying and selling. Property bridging loans are an ideal solution for when you want to make a purchase but you’re waiting for funds to be available to you from the sale of something else. This type of loan can be a way of funding a project or property purchase (bridging mortgage).

When would I need a bridging loan?

Bridging loans can be used in a variety of circumstances, for example buying property, property development and renovation, investing in buy to let opportunities and tax payments. This type of loan can be used for a Tax loan, you may want to take out a loan for a tax payment when your tax is due at an inconvenient time or if you cannot pay it all at once. You can then make the repayment once you have adequate funds to do so. Similarly, commercial bridging loans can be used to bridge the gap and finance something quickly for a commercial building. Unlike a business loan, this type of loan is to fill a short amount of time between purchase and sale.

How much can be borrowed with a bridging loan?

Bridging loan companies offer an extremely wide range of loans depending on the individuals circumstances and exit plan. Lenders can offer anywhere between £5,000 and 25 million, sometimes much more depending on the individual and circumstance. Lenders will expect you to have a solid exit plan in order to lend you any amount of money.

Do I need to have good credit?

You do not necessarily need good credit to apply for bridging finance however, you will be considered higher risk if you have bad credit resulting in the cost of your loan being higher. Your credit report will give you a good idea of whether a bridging loan will work for you and your business.

How much will my bridging loan cost?

The cost of your loan is dependent on a range of variables including how long you’re borrowing for, how much you’re borrowing and your credit history. Bridging loan interest rate can be high due to the short time scale of the loan, with lenders charging monthly rather than annual interest rates. However, not all lenders charge monthly and some banks now charge standard interest rates on this type of loan. Other fees must also be considered including but not limited to arrangement fees, legal fees and exit fees.

Types of bridging loan

Open bridging loans

An open bridging loan is more flexible as there is no exact repayment date. The debt is usually paid once your funds become available however the debt is most commonly expected to be cleared within a year.

Closed bridging loans

A closed loan is typically cheaper than an open loan as there is less flexibility with your repayment date. A closed loan has a definitive repayment date based on when your funds are expected to become available.

Whether you choose to take out an open or closed loan, your lender will expect details of your repayment and how you plan to do so. This is often called an ‘exit plan’ as lenders will need to know how and when you plan to repay them. Without a realistic exit plan, you are unlikely to be approved for a bridging finance loan.

First charge and second charge bridging loans

With this type of loan, the lender will put a ‘charge’ on your property as if you do not make your repayment, they will take your payment from the sale of your property. This will be a ‘first charge’ if you own the property and have not taken any other loans out against it. However, it will be placed as a ‘second charge’ if you have taken out any other loans on the property. For example, if you property is sold to make repayment, the lender will take their payment second after your mortgage lender has taken theirs.

Second charge loans are typically more expensive as there is a higher risk for the lender and the chance of not receiving repayment is higher. Second charge loans also require approval from the mortgage provider of the property the charge is being placed on.

Unsecured vs secured loans

A secured business loan requires you to offer something you own to provide the lender with an option if you fail to make your repayments successfully, whilst an unsecured business loan allows you to borrow an amount of money without offering anything to the lender. When taking out an unsecured loan, the lender will base the amount they can offer you or your business on your finances. The amount you can loan with a secured loan is most commonly based on the value of your property or the estimated value of your expected funds after a sale or refurbishment of a property.

Pros and cons of using bridging loans