Bridging Loans for UK Property

A bridge or bridging loan is a short term secured loan. Property buyers typically use bridging finance to “bridge” the gap between the purchase of a new property and the approval of a traditional mortgage, the sale of the new property or the release of capital from an existing property.

Bridging loans can be used in various scenarios to bridge a finance gap when funds aren’t immediately or readily available. We’ve outlined a few common situations where bridging loans can be used.

Buying Property at Auction

A mortgage might take longer than needed to come through, so a bridging loan can be ideal if you need to borrow money quickly to secure a property you want to buy at auction. Most bridging loans are relatively easy and quick to arrange once an offer has been accepted on a property purchased at auction. You can even get all the paperwork and indicative terms confirmed before you’ve found a specific property - speeding the process up once you’ve made an offer.

Renovation

A bridge loan can be used to access funds needed to complete renovations. This can range from small bridging loans for light renovations, like plastering or replacing fixtures, to larger bridging loans for major structural refurbishments.

If you’re purchasing a property that is unmortgageable because, for example, there’s no kitchen or bathroom, bridge loans can help you to cover the cost of making the necessary repairs to get the property into a mortgageable state.

Purchasing Land

It’s possible you may need to find funds quickly to purchase land at auction or secure short term finance to buy land for building residential or commercial property. A bridge loan can be a good interim option to help you purchase the land and finance building work until you’re able to sell or arrange a mortgage.

Fixing a Broken Property Chain

If you’re in a property chain that falls through, a bridging loan can be an alternative way to secure finance and make sure you don’t lose your new home. Typically, with bridging finance, you’ll have up to 12 or 24 months to sell your old property and pay off the bridging loan in full.

Bridging loans are ideal for “bridging the gap” between the purchase of a property and the securement of other funds – such as via a mortgage or from the sale of a property – because they’re quick, flexible interest-only products that are available on a wide range of properties. They’re perfect for people who would otherwise be unable to find suitable financing within a restricted time frame.

Wondering how to get a bridging loan and what you’ll need? We’ve set out the key essentials below.

You Need a Deposit

The minimum deposit you would typically put down for a bridging loan is about 25% - 40%. The amount you have to provide in deposit will come down to the type of security, condition of the property/land and the amount of work you’ll be carrying out.

Interest Rates Are High

Because bridging loans are short term and sometimes secured against riskier properties, lenders charge higher interest rates than on mortgages – about 0.5% to 1.5% a month.

They’re Short Term

You could typically have a regulated bridging loan for up to 12 months and a non-regulated bridging loan for up to 24 months. Regulated bridging loans are suitable for residential house purchases and non-regulated bridging loans are suitable for buy-to-let and commercial property purchases.

You Must Provide Evidence of a Repayment Vehicle

The majority of lenders will require that you give evidence of your repayment vehicle/exit strategy – i.e.  how you’re going to repay the loan at the end of the term. If your exit strategy will be the sale of the property then the lender will want to make sure that the expected sale price is in line with the market.

Alternatively, if your exit strategy will be to remortgage onto a new product - such as a normal residential mortgage, buy-to-let mortgage or a LTD company BTL mortgage - then it's likely the lender will likely want to see the terms of the exit, whether this will be the Illustration or DIP (Decision in Principle).

There Are No Monthly Payments

Many bridging lenders allow for the monthly payments to be rolled on top of the loan itself. This means that you don’t have to make any monthly payments as the loan plus payments is paid off via your exit strategy. It’s important to note that the interest payments that roll up will have interest charged on them as well as the main amount borrowed. You can also opt to make monthly interest payments if you wish to keep the balance from increasing. This is called servicing the loan.

There Are a Few Extra Costs like with a Normal Mortgage

You’ll probably need to pay a valuation fee, product fee, and solicitor's fee like with a standard mortgage.

The cost of a bridge loan will vary depending on your own personal circumstance and various factors and fees, including the following.

• Interest rates - typically, these will be between 0.5% and 1.5% per month
• Term length - bridging loan terms can be anything from 1 to 36 months, but 12 - 24 months tends to be the standard. Generally, the longer the loan term, the more expensive it will be overall. Longer terms are also only available on unregulated bridges
• Product fees - most lenders charge a product or arrangement fee of between 1.5% and 3% of the loan amount
• Deposit - most bridging loans require a deposit of at least 25%. As with a standard mortgage, typically the bigger your deposit, the lower the interest rate you’ll be charged
• Valuation fees - lenders will usually want to survey or inspect the property and any other secured assets that are included as part of the cross charge to value them. An individual valuation fee can be around £500
• Drawdown fees  - it’s also common for lenders to charge drawdown or admin fees, normally around £500

When looking for the right finance, it’s always wise to compare bridging loans by consulting an expert. Using a specialist broker like John Charcol can help you access the best products to suit your needs, saving you time and money.