Bridging loans - your questions answered

There are very few instances where you’ll need a five- or even six-figure sum to proceed with your plans but buying a property is one of them. It’s not the amount you can usually find down the back of the sofa so what are the options if you need to lay your hands on a substantial amount of cash quickly?  

A bridging loan can make a property purchase a reality when timings are tight and funds are tied up. Use this Q&A guide to decide whether this specialist loan may help you.  

Q. What is a bridging loan?

A. A bridging loan is a specialist, quick cash advance of a very high value. The term ‘bridging’ is used as the money is normally borrowed when one asset is being sold but the money doesn’t arrive in time to purchase another asset. The loan ‘bridges the gap’ between a sale and a purchase.   

Although people who have a mortgaged property can successfully apply for a bridging loan, lenders look more favourable at borrowers who have property or other assets owned outright.  

Q. How does it differ from other loans?

A. Unlike conventional loans, which can be repaid over years, a bridging loan is a short-term cash fix. Usually, the lender will want the full amount repaid within 12 months but each loan will have its own conditions based on the risk and the amount borrowed.   

Sometimes, the loan will need to be repaid within one or two weeks. Therefore it is essential that those taking out a bridging loan are confident in receiving enough money from a property sale or other source in time to pay off the loan in the stipulated time frame. Those taking out a bridging loan will also be expected to show the lender their ‘exit plan’ – which is how they will pay off the loan.  

Q. Why might I need a bridging loan when buying a property?

A. Bridging loans are most commonly used when buying a property but only certain types of purchasers will usually consider this method of finance. These include:  

• A homeowner who needs to purchase an onward property urgently but has not sold their current home and therefore needs to find a deposit amount quickly.
• A purchaser who intends to buy a property at auction and needs to bid with a large amount of cash and complete within 28 days.
• A property investor who wants to purchase a buy-to-let property but doesn’t have access to enough funds upfront.
• A buyer who wants to rescue a broken chain by guaranteeing they can make their onward purchase.A buyer of a property that a lender won’t grant a mortgage for in its current condition. 

Q. Are there different types of bridging loans?

A. Bridging loans usually fall into one of two product classes. These are:  

Open bridge loans: these have longer repayment terms of between 12 and 24 months but flexibility comes at a cost, however. An open bridging loan will be more expensive overall but they are usually a good option for property buyers who have found a property they desperately want to buy but have not exchanged on their current property.  

Closed bridge loans: these are a cheaper option but they will have a fixed repayment date and that will probably be a matter of weeks and not months. Closed bridge loans are more suited to home overs who have exchanged on a property but are waiting for completion and funds to be released.   

Q. What type of interest rate will a bridging loan have?

A. Each bridging loan will have its own rate of interest but expect it to be much higher than traditional loans, with interest calculated on a daily or monthly basis. For comparison, mortgage rates are currently in the region of 4.9% annually. A bridging loan may carry an annual rate of nearer 30%. In that respect, the aim will be to pay off the bridging loan as soon as possible, otherwise interest will quickly build and may become impossible to repay.  

Q. Will I have to pay other fees?

A. In addition to the rate of repayment interest, a bridging loan borrower should expect to pay arrangement, exit, valuation, administration and legal fees.  

Q. What’s the biggest risk when taking out a bridging loan?

A. If a borrower is hoping to settle a bridging loan with the proceeds of a property sale, it’s impossible to say how long accepting an offer, reaching exchange and completion will take. They may find the bridging loan needs to be fully repaid before they have sold their home, due to unforeseen delays or a collapsed chain.  

Q. What will happen if I don’t repay a bridging loan?

A. A bridging loan will be classed as ‘secured’ – which means you’ll need a substantial asset, such as a property, to provide security. If you are unable to pay back a bridging loan, the lender can take your asset to settle the debt. Usually, a bridging loan is secured against a property, which the lender will seek to repossess if the loan isn’t repaid.  

If you would like to know more about loans and property purchases, please get in touch. We can steer you in the direction of a financial adviser.