What Are Bridging Loans?
Bridging loans are short term secured loans. 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.
Could Bridging Finance Help You?
A bridging loan may be able to help you if:
- You want to move but are struggling to sell your property and need to buy your new home quickly
- You’ve lost your buyer but don’t want to let your purchase fall through
- You want to purchase a property that isn’t currently mortgageable or habitable
- You want to convert/refurbish/develop a property
- You want to purchase an auction property
- You want to purchase land so you can self-build a property
- You require funding without monthly interest payments for a short period of time
How Does a Bridging Loan Work?
Bridging loans are ideal for “bridging the gap” between the purchase of a property and the securement of other funds – e.g. via a mortgage or from the sale of a property – because they’re quick, flexible 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 timeframe.
You Need a Deposit
The minimum deposit you would typically put down for a bridging loan is about 25%.
Interest Rates are High
Because bridging loans are short term and are typically secured against riskier properties, lenders charge higher interest rates than on mortgages – about 0.5% - 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 lender 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 they won’t necessarily need to assess your income.
Alternatively, if your exit strategy will be to remortgage onto a new product - e.g. a normal residential or buy-to-let mortgage - then the lender will look at your personal income.
There Are No Monthly Payments
Many bridging lenders allow for the monthly payments to be rolled up 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 borrowing. You can also opt to make monthly payments if you wish to keep the balance from increasing.
There Are a Few Extra Costs like with a Normal Mortgage
You’ll probably need to pay a valuation fee, product fee and solicitors fee like with a normal mortgage.
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Bridging Loan Process
1. First Conversation with Adviser
When you phone us, you can either arrange a phone appointment with your adviser or a face-to-face meeting. Your adviser will ask you some questions then go away and find the best bridging loan for your circumstances and future needs. They’ll organise a follow up during which they’ll present you with what they’ve found. If you are looking to buy a property at auction you would typically contact us before making an offer.
2. Decision in Principle
Once you’re happy with your adviser's recommendation, they’ll go about securing your DIP (Decision in Principle) - which is basically a promise from the lender that they’ll loan you money on the condition that the information you’ve provided is correct and subject to a valuation of the property.
3. Offer on Property/Refinancing
After you’ve secured a DIP (Decision in Principle), you’ll be in a great position to make an offer on a property or move forward with the refinancing. If you’re purchasing an auction property, you may want to put down a deposit of 10% or so. You’ll typically have 28 days to complete the purchase after putting a deposit on an auction property.
4. Pre-Application and Submission
We’ll send you some information which explains all the documents we need to submit to the lender. You’ll be assigned a client relationship manager who’ll check and submit certified copies of your documents; they’ll liaise with both you and the lender. Your adviser will then submit the fully packaged mortgage application.
5. Lender Underwriting and Valuation
The lender will underwrite your application; this basically means they’ll verify that the information you’ve provided is correct and review all your documents for themselves. They’ll also instruct a valuation for their purposes on the property in question to make sure there are no significant problems with it and that it’s worth at least the amount you want to borrow.
6. Bridging Loan Offer
If the lender is happy with everything they’ve found, they’ll send you an offer. They’ll also send us a copy.
You’ll now go through the legal part of the process, known as conveyancing. This is where the solicitors/conveyancers draw up contracts and organise the actual, legal purchase or refinancing of the property. You’ll also need to arrange buildings insurance at this stage, making sure it’s in place from exchange.
8. Exchange and Completion
If you’re buying a property, your conveyancer/solicitor will exchange contracts with the seller’s conveyancer/solicitor; it’s at this point that you would put down your deposit and be legally bound to the property. The purchase will complete when the money is transferred on an agreed-upon date. If you’re refinancing, then your conveyancer/solicitor will set a date to draw down the funds and pay off any existing lender(s) once the mortgage offer’s released.
You’ll need a solicitor or conveyancer experienced in organising bridging loans to carry out your purchase. With JC Legal, we can refer you to a suitable solicitor by choosing from our carefully selected panel of experts.
As a John Charcol customer you'll have access to our free Concierge Service, available through Just Move In. We can arrange removals, for the property to be cleaned, utilities, Council Tax and more.
Properties purchased via bridging finance can have complicated insurance requirements. We can find you a bespoke insurance package quickly and efficiently, so your application isn’t delayed.
It's important to protect yourself against the unexpected. John Charcol arrange certain life assurances tailored to your needs and we don’t charge an arrangement fee for this service.
Bridging Loans FAQs
What Are Some Bridging Loan Rates and How Do They Work?
Interest rates for bridging loans tend to be between 0.5% to 1.5% a month, which means you could pay between 6% and 18% per year depending on how the deal is structured.
Can You Use a Bridging Loan for a Residential House Purchase?
It is possible to purchase a residential property with a bridging loan. However, bridging loans are short term finance options which means you’ll need to replace one with a normal mortgage, usually within 12 months of purchase.
How Fast Are Bridging Loans?
You can have a bridging loan put in place within a month of starting the application process - and often even sooner.
Can I “Bridge the Gap” Until My Mortgage Is in Place?
Bridging loans can be a lot quicker to arrange than normal mortgages. You can also secure them on properties that would otherwise be unmortgageable, therefore they’re a suitable option if you need purchase a property to quickly or you plan on remortgaging it after carrying out some improvements.
Can You Take Out Bridging Finance on a Property that’s Unmortgageable?
One of the main benefits of a bridging loan is that it can be secured against a property that’s unmortgageable, perhaps because it’s inhabitable – e.g. there’s no working kitchen/bathroom or it’s a property that was divided into flats and is being converted back to a single dwelling. Often times, people will use a bridging loan to purchase and renovate an unmortgageable property so that it can be sold for a profit or remortgaged onto a longer term.