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Bridging Loans
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What Is A Bridging Loan and how do Bridging Loans work is Bridging finance the same?

Bridging loans are a  short-term finance option for obtaining finance from a property, the term bridging loan comes for the term to bridge the gap which in effect means bridging the gap between funding coming in from a property sale or from another source of funding becoming available to you. Most bridging finance is used to enable the purchase of a residential property or commercial property before the existing one is sold.

 

Bridging loans come into their own when either purchasing a property or raising equity out of a property because other forms of lending are not possible. These are loans that are of a temporary nature so as can be expected bridging loan interest rates are usually more than with a traditional mortgage, although in recent years the gap between a bridging loan and a traditional mortgage has come down significantly.

How Does A Bridging Loan Work?

If you think about Bridging Finance & Loans as a short-term mortgage to bridge the gap, then it is far easier to understand what they are and how they work. They would be secured against a property and can be on a first or second charge basis either behind another lender who has a charge against the property. Typical uses are for the acquisition of a property before selling the property that you already own, another would be to get cash out of a property that you already own for short-term purposes this could be your current home or a buy to let property with an existing mortgage.

 

They work just like a mortgage, with the lender securing a charge against the property in return for an agreed interest payment over a period of 1 to 12 months. The only real difference compared with a mortgage is that the interest repayments are quoted on a monthly basis.

What Is The Meaning Of A Bridging Loan?

The meaning of a bridging loan which is basically a short-term loan, that would be issued against a property (secured by a legal charge) either residential, commercial or mixed residential and commercial, or it could even be land. The name of bridging loan or bridging finance is derived from the word bridge which in effect is a bridge from one financial product to the other via a short-term funding solution. An example would be if you were waiting to sell your existing home and then saw another property that you wanted to buy, you would not be in a position to make an offer without first having your property under offer, so you would need finance to bridge the gap between selling your property and purchasing the property that you wanted to buy.

How Is a Bridging Loan Calculated?

Unlike traditional loans which tend to be calculated with yearly interest rates and APR rates Bridging Loans are calculated on a monthly basis. The interest outstanding is calculated on a monthly basis but actually only charged on a daily basis for the days the loan has been outstanding. It would work something like this let’s assume you had a loan of £100,000 and the agreed interest rate had been set at 5% per month by the lender, then each month that you owe the loan attracts an interest charge of 5% of the £100,000 so you are liable for £500 of charges for each month that the loan is outstanding. This would be further broken down when you redeem the bridging finance as follows. If you take the £500.00 per month chargeable then this equates to a calculated interest of  £71.43 per day so if you were to have the loan outstanding for 1 month and one day your bridging loan charges would be £571.43 which is all you would have to pay back. A Bridging Loan calculator can be used to work out your total costs.

What Is the rate of Interest on a Bridging Loan?

The interest on a bridging loan is the charge that a lender would levy on the loan for the benefit of providing the finance.  The interest can vary from as low as 0.37% per month up to 1% per month it really depends on the loan to value that the loan is at (LTV) and many other factors that a lender would take into account, these would include such things as the type of property, the location of the property, what loan to value the loan is for and also the credit status of the borrower. The interest on a bridging loan is usually rolled up into the loan, this means you will not have to pay it on a monthly basis rather it is taken from the advance before, this is what they call rolled up interest, it really just means they deduct it from the loan before you receive the funds, which actually means you have paid all of the interest on the loan in advance.  What would happen when you pay the loan back is that they would only charge you for the days the loan was outstanding and deducted from your monthly payment.

 

So to recap the interest on a Bridging Loan is exactly the same as any other loan, it is a charge from a lender for the use of funds to purchase or release equity from an existing property. In addition to interest rates, arrangement fees will be added to the loan amount.

What is a Bridge loan for a house?

A Bridge loan for a house refers to a bridging loan, the bridge just being a phrase that is used sometimes, the actual name they are commonly known as are bridging loans or bridging finance. A bridge loan for a house would be used to buy a house before you had sold your own home. They work as follows let’s say a house comes up for sale and it has a really good price or it is in location where very few houses come on to the market and you really wanted to buy it but your property was not yet up for sale or it could be up for sale, but you have yet to buy a buyer. In normal circumstances you cannot have two mortgages, so the only way for you to move forward would be to either sell your property quickly in order to have your offer accepted or you could arrange a bridge loan for your house, once in place this would clear your mortgage or any outstanding loans against it and allow you to put in an offer to acquire the house you want to purchase.

Who is likely to take out a bridging Loan?

Bridging loans can be taken out by private individuals, ltd companies or partnerships to purchase property or unlock capital that is in an existing property they own. They use them to acquire or release cash from existing properties they are also used for buying at auction by property developers who use them to purchase and refurbish properties before selling on at a profit. Also, small to medium-sized business owners who are having difficulty obtaining funds from their banks would use them to get access to working capital to expand their businesses or buy capital equipment or any other requirement or for an HMO.

When should you take a bridging loan?

Bridging loans can be used for many things including quick purchase, equity release, property development etc: The thing to remember is that you should really only take a bridging loan if there is a financial benefit for you at the end of the loan. It could be that you are able to buy your dream house, you get a bargain because nobody else can complete in the time you can because you have the offer of bridging finance. At an auction, you are often competing to purchase property against cash buyers, with a bridging loan you in effect are a cash buyer. If you are a property developer then bridging loans are an ideal way to fund your short-term finance requirements and any other number of reasons can be used.

 

You should also use a bridging loan when you need the loan quickly banks and traditional mortgage lenders can take many months to process your application, whilst most bridging lenders will make an offer on the day and can complete in a matter of days on some loans. Many borrowers now use bridging finance as an alternative to traditional funding.

Where can I get a bridging loan?

Bridging lenders were once only available through high street banks and a few specialist lenders now though there are as many as 100 active lenders. We would always advise that you take advice from an FCA regulated broker, not all bridging loans are regulated, although as with any financial product it pays to do your homework.

 

Note some Bridging Loans are Authorised and regulated FCA regulated.

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