What is a Bridging Loan?
Bridging loans are a type of short-term finance commonly used for property owners, investors and developers. It is ideal for those who are urgently looking to complete on a property and where a traditional mortgage application process would take too long. So rather than lose a potential opportunity, the individual can apply for a bridging loan and receive the money in one lump within a few working days. Once the borrower has bought the property and has access to more finance (by renting it out, refurbishing and reselling it), they are able to repay their loan and find themselves in a profitable position.
There are several bridging loan lenders in the UK each with their own criteria, products and amount you can borrow. The industry has become a popular source of alternate finance as banks have become stricter with lending over the years and take longer to process applications for larger home loans. The Mortgage Market Review introduced in April 2014 makes sure that there are proper affordability checks for those applying for a mortgage, but what this means is that it takes a lot of work to submit a mortgage application and then a further 2 to 4 weeks to get a decision in principle. For some property investors or those with an exciting business opportunity, they simply do not have the luxury of time and will lose their bid unless they can complete the deal sooner.
Bridging finance can be used for several purposes including:
- Property Investors, Developers and Buy to Let Investors
- Business Owners
- Raising Finance
Scenario 1: The Homeowner
The individual has not sold their home yet but is desperate to complete on a new property or they risk losing it. A bridging loan allows them to get the money they need to complete on the property and then they can repay the loan when their house eventually sells.
Bridging Loan Example: Your house is worth £200,000 and you have an outstanding mortgage of £100,000, you want to move to a £400,000 and do so quickly. But you won’t be able to get a mortgage in just a few weeks or sell your existing home. So you get bridging finance to cover the gap, allowing you to move in quickly and clear your debts when your original house is sold.
Scenario 2: Property Developer
A small or large property developer sees an individual property or block of flats that they want to refurbish and sell at a higher price. Rather than go through a long mortgage process, they can borrow a few hundred thousand or million pounds, receive the money within a few days or weeks and complete very quickly. Several months or years later, the property has been renovated and has now gone up in value, they can sell the estate, allowing them to repay their loan and make a profit. This is also falls under Development Finance.
Scenario 3: Raising Finance
If you have an existing bridging loan or mortgage, known as a ‘first charge,’ any equity left over can be used for another loan, known as a ‘second charge.’ This can be used to raise finance for an investment opportunity such as putting money into a business or another property.
Types of Bridging Finance
Open vs Closed Bridging Loans
Open refers to when the borrower has not planned how they are going to exit or repay their loan. Essentially, the loan is still open-ended and there is no certainty that they are going to be selling or getting a big payout so they can repay their loan. The majority of applications fall under this and can include things like a business investment or a waiting for their property to be sold, when they don’t exactly know when this is.
A closed product means that the borrower knows how they are going to exit the loan agreement – so they can arrange an end date with the lender. This can include refurbishing a flat or house and knowing that they will want to re-sell after a specific time e.g 2 years. For the lender, they much prefer when the borrower has an exit strategy and when the loan agreement will end. Knowing whether the loan is open or closed will certainly have an impact on the amount you can borrow, the rates you are charged and how long for. Each lender will review the reason that you want a loan and assess your eligibility based on this – so being open or closed is something to keep in the back of your mind.
First Charge and Second Charge Bridging Loans
You can have a mortgage and a bridging loan at the same time, but whether it is first charge or second charge denotes which is the priority when it comes to making repayments. When you have more than one secured loan on a property, the lenders have to take ‘charge’ over which loan is most important when it comes to repayment. The first loan or ‘charge’ is always the priority and for this reason, any second or subsequent loans are a greater risk for the lender because they can never be certain that they will be able to recover their costs after repossession. Therefore, the LTV you receive on a 2nd charge is likely to be less than a 1st charge (around 65% maximum compared to a 75% LTV).
A first charge loan, also known as a ‘first legal charge’ refers to the principle loan on your property which takes precedent over every other loan you may have. You may have a mortgage on your house already so this will be your 1st charge loan, as it is the most important when it comes to making repayments. A bridging loan is typically a second charge and this is the most common type of loan that we deal with. As the 2nd charge, this is the second priority of loans that you need to pay. Second charges typically do not last as long as your first charge, which can be a mortgage lasting 10, 25 or 40 years but instead are likely to be less than 2 years.
Other purposes include paying off your original mortgage, in which case the mortgage is settled and your bridging loan is registered as a first charge loan. Also, if you are an individual or property developer with no outstanding mortgages on a property or if you own it outright, there is no need to mortgage and therefore bridging finance can be your first charge loan.
Fixed and Variable Rates
Similar to a mortgage, your bridging loan can be expressed as fixed or variable interest. A fixed rate means that the rate you pay over the two years does not change during the loan term and stays stable. This allows you to plan accordingly how much you owe each month and there is no unpredictability. If your loan is receive is based on variable interest, it means that the rate you pay can change during the loan period accordingly economic factors, fluctuations and the Bank of England base rate, which is currently 0.25%. The idea is that you feel that economy is strengthening, then choosing a variable rate may allow you to pay lower fees in the long run.
Are Bridging Loans Secured?
Yes, bridging loans are secured against an asset, which you risk losing or face repossession if you do not keep up with repayments. The rates charged by our lenders are competitive because they are able to recover their losses by making repossessions if you default on repayment. The most common thing to put down as collateral is the property or estate you need the loan for. Other types of security include valuables, offices or businesses which might have used bridging finance in order to raise funds. If you need extra security, you can apply here.
Are Bridging Loans Regulated?
First charge mortgages are regulated under the Financial Conduct Authority. If they are 2nd charge mortgages, they fall under the FCA’s mortgage regime (MCOB). There are some lenders we work with that are non status bridging lenders like MT Finance which means they will not lend to you if the property is used as a primary residence. It is also means that they do not carry out credit checks as part of the application and underwriting process. Instead, they look at other factors, such as your track record and the potential of the property when making their decision.
There are several lenders that offer non-regulated bridging finance and this is typically for loans secured against investment properties, buy to let properties, business purposes and people with limited companies. This also includes mixed use properties such as shops with flats above or anything that does not meet the FCA’s definition of a residential property. The idea is that non-regulated lenders will not offer a secured loan on the borrower’s main residence or where they live. So you can certainly apply for a second charge with a non-regulated lender, but it certainly will not be secured on your existing home.
If you are in the process of buying or developing a property and need money to finance it, we work with a panel to allow you to compare bridging lenders and find the best product for you. Whilst a bridging loan is a great way to get finance in a few days without needing a mortgage, there are several other products we offer that might be better for you, including second charge mortgages, auction finance, home improvement loans and refurbishment loans too.
There are several responsible regulated and non-regulated bridging lenders so there is no need to favour one over the other. Simply because the lender is not regulated does not mean that they won’t fulfil all their duties as a responsible lender. This includes having a consumer credit license, carrying out thorough checks and following the FCA guidelines of responsible lending and treating customers fairly.
How Do Repayments Work For Bridging Loans?
Loan terms are typically up to 12 months for regulated lenders and up to 24 months for non-regulated bridging lenders. There are different repayment options available to you which may be better suited depending on your project or situation.
Standard Monthly Repayments – This involves paying equal monthly repayments on a scheduled date each month, so you know exactly how much you can budget for each month. The repayment is a combination of interest and capital. The interest refers to the fees charged by the lender (0.5% – 2.0%) and the capital is the amount you have borrowed (up to £25 million). Although the repayment amount each month does not charge, you start by paying more interest of the loan and then eventually this is paid off and you are only paying the capital. This is how a mortgage repayment works and gives you the option to make overpayments of interest, which will help you save long-term. Read more here.
Rolling Interest Option (most popular) – Here, you are saving the interest right until the end of the loan term. This allows you to make lower monthly repayments as you are only paying the capital each month and the interest is rolled up or compounded until the loan’s redemption.
Interest Deducted – You only pay the capital on your loan each month and because you are taking away the interest, this is now taken away from your loan drawdown (amount you can borrow). So if you are looking to borrow £100,000 over 12 months at 1% interest, you would pay £12,000 worth of interest over the loan term. But since interest is deducted, the amount you borrow will be changed to £88,000.
What Happens If You Cannot Repay Your Bridging Loan?
If you find that cannot repay your loan, possibly because you are still waiting for the refurbishment to complete or for the sale to go through, there are different options available. Some of the lenders we work with will allow you to refinance or rebridge your bridging loan so that you can extend the loan term, but the interest rate charged is likely to be slightly higher.
If you are a few weeks or months later and do not want to rebridge, there may be late fees or extra interest charged. Finally if you find that you are a in position where you cannot repay at all what you have borrowed, there is the risk that your property in question will be repossessed by the lender in order to recover their costs. The estate will typically be sold on the open market, maybe at auction, and if there is still a remaining balance outstanding even after the sale, the debtor will be required to make payment until the full amount owed is repaid.