If you are in need of quick financing for your new home, a bridging loan could be the ideal solution for you. In this guide we look at some ways you can utilise bridging to help with your mortgage.

What is a bridging loan?

A bridging loan is a short term loan used to finance a time sensitive purchase, for instance a house or renovations. The purpose of it, as the term implies, is to bridge the financial gap created when you need to make a quick purchase but have to wait until your own funds become available.

How a bridging loan works

A bridging loan is where your assets act as security against the loan you take. However, unlike a mortgage in the UK, a bridge loan is set for a short term usually 1 to 2 years. You may need to provide the lender with an exit strategy which ensures a lump sum pay off. This can be done with the finances you generate from:

• The sale of your old home
• Renovating and reselling your home
• Remortgaging
• Inheritance
• Sale of other investments

Key features of a bridging loan

Short time frame: Bridging loans can be arranged within a period of 5 - 10 days. This is a much shorter time unlike a mortgage which could take months to finalise. Similarly, bridging loans are short term, which means the loan period is for 1 to 2 years or less, depending on the agreement.

Flexible repayment method: Repayment for a bridging loan is flexible, the main condition being that the full amount is paid at the end of the term. Payment can be made as a rolled-up interest or a serviced interest strategy. A rolled-up interest strategy allows you to make the complete payment as one lump sum at the end of the term by “rolling up” the interest rates into the principal amount.

If you prefer to make monthly payments of the interest rates, you can choose to do so under the serviced interest repayment strategy. Again, the principal amount is paid at the end of the term. If you do opt for monthly interest payments, lenders will need to assess your income and credit history to check your affordability.

Types of bridging loans

Although lenders may have multiple types of bridging loans, typically two types of bridge loans are commonly known:

Open bridging loan - This is when there is no set date for to pay back your loan. For instance if your house is on sale but you have no buyers yet, your repayment period is uncertain. A lender may decide if they can afford you more time or not to finish paying off the loan. In most instances lenders may extend the period to 1 year.  Open bridging loans are incidentally more expensive than closed bridging loans.

Closed bridging loan -  Closed bridging loans have a set date for settling the loan. It may be noteworthy to say that closed bridging loans are less expensive than open bridging loans.

First charge and second charge bridging loans

When you apply for a bridging loan a charge is placed on your property. This is a legal agreement which indicates how your loans will be repaid in the event that your asset is repossessed.

First charge bridging loan: This short-term loan is secured against your property as a first charge. What this essentially means is that in the event  you default on the loan, the lender has the first claim on your property's value.

Second charge bridging loan: If you already have a mortgage set up against the property you secure against, then the bridging loan becomes a second charge on that property. In order to borrow against this property you will need consent from the first charge lender to proceed with the bridge loan.

When is a bridging loan a good option?

Property auctions: property auctions are a great example for when bridging loans are needed. Since auctions are time sensitive purchases that require payment within 28 days, standard, slow to process methods of loans like mortgages will not make the cut.

Break in a property chain: buyers pulling out of a deal are common problems when you are trying to sell a house. In these instances, especially if you are also in the process of moving to a new home, a bridging loan will aid you in bridging the gap until you can complete the sale.

Property renovation: bridging loans can be used to provide capital needed for renovating properties that need fixing up. This allows you to purchase a residential home that has flaws that hinder you from getting a regular mortgage or gives you the option of investing in buy-to-let properties that need renovating.

What do I need to get a bridge loan?

As mentioned before, the bulk of getting a bridging loan depends on how good your exit strategy is. When it comes to this criteria, lenders use equity and the loan to value ratio (LTV) as decisive points to approve a bridging loan.

As with a standard mortgage, the property you set as security will undergo valuation. This includes assessing the property’s construction, location and other variables.

Before you take out a bridging loan you will need to present evidence of the exit strategy you plan to use. This could be an agreement in principle (AIP) of a mortgage, steps you are taking to sell your house, or any proof that shows that your strategy can cover the loan amount.

Conclusion

Bridging loans play a crucial role in the UK mortgage landscape, offering temporary financial lifelines for homeowners to help complete difficult property transactions. While not a one-size-fits-all solution, the ability to bridge the gap between buying and selling property, and to handle unforeseen circumstances makes bridging loans a valuable tool for borrowers.

However, navigating the nuances of bridging loans requires careful consideration. Thorough research, professional guidance, and a clear exit strategy are essential to ensure a smooth and cost-effective experience. Speak to a profession mortgage adviser before deciding on a bridging loan. Their insight can be invaluable.

By approaching bridging loans with a well-defined plan, homeowners can leverage their power to unlock new possibilities, achieve their property goals, and navigate the UK housing market with confidence.

Some Bridging Finance is not regulated by the Financial Conduct Authority.

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

* Approved by The Openwork Partnership on 17.04.2024"