Bridging finance is simply a short term mortgage, secured on a property. Typically the loan term will be less than 2 years as the money is only needed for a short time.
When applying for bridging finance the choices and decisions related to the loan are far less than for a long term mortgage that could be used for your own home or a buy to let. The main reason for this is that bridging finance is for the short term only.
On this page we will look at how bridging finance works and some of the choices you do have when applying for one.
So how does bridging finance work?
Bridging finance and bridging loans are short term mortgages which are used to cover a gap in cash flow or to cover short-term finance requirements.
The lenders that specialise in these types of loans are not normally found on the High Street. Loans can be arranged quickly, often in just a few days so they are perfect as a means of paying unexpected bills or jumping on a bargain property.
Once they have served their purpose the bridging loans are simply repaid all in one go.
How much can you borrow?
Bridging lenders are mostly interested in the property and your exit strategy when assessing an application, so a less than perfect credit history shouldn’t hurt your chances.
Bridging finance is commonly available upto 75% of the property value, even if it is not habitable. So you will need a cash deposit to cover the other 25%. Our Guide to Bridging Loans and Deposits covers this in more detail.
It may also be possible to get a 100% bridging loan if you already own some other properties. The flexibility of a second charge bridge loan can be used to access equity even when there’s already a mortgage in place.
Here’s a quick example:
| Purchase price/value | £400,000 |
| Bridging finance 75% | £300,000 |
| Own money deposit | £100,000 |
Can you get a bridging loan with bad credit?
Yes this is possible as the lender is not really interested in your income or your credit file.
Bad credit bridging loans are available even with the following credit issues:
- Late payments or defaults
- CCJs
- No credit history
- Poor credit score
- Bankruptcy
If you have any of these credit issues and you intend to repay (exit) the bridging finance with a remortgage then this could cause the lender to have some concerns.
Their reason would be that your credit status will affect the viability of the remortgage application and thus repayment of their loan.
CLOSED BRIDGING LOANS
When you know how you are going to pay back your bridging loan, and more importantly when, then a closed bridging loan is a cheaper option.
OPEN BRIDGING LOANS
Open bridging finance is offered without knowing the exact date of repayment. Due to this uncertainty the lender will charge a slightly higher interest rate than for a closed loan.
What is an Exit Strategy?
The Exit Strategy is how you will fully repay the bridging finance loan within the timeframe you have agreed with the lender. The Exit Strategy and the property are the two things the lender is most interested in.
Generally an Exit Strategy is one of the following:
REFINANCE
Essentially using a longer term mortgage or loan to repay and replace the bridge.
SELL
Sell the property used as security (or maybe another) and fully repay the bridge.
How much does a bridging loan cost?
Bridging loans are available to almost anyone who owns a property as security and can be arranged very quickly. The trade off is that this speed and flexibility comes at a cost.
Bridging finance is a lot more expensive than a standard residential mortgage. Interest charges will vary according to the Bank of England Base Rate but can be 0.5%-1.5% each month.
So if you borrowed £300,000 at 1% per month interest, the costs would be:
£3,000 per month (interest only)
Lenders will often allow the interest payments to ‘roll up’ so that it is all paid at the end, helping your cashflow.
There will also be an arrangement fee, valuation fees and legal charges.
Talk to the bridging experts
Drake Mortgages is a bridging finance broker and we can source competitive rates from across the market. We have built relationships with specialist lenders who do not have a presence on the high street to secure finance where others cannot.
We can help arrange a bridging loan, a short-term loan that provides fast access to funding, or development finance for the specific purpose of building new properties or making substantial changes to existing properties.
PLEASE CALL US ON 020 8301 7930
Benefits of Bridging Finance
While a bridging finance loan is often used for property purchases, it can be used for a range of different reasons.
The only thing the lender will want to see is proof of your Exit Strategy so that you can pay back the loan.
SPEED
Bridging loans can be arranged very quickly, often in just a few days. Lenders have systems in place to help speed up the process and of course there are fewer financial checks to be made.
UNDERWRITING
Bridging lenders are far more interested in the property and the exit strategy than they are in the applicants situation. So even borrowers with poor credit can be accepted.
FLEXIBILITY
Funds available at very short notice that can be used for almost any purpose. Bridging is so flexible it can help in many different ways.
Bridging Finance Examples
There’s a myriad of ways to use a bridging loan.
You can use it to raise funds for almost any reason, here we show you just a few examples.
USING BRIDGING FINANCE TO PURCHASE A BUY TO LET PROPERTY
Arranging bridging finance is fast and straightforward. It allows property investors to move quickly on purchases, whether through auction, direct to vendor or via an estate agent.
A buy to let remortgage can then be arranged for the exit strategy.
BRIDGE TO LET
This is very similar to the example above but the bridging lender also offers the longer term buy to let loan for the exit strategy, making for a smoother transition.
In this scenario the bridge-to-let is often used when the property to be purchased is uninhabitable (the property lacks essential elements such as a kitchen or bathroom).
BUY TO SELL
If you are looking to buy a property to refurbish and sell when finished, then a buy to sell mortgage could provide the finance you need.
It is a short term mortgage that is suitable for property investors and developers who want to ‘fix and flip’.
PROPERTY DEVELOPMENT
When using bridging finance for property development the funds are given out in stages.
Used in conjunction with a bridge loan you could:
- Use the bridging loan to purchase the property
- Use the development finance to cover the work needed.
The development lender will recalculate the value of the property as you pass each agreed stage of the build, releasing more funds as you make progress.
CHAINBREAKER MORTGAGE
A property chain relies on a lot of things happening on time. As the chain of buyers and sellers gets bigger the house selling process can get slowed down and be liable to break.
A regulated chain break bridging mortgage can help you buy a new property before selling your current home.
SHORT LEASE MORTGAGES
Leasehold properties have a lease agreement that grows shorter as each year passes. Once the remaining term gets to 75-80 years some of the main mortgage lenders stop lending.
This can be overcome by using a short lease mortgage to fund either the purchase or the cost of extending the lease.
PRE-PLANNING LOANS
Bridging finance can be used to buy land and it can help to buy a plot of land or a building with the aim of then achieving planning consent for further development. Receiving planning permission can increase the value quite considerably, and planning gain finance will be used for the initial pre-planning purchase.
MORE REASONS
Bridging loans are so flexible that the possible reasons for needing one are almost endless. To help you we have put together 10 reasons for using a bridging loan to give you some more ideas.
Frequently Asked Questions
Yes it can be possible to extend a bridging loan.
This will depend on your lender and how the loan has been conducted. Some bridging lenders are happy to make a short extension while others prefer to stick with the original term. Alternatively a re-bridge could be used to repay the original loan.
When you apply for a bridging loan you will need to choose the length of loan term that you need. This will be related to the reason that short term finance is required. Generally this is between 3 months to 24 months, 36 months at a push.
Regulated bridging loans are restricted to 12 months.
Learn more: How long can you have a bridging loan for?
Bridging loans are paid back all in one go. The way that you plan to do this is called your exit strategy.
Usually the interest, and sometimes the fees, are added to the loan and accrue interest themselves. This combined debt needs to be fully repaid at the end of the term.
The 2 main ways to repay a bridging loan are:
- Sale of property
- Refinance
Yes it is possible to repay a bridging loan early. They are flexible loans by design and will only have short terms of up to 24 months. If you choose to pay off the loan before it is due then the lender may apply early repayment charges.
A bridging loan is secured against a property. The only way to get out of a bridging loan is to repay it.
If you default on the repayment then the lender will repossess the security property and will pursue you for any additional costs.
The most popular ways of repaying a bridge loan are:
- Sell the property
- Refinance with a new lender
When a bridging loan comes to an end the lender will be asking for their loan to be repaid!
The amount due could be larger than the amount borrowed due to accrued interest and also any fees that were added at the beginning. Lenders will want the whole loan repaid in one go.
You can do this by selling the property that the loan is secured on, by other cash you may have or by refinancing the loan over to a new lender.
It’s important to remember that these short term loans aren’t really meant to be extended. Some lenders won’t extend the terms, so don’t rely on this as an option.
Yes you can refinance a bridging loan, this is sometimes referred to as a re-bridge.
You can apply to a new bridging lender and refinance with them, paying off the original lender in the process.
If the property is suitable you could apply for a long term mortgage (remortgage).
Or if the loan was originally used for property development, you may qualify for a development exit loan.
Both are short term secured finance arrangements.
Bridging is ultra flexible, is paid out in one go and can be used for almost any reason.
Development finance is based around a specific development, with payments made at timed intervals as the build progresses.
Read more: What is the difference between bridging and development finance?