Bridging loans can be a valuable tool for property buyers who need to move quickly, whether to secure their dream home or capitalise on an investment opportunity.
However, it’s important to understand that bridging loans will require a deposit, just like a traditional mortgage.
Understanding Bridging Loan Deposits
What is a bridging loan?
Bridging loans are short term secured loans that work in a similar way to regular mortgages. The loans need to be secured against a specific property and there needs to be cash input from the borrower (the deposit).
What is a deposit?
When you buy a house using a mortgage, you will be required to pay a cash deposit, in addition to the mortgage money.
Cash deposits are also required by bridging lenders, without a deposit they would be funding 100% of the purchase price.
For all lenders, the deposit reduces their exposure should you be unable to maintain the mortgage repayments. For bridging loans, the deposit plays an important role in determining your eligibility and the terms of your loan.
Do You Need a Deposit for a Bridging Loan?
Yes, bridging loan lenders will require a deposit, the same as a regular mortgage lender.
As a broad rule, bridging loans normally require a 25% deposit.
Here’s a quick example:
| Purchase price/value | £400,000 |
| Bridging finance 75% | £300,000 |
| Own money deposit 25% | £100,000 |
The actual deposit required, and loan to value, will depend on your own circumstances and the property you need to finance.
Bridging deposits can range from 20-40% of the purchase price or property value. However, as we’ll explore later, some lenders may offer loans with lower or even no deposit requirements under specific circumstances.
Deposit vs. Equity: A Key Distinction
It’s important to understand the difference between a deposit and equity:
Deposit
The upfront cash payment you make towards a property you wish to buy. This money would need to be transferred from your bank account to the conveyancing solicitor.
Equity
Equity is the monetary value of your current ownership in a property, after the mortgage balance has been deducted from the property value.
When is a deposit not a deposit?
We might be crossing in to semantics here but bear with us.
Lenders aren’t keen on lending 100% of a property value. They take all of the risk, and you take none of the risk. So they ask for a financial contribution to lower their stake.
A deposit will normally relate to a cash payment from the purchasers (you) own savings. If you put in 25% as cash then the lender’s stake drops to 75%.
But the equity you already own in a property can be used in place of a cash deposit. A good example of this is when raising money without moving or purchasing another property.
You use your equity to borrow against the property value, up to an overall maximum of 75% loan to value.
Read more: Do you need a deposit to remortgage?
Can you use a bridging loan for a deposit?
Yes, it is possible to use a bridging loan for a house deposit. This works where you already own a property (or properties) and wish to buy another.
You apply for a mortgage to buy the new property, often this will be capped at 75% LTV.
You could then take out second charge bridging finance on one of your existing properties, for the 25% deposit you need as ‘cash’. It’s important to remember that bridging finance is a lot more expensive than regular mortgages, and it’s designed for short term borrowing.
In this simple example, you would need to have an exit strategy that repays the bridging loan within the agreed term.
Read more: Second Charge Bridging Loans
Can you get a bridging loan without a deposit?
While uncommon, 100% loan-to-value (LTV) bridging loans are possible if you have sufficient equity in another property. This means you could borrow the entire purchase price without a cash deposit.
A 100% bridging loan is short term finance where the amount of money lent to you matches the value of the property being purchased.
Bridging lenders usually only offer 75% of the property value so these loans are a bit harder to find.
How Does It Work?
Bridging loan lenders will not want to lend 100% of the value of any one property, their exposure will be too high.
However, if you can include another property, to enhance the security position, then the lender can look at the overall risk position which should be much better. This extra property will need to have sufficient equity in it to make the sums work.
For example, if you wanted to buy a property at auction for £100,000 to refurb and then sell on you would need a cash deposit of £25,000. If you bring your own home or another owned property into the deal this allows the bridging lender to advance you the full £100,000.
The £100,000 bridging finance is secured against both properties.
So you can buy a property with no money down.
Bridging Loans and Deposits: Real-World Examples
Let’s explore how bridging loans and deposits work in practice:
Using a Bridging Loan for a Deposit:
You’ve found a second property that you would like to buy, but your capital raising remortgage isn’t ready yet. A bridging loan can bridge the gap:
- Secure the Loan: You get a bridging loan to cover the deposit on the new property.
- Complete the Purchase: You buy the new property while your remortgage application gets processed.
- Repay the Loan: Once the remortgage is approved, you use the proceeds to repay the bridging loan.
This lets you act fast, secure the property, and potentially negotiate a better price. However, be aware of the higher interest rates and the need for a solid repayment plan.
Auction Purchases:
Bridging loans are often used in the fast-paced world of property auctions:
- Secure the Loan: Get a bridging loan pre-approved before the auction.
- Bid and Win: If you win the auction, your bridging loan will be ready to go.
- Repay the Loan: Repay the loan once you secure long-term finance or sell another asset.
This provides the speed and flexibility needed to complete an auction purchase quickly.
Read more: Guide to Property Auction Finance
Chain Break Bridging Loans:
When a property chain collapses, a bridging loan can be your saviour:
- Break the Chain: Get a bridging loan to buy your new property, allowing the seller to move on.
- Complete the Purchase: Secure your new home without waiting for the entire chain to align.
- Repay the Loan: Once your existing property sells, you use the proceeds to repay the loan.
This saves your purchase, avoids delays, and strengthens your negotiating position. However, remember the higher interest rates and the need for a reliable exit strategy.
Read more: What can a bridging loan be used for?
Choosing an Exit Strategy
A vital aspect of any bridging loan is the exit strategy – your plan for repaying the loan at the end of its term.
Lenders will scrutinise your exit strategy closely when considering your application, as it demonstrates your plans to repay the loan and mitigates their risk.
What is a Bridging Loan Exit Strategy?
Simply put, it’s a structured plan of how you intend to repay the borrowed amount, plus interest and fees, when the bridging loan term ends. It’s essential to have a realistic and well-defined plan in place before applying for a bridging loan.
Common Exit Strategies for Bridging Loans:
- Sale of the Property: The most common strategy is to sell the property purchased with the bridging loan. This could be your existing home (in the case of a chain break) or a property bought at auction or for refurbishment.
- Refinancing to a Traditional Mortgage: Once the property is ready, you can refinance onto a standard mortgage with lower interest rates and longer repayment terms. This is a popular option for refurbishment projects or when buying a property that initially doesn’t meet standard mortgage criteria.
- Sale of Another Asset: If you have other assets, such as shares, bonds, or another property, you could sell them to repay the bridging loan.
- Equity Release: If you have sufficient equity in another property, you could release some of that equity through a remortgage or second charge loan to repay the bridging loan.
- Savings or Investment Income: If you have substantial savings or investment income, you could use those funds to repay the loan.
Here are some factors to consider when choosing an exit strategy:
- Timeframe: How long do you realistically need the bridging loan for?
- Property Value: What is the expected value of the property at the end of the loan term?
- Financial Resources: What other assets or income sources do you have available to repay the loan?
- Market Conditions: What are the current and predicted property market conditions?
Read more: Bridging loan exit strategies
Bridging loans are incredibly flexible and can be a powerful option for unlocking property opportunities, but understanding deposits is important for success.
Remember:
- Most bridging loans require a deposit, typically 20-40% of the property value.
- The deposit you provide affects your LTV ratio, interest rate, and loan terms.
- Equity in a property is key for eligibility.
- Alternative deposit options exist beyond cash.
- 100% LTV bridging loans are possible in certain situations.
Ready to chat? Just give us a call on 020 8301 7930 to see how we can help.
Frequently Asked Questions
Lenders require a solid exit strategy to assess the risk of lending to you. It demonstrates your ability to repay the loan as they have no wishes to lend for the longer term.
While it’s possible to change your exit strategy, it’s best to have a clear plan in place from the outset. Discuss any potential changes with your lender or mortgage broker as early as possible.
Yes. You will either need a cash deposit or available equity in another property. Bridging lenders typically go up to 75/80% LTV.
Yes, you can use equity from another property as security for a bridging loan. This can be extracted with a secured loan, remortgage or another bridging loan, or some lenders offer cross-collateralisation, where they take a legal charge over two properties.
Yes, this is a common use case for bridging loans, especially in chain break situations. You can use a bridging loan to cover the deposit on a new property while waiting for your existing property to sell.
Yes this is quite a normal situation. In most cases the current mortgage stays unchanged, although the lender will need to agree to the new bridge loan. This will be in the form of a second charge bridge.
Yes, easier than you probably think. Bridging finance is quick and easy to arrange.