Securing your dream home or an ideal investment opportunity often hinges on swift decisions and quick financing. This is where bridging loans step in as a valuable tool.
Bridging is most often thought of as a chain-breaker loan, helping you to move if the property chain breaks down. This is still the most popular reason but there are many other uses.
In this article will will answer the question: Can you buy a house with a bridging loan?
We will explain how bridging works, what it can be used for and how it can help you to buy a house.
What is a Bridging Loan?
Bridging loans are short-term loans secured against a property, designed to “bridge” the financial gap when you’re purchasing a new property but haven’t yet sold your existing one or had your finance approved.
It provides you with the necessary funds to complete your new purchase without having to wait for the sale of your current home. This can be particularly useful in fast-moving markets or when buying at auction, where speed is of the essence.
Lender’s are flexible with the amount you can borrow, but you will be limited to 75% LTV for the house you wish to buy. You will need cash to fund the 25% deposit.
Bridging loans are classed as regulated or unregulated:
Regulated
Regulated bridging loans are used when you’re buying a property you intend to live in. These loans are subject to stricter regulations and have a maximum term of 12 months.
A regulated bridging loan will take longer to arrange than an unregulated loan as there are more conditions for the lender and you to comply with.
Unregulated
Unregulated bridging loans, on the other hand, are for properties you won’t be living in, such as buy-to-let investments or properties in need of renovation. These loans offer more flexibility and can extend up to 36 months.
Repayment
Bridging loans are normally repaid in a single lump sum at the end of the term, either through the sale of your existing property or by refinancing onto a traditional mortgage.
You will need to pay back the full loan. plus interest, plus any fees that have been added.
While they offer a quick and flexible solution, it’s important to note that bridging loans do come with higher interest rates than standard mortgages.
Why Use a Bridging Loan to Buy a House?
Bridging loans can be a lifeline in various scenarios where traditional mortgage financing falls short:
Broken Property Chains
In the UK, property transactions often involve chains of buyers and sellers. If one link in the chain breaks, the entire process can collapse. A bridging loan can help you break free from the chain, allowing you to purchase your new property without waiting for the chain to complete.
Auction Purchases
Auctions often offer properties at below-market prices, but they require a quick turnaround for payment, usually within 28 days. Bridging loans can provide the funds needed to meet this tight deadline, giving you the buying power to secure properties at auction.
Properties in Need of Renovation
Properties requiring significant repairs or renovations are often deemed unsuitable for traditional mortgages by lenders. A bridging loan can finance the purchase, allowing you to make the necessary improvements and then secure a mortgage later.
Quick Purchases
In hot property markets, desirable homes can sell within days. A bridging loan enables you to make a swift offer, increasing your chances of securing the property before it’s gone.
Downsizing or Upsizing Before Selling
Whether you’re looking to downsize or upsize, a bridging loan can facilitate the move before your current property is sold. This gives you more time to find the perfect buyer without feeling pressured.
Buying Your Main Home with a Bridging Loan
While bridging loans are traditionally associated with property investors, they are a viable option for buying any type of property, including a main residence.
This is particularly true in the scenarios mentioned above, such as broken chains, the need for speed and certainty, or unexpected opportunities.
The finance allows you to literally move quickly, grabbing an opportunity or avoiding delays and hassle.
But don’t forget: Bridging is always short-term.
If you’re buying a house to live in, the bridge term will be restricted to 12 months (as it’s regulated).
In this situation, most people exit the bridge using a new residential mortgage. This new mortgage will be paid to your solicitor, who will then in turn, repay the bridging lender.
Read more: How long can you have a bridging loan for?
Buying Investment Property
Bridging loans are a popular choice for property investors for several reasons:
- Auction Purchases: As mentioned earlier, auctions require quick payment, making bridging loans an ideal solution. Also the properties are often in a state of disrepair.
- Refurbishment Projects: Bridging loans can fund the purchase and renovation of properties that traditional lenders might not finance due to their condition.
- Portfolio Expansion: Investors can use bridging loans to quickly expand their property portfolio without waiting for existing properties to sell.
- Speed and simplicity: The finance is approved quickly and you move to completion in good time.
Although bridging is a convenient choice for investors, it can also be quite expensive. So they will use the bridge to fund the purchase, then look to refinance using a longer-term mortgage like a buy to let mortgage or a holiday let mortgage.
Because these two transactions are quite close to each other, it’s important to be aware of the six-month rule for mortgages, which can cause unexpected issues.
Types of Bridging Loan
We have already mentioned the loans will be classed as either regulated or unregulated.
There are also:
Closed Bridging Loans
Closed loans have a fixed repayment date, making them ideal when you have a clear idea of when you’ll have the funds to repay, such as through the sale of your existing property. This certainty allows lenders to offer slightly lower interest rates compared to other types of bridging loans.
Normally used when you have already exchanged contracts.
Open Bridging Loans
‘Open’ loans offer more flexibility, as there’s no set repayment date.
This can be useful if you’re unsure when you’ll be able to repay the loan, but it comes at a cost – open bridging loans will have higher interest rates due to the increased risk for the lender.
First and second charge loans
In addition there are also first and second charge bridging loans.
If you are buying a house then the bridging loan will be set up as the first charge. A first charge loan is secured against a property that doesn’t have an existing mortgage, while a second charge loan is secured against a property that already has a mortgage.
What is an exit strategy?
These types of finance are short term by design and so you need a way of paying them back, all in one go. Having a solid and realistic exit strategy will help to get the lenders on your side, your loan won’t be approved without one.
The exit strategy should be realistic and credible enough to convince lenders that it can reliably be used to repay the bridging loan. At the end of the loan term, you are expected to repay the bridging loan in full, including any fees and accrued interest.
Your plan to repay the loan is one of the most important aspects of a bridging loan and all lenders will analyse it carefully.
With a main residence you are most likely to be using a new residential mortgage as your ‘exit’. ie the mortgage will be used to pay off the bridge.
Because of this the lender will want details of the new mortgage and will be checking your credit status and affordability.
How to Get a Bridging Loan
There are lots of banks and specialist lenders offering bridging finance, it’s a competitive market which helps to keep the rates down.
In our opinion bridging finance definitely needs a broker to help you get the best deal. Unless you are quite experienced yourself in short-term finance.
The first issue is choice. There are lots of lenders, but many exclusively work with brokers and advisers, they will not deal direct. By using a broker you get the pick of the bunch.
The second issue is how well the loan suits you. By this we mean the rates, the term, any ERCs etc. Our brokers will be able to make sure the loan suits your needs and circumstances, whilst remaining competitive.
Conveniently, as an FCA registered broker, we can also arrange the long term mortgage that will be need to pay of the bridge.
Be a cash buyer
Bridging loans give you the power to act as a cash buyer, even if you haven’t yet sold your existing property.
This is because the loan provides you with speedy approval upfront, allowing you to make an offer without being reliant on a mortgage approval or a property chain.
In the eyes of sellers, cash buyers are highly desirable.
They represent a smoother, faster transaction with less risk of delays or complications. This is especially valuable in competitive markets, where being a cash buyer can give you a significant advantage over other bidders.
The bridging market has come on leaps and bounds over the last 10-15 years.
It’s now a highly competitive marketplace with flexible borrowing options for all types of scenarios.
A successful application will depend on the property valuation and the exit strategy. If these two stack up, everything else should fall into place.
Just be mindful that bridging loans can be expensive, they charge interest each month, and this can soon add up.
To discuss how a bridging loan could help you, please call us on 020 8301 7930.