Bridging loans are a popular short-term financing option in the UK property market, providing a quick way to secure funds for property purchases, renovations, or even auction buys. But because these loans often come with higher interest rates and shorter terms, many borrowers wonder whether remortgaging after a bridging loan is a viable option.
In this blog post, we’ll explore the process of remortgaging after a bridging loan, how it works, and what to consider when transitioning from short-term to long-term financing.
What Is a Bridging Loan?
A bridging loan is a short-term financial product designed to “bridge the gap” between the purchase of a property and securing longer-term financing or the sale of another asset. Bridging loans are typically used in situations where a buyer needs funds quickly, such as purchasing a new home before selling an existing one, or buying a property at auction.
Bridging loans are generally interest-only, meaning you only pay interest during the loan term, with the principal repaid at the end of the term or when your financial situation changes (e.g., you sell a property or secure a mortgage).
Can You Remortgage After a Bridging Loan?
Yes, you can remortgage after a bridging loan. In fact, transitioning to a traditional mortgage is a common exit strategy for many bridging loan borrowers. Once the immediate financial need is met (e.g., the purchase of a property), borrowers typically look to remortgage onto a longer-term, lower-interest mortgage.
Here’s how it works:
- Complete the Bridging Loan Objective: The first step is ensuring you’ve used the bridging loan to complete your objective, whether it’s securing a property, carrying out renovations, or completing a sale. Once you’ve achieved the goal, the next stage is to arrange long-term finance to pay off the bridging loan.
- Apply for a Mortgage: After you’ve completed your immediate financial need, you can apply for a residential mortgage (if it’s a home purchase) or a buy-to-let mortgage (if it’s an investment property). If the property has been renovated, improved, or sold, you can use the proceeds or new property value to remortgage and pay off the bridging loan.
- Property Valuation: As part of the remortgaging process, your mortgage lender will conduct a valuation of the property to determine its current market value. This is crucial because if the property has increased in value due to renovations or market conditions, you might be able to access a better loan-to-value (LTV) ratio, potentially improving your mortgage terms.
- Exit Strategy: When you initially took out the bridging loan, you would have needed an “exit strategy” to repay it. Remortgaging onto a traditional mortgage is one of the most common exit strategies. If you already have equity built into the property, it may be easier to secure a favourable mortgage rate.
Benefits of Remortgaging After a Bridging Loan
- Lower Interest Rates: Bridging loans typically come with higher interest rates than traditional mortgages because they are short-term, high-risk loans. Remortgaging allows you to move onto a product with much lower interest rates, making your repayments more affordable in the long run.
- Longer Repayment Terms: Bridging loans are designed for short periods, usually between 6 and 12 months. By remortgaging, you can switch to a mortgage with a longer repayment term, usually 25 to 30 years, which provides more time to pay off the loan at a lower monthly cost.
- Stabilising Your Finances: Bridging loans are meant for temporary financial situations. By remortgaging, you can stabilise your financial situation and move from short-term borrowing to a long-term solution.
- Take Advantage of Increased Property Value: If your bridging loan was used to finance property renovations or improvements, your property may have increased in value. This can give you access to better mortgage deals when remortgaging, allowing you to benefit from improved equity in the property.
What to Consider When Remortgaging After a Bridging Loan
- Timing: It’s important to remortgage before your bridging loan term ends to avoid paying any additional penalties or fees. Most bridging loans have a fixed term, and failing to repay them on time can lead to increased costs. Plan ahead to ensure your remortgage is in place before the loan matures.
- Affordability: When applying for a mortgage, lenders will assess your affordability, including your income, outgoings, and credit history. If your financial situation has changed since taking out the bridging loan, you’ll need to ensure you meet the mortgage lender’s criteria.
- Credit History: Some lenders might be cautious if you’ve recently taken out a bridging loan, as it may appear riskier. Ensure that your credit score and financials are in good order before applying for a remortgage.
- Property Type: Certain types of properties, such as commercial or mixed-use properties, may require a specialist mortgage product. In these cases, it’s advisable to consult with a commercial mortgage broker who specialises in complex mortgages to find the best deal.
The Role of a Mortgage Broker
If you’ve taken out a bridging loan and are now looking to remortgage, seeking advice from a mortgage broker can be extremely beneficial. Brokers have access to a wide range of mortgage products and can guide you through the complex process of transitioning from a bridging loan to a long-term mortgage. They can help you find the best deal tailored to your needs and circumstances.
Conclusion
Remortgaging after a bridging loan is a common and effective exit strategy for property buyers in the UK. It allows you to transition from a short-term, high-interest loan to a longer-term, lower-interest mortgage, helping you manage your finances more effectively. If you’re considering remortgaging after a bridging loan, planning your exit strategy in advance and seeking professional advice is crucial to ensure a smooth transition.
