Bridging loans are used to fill known gaps in cash flow between buying and selling assets. They are extended for a limited period that could be as little as several weeks, up to at most a few years. Bridging loans are used extensively in corporate finance and commercial real estate. However, they can also be useful for homebuyers under some circumstances, such as escaping a property ‘chain’ by closing the purchase of a new house before selling an existing one.
Use of bridging loans has increased substantially among homebuyers in the UK in the past 15 years. From a regulatory standpoint, bridging loans in which the borrower will occupy the property are considered mortgage contracts and are regulated by the Financial Conduct Authority (FCA).
Bridging loans can be ‘closed’ or ‘open’. A ‘closed’ loan has a fixed repayment date, while an ‘open’ loan does not, though it may have a fixed maximum duration, such as 12 months. Lenders will require evidence of a repayment strategy – such as selling the property. Additionally, bridging loans are set up as interest-only loans, where the principle is repaid in full only at the end of the term.
Care should be taken when comparing costs to traditional mortgages, since interest rates are quoted monthly. Since bridging loans are intended to be short-term, they are more expensive compared to ordinary mortgages, typically 0.5-1.5% per month, substantially higher than a normal residential mortgage. They will also usually have tighter loan-to-value restrictions than a traditional mortgage, and setup and other fees should also be factored into the calculation. It is worth also noting that ‘closed’ loans will be cheaper than ‘open’, since the repayment date is known in advance.
Bridging loans can be first or second charge. This determines which lenders are repaid first in the event of a default. A second charge bridging loan means that the property already has a mortgage secured against it, and the existing mortgage debt will be paid first. However, mortgage-free borrowers, or those using a bridging loan to repay a mortgage on the same property, would take out a first charge loan. In this case, they would benefit from both a lower interest rate and a higher loan-to-value limit.
One of the major advantages of these loans is speed. A bridging loan can often be set-up much faster than a mortgage, potentially in less than 24 hours. The process is also much less intrusive, typically involving filing out an online application form or answering some questions by phone.
Since bridging finance typically has less stringent terms than traditional mortgages, it could also be useful for residential buyers in non-standard environments, such as those buying a property at auction or buying a derelict property that must be renovated before it can be mortgaged.
Using their in-depth knowledge of the industry and extensive contacts at lenders, a bridging loan broker will be able to guide you through the process of applying for a loan, saving you valuable time and finding you the best deal to match your circumstances.
