A bridging loan is essentially a short-term loan that bridges the gap between purchasing something and waiting for funds to arise elsewhere. Whilst they’re commonly used when purchasing a house before the sale of a current property, they can be used for a wide variety of reasons; it can also be used for property development, business ventures, divorce settlements and paying tax bills.

Bridging loans: how do they work?

Bridging loans are secured, which means that you have an asset that the loan provider can repossess upon failing to make repayments. In the example of a property bridging loan, the loan will be secured against your new home.

Generally there are two types of bridging loans: open and closed. 

Open bridge loans have no fixed end date. Whilst they’re usually expected to be paid back in full within a year or two, there’s no fixed date unlike closed loans.

Closed bridge loans have a pre-agreed end date for repayment. This is common if you’ve already exchanged contracts for a property purchase, or another form of certainty.

There will likely be a burden of proof regarding your ability to repay the loan. In the example of a property purchase, they will require the purchase price, details on the property, and evidence that you’re trying to sell your home.

Choosing a bridging loan

It’s important to get the right bridging loan in order to avoid mis-payments or overpaying interest. Here are some of the things you need to decide:

• How much do I need to borrow? This will depend on the size of your purchase, and how much capital you already have available. Generally, bridging loans range from a few thousand all the way up to £15 million and more.
• How much can I borrow? The amount you can borrow will go down to several factors, the most prominent of which is how much your property is worth.
• Do you have a mortgage? Whether you have a mortgage or not on your property purchase will determine how much you can borrow.
• Length of loan. Bridging loans are short-term, so there’s not a lot of choice. You can still often choose between a month and a year, and potentially two years.

Other things to consider when getting a bridging loan

Fixed rate vs variable rate

As with mortgages, there are two types of repayment plans regarding interest rates. Fixed rate bridging loans are where your monthly repayments will remain constant, which offers more certainty. 

Variable rate bridging loans however mean that the interest rate can change. Whilst this is set by the lender, it is in-line with the Bank of England Base Rate. Given that the current base rate is 0.1%, there’s not a tonne of room for it to decrease. Despite the base rate being unlikely to rise, there isn’t much scope for benefit regarding variable rate loans.

First charge vs second charge

If you’re unable to make repayments, a secured loan provider can seize your assets (or in this example, property). If your property is seized and sold in order to pay off outstanding debts, there would be an order of priority for who gets paid first.

First charge loans essentially mean the bridging loan is the first and/or only loan that’s using your property as security. This is usually in the event of not having a mortgage, because they’re almost always first charge loans.

Second charge loans, however, are when there is already a first charge loan or mortgage against the property. In order for the provider to issue a second charge loan, permission needs to be granted from the first charge loan providers.

Where to get a bridge loan

Bridging loans can often be found at property financing companies such as LendInvest and Octopus, from banks or from alternative lenders online. Alternatively, mortgage brokers such as IMC Financial Services can organise bridging loans with the addition of personalised guidance, which could be important for large, higher interest loans.

Property financing companies such as LendInvest and Octopus commonly offer bridging loans. Alternatively, we’d always recommend speaking to an experienced mortgage advisor. At IMC financial services, our mortgage and loan experts work with you to understand your financial situation, and find you the best credit options available. If you’re currently looking to secure a bridging loan, get in touch with us today.