The world of property and loans go hand-in-hand with both private individuals and commercial property owners and developers making use of these financial instruments in order to secure sales and purchases of properties. One such loan in the field of property finance is the term bridging loan. But this can be a rather confusing concept to some and this is why we’ll take a close look at what it is and answer some of the most frequently asked questions about it with a supporting example to help you make more sense of it. So, without further ado, let’s take a look at what a bridging loan actually is.
What is a bridging loan in the UK?
Before navigating the field of property sales and purchases, it’s important to familiarise yourself with key concepts. The first of these is a bridging loan or bridge loan. But what is a bridging loan? The bridging loan meaning can be explained as a way of achieving set objectives in the sale and purchase of properties in the UK. These objectives are purely financial and as a result, a bridging loan acts – quite literally as a bridge – between two financial events happening.
For example, say that you’re in the process of selling your house and you need a deposit to purchase a new home. When you don’t have this deposit on hand as yet, because the sale of your property has not gone through, a bridge loan may be a quick solution to gaining access to financing to ensure you secure the purchase of your new home.
Another example would be in the case of buying a property from an auction house. Many buyers do not yet have large sums of cash on hand, and by using a bridge loan, they’re able to secure their purchase with a promise to pay it back later. However, this time frame is usually much shorter than a mortgage – ranging from a few months to a couple of years (around two years).
It’s also important to know at this stage that there are two main types of bridging loans available to individuals in the UK. These are open bridge and close bridge. Whereas the former relates to bridge loans that have no fixed repayment date but rather when the funds from the proceeds of a sale become available to you, the latter refers to bridge loans that do.
In essence, much like any form of loan out there, a bridging loan, too, carries interest rates (usually quite higher than a mortgage, for example), and this must be repaid on time. The ultimate purpose of these loans is to be a short-term financial solution to property buyers and sellers in various scenarios in order to help them gain faster access to financing which they otherwise wouldn’t be able to get. Therefore, this should answer the question of how does a bridging loan work?
How much does a bridging loan cost?
It must be kept in mind that because bridging loans are typically provided for a much shorter time frame (anything from a couple of months to two to three years), they bear a bridging loan interest rate. This rate will vary from one provider to the next. And if you’re wondering what is the average interest on a bridging loan, the answer is a bit complex.
The reason for this is because you can either pay fixed or variable interest rates which will either mean that you pay a fixed sum over a set period, or pay varying sums over a set period. As a result, if you are asking do you pay monthly repayments on a bridging loan – the answer will again be “it depends”. Because this will depend on your particular case in question, your ability to repay, the type of interest you’re required to pay (whether fixed or variable), and more.
So, how much is a bridging loan altogether? Although this will depend on your specific situation, you should bear in mind that there are several costs associated with this type of loan and these costs may include:
- Arrangement fee
- Valuation fees
- Administration fees
- Redemption fee
- Solicitor fees, and
- Broker fees
With all that being said, it’s also crucial to keep in mind that lenders usually seek some type of security when offering financing. As a result, when it comes to the question of do you need a deposit for a bridge loan, the short answer is that it is preferable and in most cases, you will be required to provide a deposit of around 20% to 30%, but there are some instances (albeit rare) in which you can get a bridge loan without such a deposit.
How to get a bridging loan
There are several bridging loan requirements that you need to meet in order to ensure that you get the financing that you are looking for. A small caveat at this point is to mention that although many other loan types require a good credit history and score, bridging loans typically do not take this into account. A possible reason for this is that you’re providing security through the sale of your property and this gives the lender assurance that you’ll be able to make back the payments. But who can actually apply for a bridging loan? Is this loan type available to some people and not others? Let’s take a closer look. According to sources, the following individuals may take out a bridge loan:
- “A private individual, partnership or limited company
- Purchasing or refurbishing residential or commercial property.
- Over the age of 18 years (however, some lenders have an upper age limit)
- Live or have a registered address in the United Kingdom
- Has a form of security – usually one or more properties that the loan can be secured against
- Has a defined exit route – plans to sell the property, refinance or money due to be received
- Wants to borrow at least £10,000, and is
- Employed, self-employed or retired.”
How long does it take to get a bridging loan?
Once you’ve decided that a bridging loan is for you and that you meet the criteria of a borrower, another frequently asked question is how long does it take to get a bridging loan. Some sources indicate that the fastest a bridging loan has been granted has been in a matter of 10 hours only. But this is a rare and exceptional case and in most situations, you will need to wait for approval that may take anything from a few days to a few weeks to be granted.
A similar query that’s raised as well is “how long is a bridge loan” Once again, this will depend on the specific terms of the bridging loan agreement that you have agreed upon with your lender of choice.
Is a bridging loan the same as a mortgage?
In short, a bridging loan is not the same as a mortgage and there are several important differences between them. The first of these is the duration of the loans. Mortgages last for up to several decades whereas a bridge loan can be for up to a period of three years. In addition to this, mortgages are usually higher value with lower interest rates, and bridge loans on the other hand, are of a lower value than a mortgage with higher interest rates (although these can be fixed or variable as mentioned earlier).
Other related questions when it comes to bridge loans and mortgages include: does a bridging loan affect a mortgage application and do you pay two mortgages with a bridge loan? We’ll cover these in some more detail below.
Regarding the first question, a bridging loan will not necessarily affect a mortgage application, although here, you should consider your credit score and credit history in terms of your mortgage application. And speaking of credit scores, you may be wondering does a bridging loan affect your credit score? The answer is that it will depend on the lender, although in some cases lenders will not look at your score but your overall credit rating that’s present in your file.
And moving on to the second question (if you pay two mortgages with a bridge loan), the short answer is that you can. Although whether you’re using the bridge loan for residential or commercial purposes will have an effect on this query.
What is a bridge loan example?
Say, for example, that you’d like to purchase a property that’s valued at 500,000 GBP. You need a 100,000 deposit on the property but you only have 20,000 GBP in cash and savings. This leaves you with a balance of 80,000 GBP outstanding that you need to source or acquire from a lender. This is where bridging finance comes in. This is one solution that you can opt for to help you get the 80,000 GBP and essentially “bridge the gap” between where you are currently lacking funds and what you’re actually in need of financially. To ensure this loan can be repaid, you will also need to make sure that the current property you live in (if, for instance, you own it fully it is not subject to a mortgage), once sold, will be able to help you repay the bridging loan amount. The cases vary, however, from individual to individual, and will also be different for private individuals and commercial developers.
Wrapping up
We hope that this article has provided you with some clarity about the world of property ownership, purchases and sales and the role of bridging finance in this structure. Although it may seem a bit confusing and daunting at first, it’s important to remember that bridging finance is more of a short-term solution that comes at a cost. It is therefore advisable to weigh up your options and see which one is best for your particular case. And if you need any other property related advice, feel free to get in touch with the pro estate and letting agents in Hull and Beverley to make sure you have more peace of mind when it comes to buying or leasing a property.
