A bridging alone is essentially an advance, given by a lender to tide the borrower over until an expected source of income comes in. These days the term is most often used in reference to the purchase of property. Typically a bridging loan is used to facilitate a move between properties where a party has had an offer accepted on the house they want to buy, but are having trouble selling. The loan is obtained to fund the purchase of the house and stop the deal falling through on the understanding that the borrower will be able to clear the debt once the impending sale of their own home goes through.
Alternatively, it may be used by somebody who needs to raise finance quickly and doesn’t have time for a mortgage to be arranged, for example, someone whose bought a property at auction and needs to pay before the agreed settlement date. Likewise, a developer might use a bridging loan if the property they’re buying is uninhabitable and cannot be mortgaged.
Normally, you’ll be able to borrow up to 80% of the equity of your property and the loan will last for a term spanning from a few months to a year or more. There is usually a minimum amount you can borrow between £10,000 and £30,000.
There are two types of bridging loan:
Closed: This is where you have a clearly defined arrangement in place for obtaining the capital to clear the loan. For example, you may have already exchanged on the sale of your property and, therefore, are able to demonstrate to a lender that your sale is unlikely to fall through.
Open: This is where the sale of the property you are moving out of is not yet assured. Obtaining finance in this scenario is much more difficult and lenders will need to find ways of assuring themselves that you’ll be able to repay them.
What Interest Rates Can I Expect?
Bridging rates are not cheap. In general you’ll be charged interest monthly at between 2% to 3% above the base rate set by the Bank of England, on top of which you’ll need to pay an arrangement fee which could cost you as much as 1.5% of the loan value. Even ignoring the fee, if you work out the rate in terms of APR, it will be in the region of 20% or so, more than double what you’d expect to pay on a mortgage.
In general, the lower the interest rate on offer, the higher the arrangement fee you’ll be charged and vice versa. Getting the best deal for you depends on the amount you are borrowing and how quickly you expect to repay the money. If you have a set date by which you are confident you’ll be able to clear off the loan, calculating whether a higher fee or a higher interest rate will favour you is a simple business.
What Are The Risks?
Defaulting: These loans are only cost effective in situations where they prevent the chain of your move falling apart and thus ensure that the money you’ve spent on all the previous arrangements won’t be wasted.
It’s imperative that you have an exit strategy in place otherwise you could end up lumbered with a mortgage-sized loan with a very high rate, which on top of your actual mortgage, you’ll likely find impossible to pay. As a result you’ll have no choice to default and may even have to consider becoming insolvent. As you’ll see below, given the securities your lending against you’ll have a lot to lose.
Double Security: Some lenders will demand not only your current home, but also your new property as security. This means both could be at risk if you are left unable to get rid of the first. Again it needs to be stressed, you should be highly confident of selling the first property if you’re taking a bridging loan to facilitate a move. (On a more positive note, offering both properties as security will make the loan cheaper.)
Lack of Regulation: Bridging loans only have to be regulated if they are ‘first charge’. (This means they are the primary source of finance being used to buy the property. This would apply if there’s no mortgage in place, or if you aren’t going to be using a mortgage.) If they are second charge, they won’t necessarily be subject to regulation. Given the consequences you could face if the loan becomes unmanageable, you may prefer to have the option of complaining to the financial ombudsman.
What Are The Benefits?
Become a Cash Buyer: If you’re not going to be using a mortgage to purchase your new property you are essentially a cash buyer. This can help you wrangle a discount as this is generally how people prefer to be paid. It can also help you save costs such as arrangement fees or commission to mortgage brokers.
Only Pay For The Credit You Use: In most cases there are no fees for early repayment so you only pay for the credit for the period in which the gap between purchase and sale actually needs to be ‘bridged’.
Save A Chain Collapse: Whilst bridging loans are expensive, so is the process of arranging a move. If things fall apart the money you’ve spent on valuations, surveys and other such costs of moving house will have been for nothing.
Speed: These loans can be arranged very quickly. Indeed, with some lenders you may even be dealing in hours rather than days, let alone weeks or months. This is vital if you are looking to save a chain.
Retained Interest: You will normally have the option to avoid paying interest on a monthly basis. Instead you can defer and pay it all at once when your lump sum comes in.
Using a Broker: Bridging finance brokers
How Can I Obtain A Bridging Loan?
As well as a good credit history, you will have to pass affordability tests to show that you can handle the finance in your hands going forward. This will include giving details of your exit strategy. This might be a loan offer, an exchanged contract, a missive to sell on or a decision in principle from a bank.
Depending on the lender in question the type of property you want will also factor into whether or not you can fund a purchase in this manner. As bridging loans are a specialist product, it can be worthwhile investigating lenders that deal exclusively in such loans, however, they are now widespread enough that highstreet banks also offer them.
What Are The Alternatives?
Letting: By remortgaging your current home you can release the equity you need to put down a deposit on the house you’re looking to buy. You’ll pay the new mortgage out of your income whilst converting the mortgage on your old property to a buy-to-let product. The rent paid to you by your tenants will cover your repayments on the first loan.
Obviously, this will only work if you are confident of finding tenants willing to pay high enough rent, which will depend on the area of the country you’re based in. You can, of course, always sell the property later.
A No Fee Mortgage: If you obtain a No Fee Mortgage (a mortgage where appraisal and arrangement fees are waived in return for a higher rate) on your new property then you maybe able to finance the purchase of a new property even before releasing the equity from your existing assets. This could end up being far more affordable in the long run provided you can cover both loans during the period between purchase and sale.
Wait: The simplest solution shouldn’t be overlooked. If you are struggling to sell your home as it is, taking out what essentially amounts to a second mortgage isn’t going to anything to make it easier to get your sale through, but it will up the stakes massively. By putting yourself under such pressure you’re going to weaken your position as a seller.
