A bridging loan is a short-term loan borrowed by those that need access to capital quickly. This is usually in cases when a new property is being purchased before an existing one has been sold.

A bridging loan is highly flexible, giving borrowers access to large sums of money quickly. For this reason, a bridging loan is also secured, meaning the borrower must use a property or other asset as security to the lender.

If you are interested in taking out a bridging loan and want to know more about the costs involved, Seek Finance has put together this handy guide outlining everything you need to know about bridging loans in 2021.

How does a bridging loan work?

Before we look at the costs involved in a bridging loan, let’s start by looking at how it works.

As we’ve mentioned, a bridging loan is a way to borrow money on a short-term basis. A bridging loan is usually taken out to bridge the gap between the point where you wish to buy one property before selling another.

It’s important that you can provide evidence of an exit strategy to the lender, as this will give them confidence that you can repay the loan and when you can do this.

Why take out a bridging loan?

There are several reasons a bridging loan could be taken out. These include:

  • For the purchase of a property before the sale of an existing house
  • To buy a property at auction
  • To buy a property that is unmortgageable
  • To buy a property to develop
  • To buy a property as a buy-to-let investment
  • To pay a tax bill
  • In a divorce settlement

Types of bridging loan

There are two different types of bridge loan you need to be aware of, an open loan and a closed loan.

  • Open bridge loan: this is when the loan has no set repayment date. In other words, the loan can be paid back whenever the funds become available. The average term of a loan is usually 12 months, but this can vary.
  • Closed bridge loan: a closed bridge loan, on the other hand, does have a set repayment date. This is usually based on when you know you will have the funds to pay back what you’ve borrowed.

As an open bridge loan is more flexible and often considered riskier to the lender, they are usually more expensive than closed bridge loans.

However, it is worth bearing in mind that whichever type of loan you decide on, you will need to show you have a repayment plan in place.

First charge and second charge bridging loans

As well as open and closed bridging loans, there are also first charge or second charge loans.

When a bridging loan is applied for, the lender puts a charge to the property you’re using as security. This charge is a legal agreement that sets the priority of debts if you are unable to repay back the loan.

  • First charge loan: a first charge loan is when the bridge loan is the first or only borrowing secured against the property. A first charge loan is usually a mortgage, however, if you do not have a mortgage on the property, then a bridge loan can be the first charge loan.
  • Second charge loan: a second charge loan, on the other hand, is when there is a mortgage or other loan already on the property. In this case, the bridge loan will become a second charge loan, which typically requires the permission of the first charge loan lender before it can be added.

What are the advantages of taking out a bridging loan?

There are many benefits to taking out a bridge loan. These include:

  • They let you borrow large amounts of finance quickly
  • They are extremely flexible loans
  • The application process is quick and easy
  • They help to improve the chances of securing a property as they mean that you are a cash buyer

However, like with anything, there are also a few drawbacks to the bridging loan option. These include:

  • They can often have high-interest rates due to the fact that they are highly flexible
  • There are other types of fees attached to the bridging loan which can add up
  • They are secured against your home, meaning you could risk losing your home if you fail to pay the loan back

How much does a bridging loan cost?

Now you know what a bridging loan is and how one works, it’s time to look at how much one costs.

There are different costs involved in a bridging loan, including interest rates and bridging loan fees.

First, we’ll look at bridging loan interest rates and what you can expect to pay.

Bridging loan interest rates

Bridging loan interest rates will vary from lender to lender but can range from between 0.4% to 2%.

As with most loans out there, bridging loan interest rates can be either fixed or variable.

With a fixed rate, the interest is set at a fixed amount across the term of the loan. This means that every monthly payment you make will be the same.

With a variable rate, however, the interest you pay can change. It will be the lender that sets the variable rate, which is usually done in line with the Bank of England’s base rate, meaning your interest payments can go either up or down.

So, how do you pay the interest on your bridging loan?

Bridging loan interest rates can be charged in the following ways:

  • Monthly: with this option, interest is paid back monthly and is not added to the overall balance of the loan, which is paid off at the end of the term.
  • Deferred/rolled up: here, all interest is paid at the end of the bridge loan term. With this option, interest is still charged monthly, but payments are rolled back to the end of the bridge loan rather than being paid monthly.
  • Retained: finally, with the retained option, interest is borrowed as a lump sum which is agreed upon when you apply for the loan. This is then paid back at the end of the loan term.

There is flexibility in how you pay back your interest, with some lenders letting borrowers pay in monthly installments for the first period, say of 6 months, and then switch to paying retained interest rates for the following 6 months.

As well as interest, there are other bridge loan fees that will need to be paid.

Bridging loan fees

There are several different fees involved with bridging loans, these include:

  • Arrangement or facility fees: this usually stands at around 1-2% of the loan balance and is paid when you set up the loan. This lets the lender make a profit from the agreement.
  • Administration fees: this is the fee you will pay when the paperwork is completed at the end of the loan.
  • Legal fees: these cover the solicitor’s and lender’s legal fees. These are usually charged at a set rate.
  • Valuation fees: these are paid to the surveyor who values your property. It is a requirement of the loan that the property is valued. This fee will depend on a variety of factors including the property value, location and the type of valuation needed.
  • Exit fees: although not all lenders will charge an exit fee, some do. This is typically around 1% of the bridge loan and is charged if you decide to pay back the loan early.
  • Broker fees: if you are using a broker, they will often charge an upfront fee for processing the application. The broker’s fee can’t be added on to the loan and must instead be paid upfront.

How much can I borrow?

That’s how much a bridging loan will cost you, so how much will you be able to borrow?

Lenders usually offer loans ranging anywhere between £25,000 to £25 million.

You will be able to borrow a loan to value ratio of 75% of the property’s value. The loan is usually repaid by the sale of an existing property or by raising finance through a mortgage.

If you are taking the bridging loan out as a first charge loan, you should be able to borrow a bigger amount than if you were taking the loan out as a second charge loan.

It’s possible to get a bridging loan with a loan to value ratio of up to 100%, however, the lender will typically need you to put in extra security, such as securing the loan against an additional property.

Most lenders consider the following types of property as security:

  • Houses, flats and bungalows
  • Warehouses
  • Factories
  • Shops and shopping centers
  • Restaurants and pubs
  • Plots of land
  • Hospitals
  • Nursing homes
  • Sports facilities

How much you can borrow does also depend on your credit rating. Lenders will usually favour those who have a positive credit rating.

However, if you do have a bad credit score not all is lost. Many lenders will still consider your application. It might just mean that you are considered a riskier borrower, and therefore face slightly higher interest rates, making the loan more expensive for you.

As bridging loan rates vary depending on the lender and how high risk the borrower is considered, in order to get the best rates possible, there are a few things you can show to the lender, including:

  • Having a strong exit strategy
  • Having a good credit rating
  • Having previous experience with property
  • Having good security

How to apply for a bridging loan

Once you’ve decided that a bridging loan is the best route forward for you, you will need to know how to apply for one.

  • The first step should be to establish what it is you need from a bridging loan, this includes how much you wish to borrow and how long you would need to borrow this amount for.
  • Next, you need to collate important information surrounding your present situation. This includes looking at information such as how much your property is worth, whether you have a mortgage, how much your mortgage is and how much equity is in your property. By gathering this information you will be better equipped to find a bridging loan that fits in with your needs.
  • Speak to Seek Finance’s specialists who can help you discuss your borrowing requirements and help you with the next steps.

The good news is that having applied for a bridging loan, you should get a decision within 24 hours. Following this, it takes around 2 weeks for the application to be processed, in which time the correct checks and balances are carried out, as well as the property valuations and the transfer of funds.

There are many places you can get a bridging loan from, ranging from banks to specialist lenders, so it’s always important to do your research to see which the best provider for you will be.

Are there any alternatives to bridging loans?

There are some alternative options to bridging loans if one isn’t quite right for you under your specific circumstances.

One alternative option to consider is a let-to-buy mortgage. This option lets you remortgage your current property onto a buy-to-let mortgage, using the equity that has been released to buy a new property.

You could also consider getting a second mortgage or remortgaging your home to free up funds.

Other options include:

  • Homeowner loans
  • Commercial loans
  • Secured loans
  • Commercial mortgages
  • Buy-to-let mortgages
  • Invoice finance
  • Mezzanine finance

However, if you have decided that a bridging loan is the right move for you, Seek Finance is here to help.

Let Seek Finance help with the next steps

Although bridging loans can attract relatively high interest rates, there are several benefits to taking one out. After all, they allow you to borrow large sums of money on a short-term, flexible basis, helping tide you over whilst purchasing a new property.

This can help you secure your dream property or investment opportunity quickly and easily.

If you want to find out more about how to progress with applying for a bridging loan, Seek Finance is here to help you with the next steps. Get in touch with our expert team today to talk through your short-term borrowing requirements and see how we can help you find the best bridging loan for your needs.