A bridging loan is a type of finance for those that need short-term, immediate access to funds.

Taking out a bridge loan can be helpful for those looking to purchase a new property before the sale of their existing one, helping to ‘bridge the gap.’

If you’re looking to find out more about bridging loans to see if this a good option for you, Seek Finance has put together this handy guide outlining how bridge loans work, when you would use one, how much they cost and how much you can borrow.

What is a bridging loan?

As we’ve mentioned, a bridging loan lets you borrow a sum of money on a short-term basis, with the average term of the loan being 12 months.

Bridging loans are used for those that need finance while they are waiting for longer-term funding. This type of loan is usually used for one of the following reasons:

  • To purchase a property at auction where cash is needed quickly
  • To purchase a property before the sale of an existing property has been made
  • To buy an investment property to either rent out or sell
  • To cover a tax bill
  • For a divorce settlement

How does a bridging loan work?

There are two types of bridging loan available, these include:

  • Closed bridging loan: with a closed bridging loan a fixed repayment date is set. A closed loan is usually given to those that have already exchanged contracts but are waiting on the completion of the property sale.
  • Open bridging loan: the other type of bridging loan is an open loan. Unlike a closed bridging loan, with this option, there is no set repayment date, and therefore this is the more flexible of the two. Here, the lender will usually want to see evidence of a repayment plan. As open bridging loans can be considered riskier for the lender, they can also be more expensive to take out.

When a bridging loan is taken out, a charge is placed on the property. This is a legal agreement that prioritises which lenders will be paid back first in the case that you fail to repay the loan.

There are two types of charge.

A first charge loan is the first or only loan secured against the property. A second charge loan refers to when you take out another loan on an asset which you already have a mortgage or a loan on.

Who can take out a bridging loan?

In the UK, bridging loans are available to both individuals and businesses.

They are typically used by landlords, investors and property developers, but are also taken out by individuals who are in need of short-term finance.

How much does a bridging loan cost?

As bridging loans are short-term loans, they are usually priced monthly rather than annually.

As they are highly flexible loans, they can be fairly expensive for this reason. Fees for bridging loans can sit between 0.5% and 1.5% each month, making them more expensive than standard mortgages.

However, in the last few years, the cost of bridging loans has fallen, as they have grown in popularity. Now, more lenders are offering bridging loans, meaning more competitive prices are out there.

How much can you borrow?

The amount available to borrow varies hugely, starting at £25,000 and going up to anywhere over £25 million.

However, it is worth considering that you will usually only be able to borrow a maximum loan to value ratio of 75% of the property’s value.

If you have taken out a first-charge loan, you will usually be able to borrow more than if you were taking out a second-charge loan.

Bridging loan interest rates

Bridging loan interest rates are typically charged in one of the following ways:

• Monthly interest: this is when interest is charged each month. Here, interest is not added to the overall balance of the loan, which is paid off at the end of the agreed term.
• Rolled up/deferred interest: here, all the interest is paid at the end of the term when you pay back the loan. Interest is still charged monthly, but payments are made at the end of the term and not each month.
• Retained interest: here, interest is borrowed as a lump sum calculated when you apply for the loan. It is then paid back at the end of your term.

Bridging loan fees

There are also a number of fees involved when you take out a bridging loan. These fees will vary between lenders, so it’s always a good idea to check what you are being charged before you take out the loan.

Fees include:

• Arrangement/facility fees: these fees exist to help the lender make a profit from the arrangement. They are usually around 1-2% of the loan balance.
• Solicitor fees: as the lender must use a solicitor to deal with the loan agreements, they must pay a solicitor’s fee.
• Legal fees: these are typically charged at a set rate and cover the solicitor’s and lender’s legal fees.

What are the advantages of taking out a bridging loan?

There are many advantages to taking out a bridging loan.

As we’ve mentioned, they make it quick and easy to access finance in the short term. There are also several other benefits, including:

  • The ability to borrow large amounts of money
  • They are very flexible
  • They can improve your chances of securing a property as you become a cash buyer
  • They have a quick application process
  • Borrowers have control over repayments

Looking to progress with a bridging loan? Let Seek Finance help

Having read our handy guide, if you’ve decided that a bridging loan is right for you, Seek Finance is here to help with the next steps.

Simply get in touch today to discuss your short-term borrowing requirements and to see how we can help you move forward.