A house is the most substantial financial investment you’ll ever make. So it’s essential to get everything in order to avoid making costly mistakes. If your property deal goes through faster than expected and you need to move quickly, using a bridging loan to buy a house is a practical solution.
In this article, we’ll examine what a bridging loan (or bridging mortgage) is and consider its viability as a financial option. We’ll also give an honest appraisal of the pros and cons of choosing a bridging loan for a house purchase and the different types of loans on offer. Look out for our expert’s replies to your FAQs, too, which could help you make an informed decision if you need one.
What is a bridging loan?
Bridging loans are exactly what their name suggests – a loan to bridge the gap between purchasing a property and securing longer-term finances such as a mortgage. They can also be used when you’ve found your new property but haven’t yet completed the sale on your old one. In time-sensitive purchases such as property bought at auction, bridging loans can also be used to pay for the purchase.
A bridging loan to buy a house is secured against the value of the property. These loans are usually taken out for a very limited period, which can be as short as one month or up to a year. There are two basic types: regulated and unregulated.
Regulated loans are controlled by the Financial Conduct Authority. These are limited-term loans that have to be repaid within an agreed time of no longer than 12 months. They tend to take longer to arrange and come with a lot more conditions for both the borrower and the lender.
Unregulated bridging loans are for investment properties and properties that you won’t be living in, such as renovations and buy-to-let houses. They’re a little more flexible than regulated options and can be extended up to three years.
Why buy a property with a bridging loan?
Bridging mortgages can provide buyers with a quick and easy way to finance a purchase where there are time restrictions on the completion of the transaction, but long-term financing isn’t yet in place.
In the UK, buyers and sellers will often be caught up in a ‘chain’, where the purchase of one property depends on the sale of another in a chain of transactions. If one of the links in the chain falls through (for example, if the buyer of your property suddenly pulls out of the deal), a bridging loan can be used to purchase your next property. It means you don’t have to wait for another buyer to take the previous purchaser’s place.
Time-sensitive purchases at auctions require quick turnarounds on payments. It can be next to impossible to secure a mortgage for an auction purchase in time, so a bridging loan can cover the cost of the purchase while you wait for the long-term finance to fall into place.
The same principles apply to properties that need extensive renovation. These can often be hard to mortgage in the traditional way, so a bridging loan can finance the initial purchase. This gives you time to secure additional funding further down the line.
If you’re buying another property before selling your current home, a bridging loan enables you to complete a purchase (especially if you have to move quickly to secure a deal). You can then take a little longer to complete the sale of your home, enabling you to hold out for the best offer rather than taking the first one that comes along.
In certain regions, especially in the south of England, properties are in high demand. Desirable residences in locations such as Hampshire, Dorset and the Isle of Wight can be snapped up within days of coming onto the market. If you’ve found that perfect townhouse in Winchester or a charming cottage near Weymouth, you may need to move quickly to secure it. That’s where a bridging loan for a house purchase can make all the difference to your outcome.
How bridging loans work – from start to finish
The first step in acquiring a bridging loan for a house purchase is to determine how much money you will need. Typically, the amount can range from £50,000 to £5 million. The amount of money you can borrow will depend on the level of equity you have available. The standard maximum loan rate is usually capped at 75% LTV (loan to value). You will have to have a cash deposit to cover the remaining 25% to secure any loan. That 75% LTV includes interest, so you will need to factor that in as well to your calculations.
Bridging loans are not linked to your income, but purely based on your assets. The security can be spread across multiple assets or just one. Let’s take a simple scenario to see how a bridging loan works.
- You want to buy a house with a current market value of £300,000. A 33% deposit is required, totalling £100,000.
- You are still in the process of selling your property and only have capital of £25,000 available.
- To make the £100,000 deposit, you need to borrow a short-term bridging loan of £75,000.
- Your bridging mortgage provider lends you the amount against the collateral of your assets and not your salary.
- Once your property is sold, you then return the £75,000 bridging loan (including interest) from the proceeds of the sale of your property.
- Your regular mortgage broker then supplies the remaining finance on your new property.
The Pros and Cons of using a bridging loan to buy a house
There are pros and cons to taking out a bridging loan to buy a house. It is important to look at both sides of the coin before making a decision, as it can impact your financial situation, your credit rating, and even the possibility of securing more long-term finance.
The Pros
- Fast – Compared to arranging a traditional mortgage, a bridging loan can be secured very quickly if you have the assets to cover it.
- Larger loans – Rather than taking out a standard bank loan (often limited to just a few thousand at most), bridging loans can be taken out for much larger amounts. The spectrum of loans ranges from around £50,000 up to several million.
- Flexible – Bridging loans are designed to be short-term, flexible and manageable. It’s easier to take out a loan that suits your exact needs.
- Greater lending options – Bridging loans can be used against properties that would not normally be considered for mortgages, such as buildings that require considerable restoration.
The Cons of bridging loans
While they may seem very attractive, you must consider the other side of the equation and consider the pros and cons of bridging loans.
- It may put your assets at risk – As bridging loans are secured against the value of your assets rather than your salary, your property may be at risk if you can’t repay the loan within the specified time frame.
- The interest rate is higher – Easy-access, fast loans always come with a price, generally a higher interest rate. Be sure to factor that into your calculations and shop around for the best deals.
- Higher fees – All financial services tend to come with fees attached. Bridging loans are no different, and the fees can add to the overall cost of the loan.
Interest rates in more detail
Interest rates for bridging loans are not charged annually, as they are on mortgages. Rather, they’re charged daily or monthly and then grandfathered over into three primary ways of payment:
- Monthly – These are similar to an interest-only mortgage. The interest payments are taken monthly rather than being added to the loan. This means you still need to pay back the full loan amount at the end of the loan period.
- Rolled-up interest – The interest on the loan is added to the amount to be repaid at the end of the loan period. For example, with our £75,000 loan, if the interest was charged at 10%, an additional £7,500 in interest payments would be added to the total cost of the repayment at the end of the agreed loan period.
- Retained – The interest is ‘borrowed’ up front and then when the loan is paid in full, any remaining interest charges are returned to you. So, for example, if your £75,000 was due in 10 months but you repaid it in full after five, half of the retained interest payment would be returned to you.
The different types of bridging loans
Not all bridging loans are the same. You have a choice between first and second charge loans, fixed or variable, and open bridging.
First and second charge loans
If you own a property outright, the bridging loan will be secured against your property. This is known as a first charge loan, so the lender is the first to be paid when the property is sold. If you already have a mortgage on that property, the repayment of that when the property is sold is the priority and the bridging loan is the second loan to be repaid. This is a second charge bridging loan; to apply for one you’ll need the permission of the first charge (primary mortgage) lender.
Fixed and variable interest bridging loans
We’ve already discussed interest rates in some detail, but you also need to consider whether to go for a fixed or variable-interest loan. If you choose a fixed-interest loan, you’ll pay a set rate for the duration of the loan, whether the Bank of England rate rises or falls. The interest rate of a variable interest rate loan will depend on the BoE rate. However, if you think that interest rates are likely to drop during the duration of the loan, a variable rate could save you money in the long term.
Open and closed bridging loans
An open bridging loan has no fixed repayment date, so unlike other fixed loans, you would not be financially penalised for paying it off early. You are usually expected to repay the loan within one year, although longer repayment periods are available. Interest rates on open bridging loans may be higher. A closed bridging loan has a finite repayment period and a fixed date by which the full amount needs to be repaid. The benefit of this is that interest rates are lower.
Top tips from the experts – your FAQs about bridging loans
The easiest way to limit the risk is to look around for a loan that includes the interest in the final payment at the end of the term (rolling interest). This removes the risk of missing an instalment payment and the financial penalties that may be imposed as a result.
There are a variety of different alternatives to financing a house purchase. Bear in mind that a bridging loan is designed only as a short-term financial ‘stop-gap’ until you can secure long-term financing such as a mortgage.
You could apply for a secured loan, but the amount available may not be enough for your needs. Other alternatives include private investment, development finance (particularly for renovations), savings and commercial mortgages. Your financial advisor will be able to provide you with impartial advice on each.
Yes. The typical interest rate on a bridging loan is around 1%/month. This is because bridging loans for buying houses are regarded as high-risk loans.
They can. However, the buy-to-let market is undergoing significant changes, so it is worth talking to your financial advisor before committing to a purchase of this nature.
Yes. Your collateral can be attached to commercial property. However, if the property is part of a limited company, the lender may require the consent of any shareholders or other partners within the business before granting any bridging loan secured against the asset.
Any loan is effectively ‘credit’, so a lender will run a check on your score before going any further with the arrangement. As a bridging loan to buy a house is primarily secured against your assets rather than your perceived personal ‘risk’ to the lender, as long as you have the assets to cover the loan, a low credit score won’t necessarily impact your ability to secure the loan.
A bridging loan can be arranged very quickly, often within 10 to 12 working days from the application. You can increase your chances of getting your loan more quickly by making sure you’re prepared with all your paperwork and a defined exit strategy.
This is the borrower’s plan for repaying the loan. This can be attached to the sale of a property, refinancing, moving to a standard mortgage, using savings or investments, or downsizing and using the additional finance to repay the loan. An exit strategy needs to be agreed between the lender and the borrower before any bridging loan can be arranged.
Get the best advice from the experts
At Fresh Solutions, we look for better, more user-friendly ways to help you secure the financing you need. Our bridging loans are designed to be flexible, accessible, and practical, whether you’re buying your first house in Southampton or looking for that perfect holiday cottage on the Isle of Wight.
We’re based here in Hampshire, so we know the area and the market trends. You can get a no-obligation quote today by filling out our online form and in just 90 minutes you’ll have a response from one of our advisors.
Contact Fresh Solutions today for more information on bridging loans for house purchases.
Call us on 0333 577 3359, or email [email protected]
