Bridging finance

What is a bridging loan?

A bridging loan, or bridging finance, is a short-term loan typically used when you require funding quickly, as you can access the cash much faster than with a standard mortgage application. As the name suggests, a bridging loan can ‘bridge the gap’ from the point of purchase to the loan’s exit. Typically, the exit from the bridging finance will be when you refinance the property onto a standard mortgage or sell it to repay the loan. 

It’s important to note that bridging lenders will always require your exit strategy to be in place before releasing funds to ensure that you have the means to repay the loan.

How does a bridging loan work?

Repayments

As bridging loans are a type of short-term finance, lenders charge interest monthly, from three to eighteen months, or the required loan term. 

Lenders know that during this period, you will probably not earn anything from the property (if it’s an investment property). As such, the capital and interest repayments are not repaid during the loan term but rolled up and repaid when the loan is redeemed. 

Some lenders may consider allowing you to make repayments during the loan term if you can evidence your experience with this type of finance. 

Loan to value (LTV)

Loan to value is the ratio of how much you want to borrow in relation to the value of the property you’re purchasing and is expressed as a percentage.

With standard mortgages, lenders will always use the lower of either its current open market value or the price you purchased it for. However, with bridging finance, some lenders can use three different values to calculate LTV: purchase price, open market value or gross development value (GDV).

For example, you’ve bought a property at auction for £85,000, but the open market value is £100,000.

• Lender one: 70% LTV based on purchase price means you can borrow £59,500.
• Lender two: 70% LTV based on the actual market value of £100,000 means you can borrow £70,000.
• Lender three: 70% LTV based on the GDV after refurbishment of £120,000 means you can borrow £84,000.

If you’re trying to stretch your cash as far as possible to fund a project, this can make a significant difference. But remember, borrowing more means higher interest charges, so you must factor these into the total project costs.

To see what options are available to you, speak to one of our experienced mortgage brokers, who will guide you through the complexities of this type of funding.

How long does bridging finance take?

One of the main benefits of bridging finance is how quickly you can access the funds. Generally, you will receive funding within weeks rather than months of your initial application. This allows you more flexibility, rather than, for example, needing to capital raise as part of a remortgage. 

How much does a bridging loan cost?

As bridging loans are a short-term property finance option, they are almost always more expensive than standard mortgages. However, they allow you to complete purchases and projects that you simply can’t with a traditional mortgage. 

As they’re expensive, securing the right one is essential to keeping costs down, as a slight difference in interest rates or not considering all the fees can significantly impact your overall cost. That’s why using one of our specialist brokers will make the whole process straightforward and efficient.

Bridging finance rates typically range from 0.5% to 1.5% per month. As bridging finance is often used for refurbishment and development projects, the property isn’t likely to generate an income during the loan term. Because of this, many lenders defer or “roll up” interest until you repay the loan at the end of the agreed term.

Bridging finance fees

Don't forget about additional fees when you’re costing up your bridging finance. These typically include but are not limited to:

• Arrangement fees - typically 1-2% of the total loan amount, depending on the lender
• Legal fees - yours and often the lenders
• Valuation fees
• Administration fees
• Exit fees

When possible, adding fees such as the arrangement fee to the loan could impact your NET loan amount and loan to value (LTV). If you take a 75% LTV bridging loan but want to use some of the money to cover these additional fees, it could take your LTV down to 70%.

Bridging finance exit options

Your bridging finance lender needs to know how you plan to repay the loan at the end of the term before they release funds. There are two standard options borrowers use:

• Refinance – take out a traditional mortgage term, such as a buy to let mortgage, to repay the bridging loan. Standard mortgages are typically a cheaper property finance option for the long term.

• Sell the property – if you’re developing or refurbishing a property for profit and don’t intend to keep it as a buy to let investment, you’ll need to sell it to repay the bridging loan. Therefore, you’ll need to be confident that the property’s new value will cover the loan and accrued interest and hopefully have enough left for you to pocket as profit.