If you need to borrow money to buy a property but you can’t get a mortgage, you’ll need to look at other finance options. A hard money loan – also known as a bridging loan – is one of them. This is a type of short-term loan secured on property – a “hard” asset. Although buying property is the most common use for hard money loans, they can also be used to raise money for other purposes.
Compare hard money loans (bridging loans)
Table: sorted by monthly interest rate
Overall representative example for regulated bridging loans
If you borrowed £195,000 over a 1-year term at 8.40% p.a. (fixed), you would make 12 monthly payments of £1,399.93 and pay £211,799.16 overall, which includes interest of £16,799.16, a broker fee of £995 and a lender fee of £3995.00. The overall cost for comparison is 11.6% APRC representative.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
What is a hard money loan?
A hard money loan lets you borrow money over a short period, which can be for as little as 1 month or for as much as 2 or 3 years, although they are usually taken out for 12 months or less. As they are a more expensive way to borrow than a mortgage, the shorter the term you can take them out for the better.
They can be secured on either the property you’re buying or on one you already own, and you can usually borrow up to 75% of its value (known as the loan-to-value or LTV).
The loans are taken out on an interest-only basis and are priced using monthly interest rates. Rather than making monthly interest payments, you can choose to “roll up” the interest until the end of the term and pay it all off with the capital then. Another option is for the total interest to be deducted from the loan amount at the outset – known as “retained interest”.
The actual interest rate you pay will depend on the risk to the lender, which will take into account factors such as what you’re using the loan for, the property it will be secured on, the property’s value, the LTV (it’s cheaper to borrow for low LTVs), whether you have any other loans secured on the property and your credit history.
As well as interest, you may also have to pay an arrangement fee of 1-2% of the loan amount, an administration fee and a redemption fee when you pay off the loan. There will also be valuation and legal fees.
You’ll need to have an exit strategy in place for paying off the loan at the end of the term, which could also affect the interest rate you get. This might be selling the property you borrowed the money to buy if you are renovating it to make a profit or refinancing it with a mortgage to pay it off.
The lender will focus mainly on your exit strategy when deciding whether to lend to you, which is more important than your personal finances and credit history.
What can a hard money loan be used for?
There are a number of reasons why you might want or need to take out a hard money loan. If you are buying a property that’s in poor condition because you plan to refurbish it – to “flip” it for example – mortgage lenders will be reluctant to lend on it. You may also struggle to get a mortgage on an unusual property or one that’s unusually constructed. These are not barriers to getting hard money loans though.
You may find it difficult to get a mortgage if you have had credit problems in the past as the lender needs to be sure that you’ll be able to make the monthly mortgage repayments. As your exit strategy is more important than your personal finances and credit history with a hard money loan, a poor credit history is less likely to be an issue.
However, credit problems might affect your application if your exit strategy is to refinance the property with a mortgage, so you may need to get a mortgage agreed in principle when you apply for the hard money loan to prove you’ll be able to get one when you need it.
Timing is another reason why a hard money loan could be a better option than a mortgage. They can be arranged a lot more quickly – in as little as one or two weeks – because the approval process is more straightforward.
For example, if you’re buying a property at a traditional auction, you’ll need to complete the purchase within 28 days and you often won’t be able to get a mortgage approved quickly enough. You might also need to act quickly to secure the perfect property.
You can also use them to buy a new home before you’ve sold your old one if you want to move chain-free or you’re in a property chain that breaks down. This means you can avoid losing the property you want to buy if there’s a delay in selling your existing home.
How to get a hard money loan
As they are specialist products, you can’t usually get hard money loans from mainstream lenders. To find the best deal for you, speak to a specialist bridging finance broker as they will be able to look at the whole available market. They will also have access to deals not available directly from lenders.
The broker will also help you through the application process and help you make sure your exit strategy is viable.
Pros and cons of hard money loans
The benefits of hard money loans are that they are quick to arrange, let you borrow money on unmortgageable properties and let you take out a loan even if you have a poor credit history or a low income. They are also flexible in that you can choose when to pay the interest and you have the option of not paying anything until you pay off the loan.
On the other hand, they are an expensive way to borrow, and if your exit strategy fails and you can’t pay back the loan, you may have to pay penalties or lose the property.
Bottom line
Hard money loans are a useful way to borrow money if you can’t get a mortgage or need to raise money quickly, but they are relatively expensive so should be taken out for as short a period as possible.
Finder survey: Who or what would Brits turn to for mortgage advice?
| A mortgage broker | 47.06% | 46.96% | 40.91% | 40.58% | 49.67% | 47.37% | 45.83% | 47.93% | 38.1% | 40.74% | 59.77% | 50% |
Source: Finder survey by Censuswide of 1032 Brits, December 2023
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