Residential bridging loans are a type of short-term finance secured on residential property that are designed to “bridge” a funding gap. They are useful if you need to pay for something while you’re waiting for funds you’re expecting to get, for example, if you need to buy a home before you have sold your old one.
Bridging loans are quick to arrange so are useful if you need to raise money fast, such as to buy a property at auction. However, they have relatively high interest costs and should be taken out for as short a period as possible and only if you have no alternative. If you’re taking out a bridging loan secured on your home it will be regulated by the Financial Conduct Authority, so there will be rules around the information and advice you receive before you take one out, to make sure you’re not mis-sold.
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.
How do residential bridging loans work?
You can take out a residential bridging loan for as short as one month to as long as one or two years. You can usually borrow up to 75% of the property’s value (known as loan-to-value), or possibly more if you have additional assets to use as security. The lower the LTV, the lower the interest rate you’ll usually pay. Rates can be fixed or variable.
They are interest-only loans. You can either make interest payments each month, pay the compounded interest all off at the end when you repay the loan or have it deducted from the loan amount at the outset.
Although lenders may look at your personal finances, including your income and credit history, when you apply, especially if you’ll be making interest payments each month, your exit strategy is more important. Your exit strategy is how you intend to pay off the loan.
If you’re planning to sell a property to pay it off, the lender will want to be sure it has a high enough value and can be sold within the necessary timeframe for the loan to be paid back in time. Or if you’re planning to take out a mortgage on a property to repay it, the lender will want to be sure you’ll be able to get one for a high enough amount.
As well as interest, there may be arrangement fees of 1-2% of the loan amount to pay and there are sometimes fees for paying it off early.
You can normally get a decision about whether the lender will grant you a loan within 24 hours although it might take one to two weeks to get the money.
Types of bridging loan
There are two types of bridging loan – closed and open. With closed bridging loans you commit to paying back the loan by a fixed date so you need to be certain what your exit strategy will be and that it can happen when you need it to. They are cheaper than open bridging loans as there is more certainty for the lender but there are penalties if you don’t pay the loan back on time.
Open bridging loans give you more flexibility about when you can pay it off and you won’t need such a definite exit plan, but you’ll still have to pay it back within a certain timeframe, such as six months or a year.
What are residential bridging loans used for?
There are a number of reasons why you might want to take out a residential bridging loan, including:
- To stop a property transaction falling through. If you’re selling your home and you’re in a chain, you can use a bridging loan to buy your new home if the sale of your old one is delayed to prevent the chain from breaking.
- To buy a property at auction. When you buy at a traditional auction you only have 28 days to complete the purchase, which might not be long enough to get a mortgage arranged on the property. The property also may not be mortgageable (because it’s uninhabitable, for example) or you might not be able to get a mortgage until you’ve sold your existing property. You can take out a residential bridging loan secured on the auction property or a property you already own.
- To fund renovation work. If you can’t borrow enough to renovate your home by remortgaging it, you can take out a residential bridging loan secured on it then pay it off when you can remortgage based on the property’s increased value when the renovations are complete.
- To buy a property that’s not mortgageable. If you want to buy a home that needs a lot of work to make it habitable (for example, it doesn’t have a working kitchen or bathroom), you won’t be able to get a mortgage to buy it. You can get a bridging loan instead and then pay it off when you’ve completed the refurbishment work and can get a mortgage.
How to get a residential bridging loan
Bridging loans are mostly offered by specialist lenders rather than mainstream banks. It’s best to speak to a specialist bridging finance broker as they will be able to look at the whole available market to find the best deal for you and help you with the application process.
Pros and cons
The benefits of bridging loans are that they can be used to raise money quickly and to pay for something in the short term while you’re waiting for other money to come through.
However, they are more expensive than other types of borrowing and you’ll pay penalties if you can’t pay the loan back by the end of the term. You could also lose your home if the loan is secured on it.
Bottom line
Residential bridging loans can be useful for a range of purposes if you have no other option, but make sure you have a solid exit strategy in place and speak to a specialist broker to get the best deal.Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
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