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Bridging Loans

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Bridging Loans

Bridging Loans

Richard Campo explains bridging loans.

What is a bridging loan and how do they work?

A bridging loan is very simply a short-term loan and we often call it short-term finance. It’s an area where traditional lenders fall short of the mark. 

It often revolves around not having capital available. Bridging lenders will step in for a week, a month or a year and then you go back to the high-street for further borrowing. It’s very much about the exit, which I’ll expand upon, but it’s essentially what you are doing next.

What’s the difference between a commercial and a residential bridging loan?

As a firm, we only deal with residential finance, that is, on a house you would live in. If it’s outside of that – an office block, shops, restaurants, etc we don’t deal with that. 

If that crops up we do work with a great firm that can help you. But we’ll be talking about residential bridging today.

What are open and closed bridging loans?

It’s a technical term but it is important. Fewer lenders do open bridging and closed loans are more common. A traditional example is where you want to move home but you haven’t sold your house. 

You’ve got your heart set on a property you want to buy but all your equity is tied up in your current home. A bridging loan would let you purchase the new property and the lender would take a charge over both properties. Then, when your property is sold, you pay off the bridging loan. Maybe you have a mortgage on the remainder or you’ve got enough cash to do it. 

Now, when there’s no offer on your property to sell, or you haven’t exchanged contracts with the new property, that’s open bridging. Closed bridging is the opposite, where an offer has been accepted or contracts have been exchanged. We’re seeing a lot of this at the moment where people need to move quickly. 

Someone might offer you a deal on a property if you can move in a month – but your buyer can’t move for two or three months. That’s a classic closed bridge scenario. Closed bridges are less risky and slightly less expensive. 

Can you have a fixed or variable rate bridging loan?

They tend to be fixed, but the calculations are done on a monthly basis. We’ll touch on pricing later, but you might typically get a rate of 0.5% or 1% a month. But it’s a fixed monthly cost as opposed to a traditional mortgage which could be a two, three or five year fixed. 

The products tend not to have any sort of penalties attached to them because they’re very short term by nature. 

Who can get a bridging loan and what can they be used for?

I’ve already gone through the most classic example and 90% of situations are when a client is looking to buy but hasn’t sold. But bridging can be used for any legal purpose such as development work or even paying tax bills. 

Probably the second most common use is going to auction. With auction properties, if you’re successful on the day you put down a 10% deposit there and then. If you don’t complete in 28 days you lose your deposit. 

It depends where the market’s at, but there’s usually no harm getting a bridging loan to complete the purchase really quickly. Then you’ve got time to remortgage. You don’t want to lose 10% of the purchase price, particularly if you’ve gone to auction as the property may not be habitable. I’ve got quite a good podcast about self-build properties [add link] which touches on this. 

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What is the exit strategy? 

This is fundamental to bridging loans. I have never arranged a bridging loan for any clients until I’ve arranged the exit – that’s how important it is. 

With clients who are buying without selling, we submit a mortgage application on the property they’re buying and make sure it’s completely squeaky clean. Then we do the bridging loan. That way, come the sale of their property, there won’t be any problem getting a mortgage to repay the loan. That’s the most common exit – taking out a mortgage to pay off the bridging loan. 

There are other ways of doing it. You might be selling and downsizing, in which case you can pay the bridge in full from the sale. Or you might be having a ‘liquidity event’ from selling businesses or inheriting money. If you know you’ve got some money coming down the track  you don’t necessarily need to wait for it. 

Sometimes people just need money – life happens. Bridging can step in, but unless there is a really clear exit strategy we would not put you into that situation. If you don’t exit, interest picks up really quickly and your lender will repossess the property. Lenders have a bit of a bad reputation in this area. They do want to help and work with people, but repossession is the endgame. 

Some are first charge and some are second charge – what does this mean?

With lending, a charge is simply who gets the money first. So residential mortgage lenders like Halifax and Santander would always take first charge on your property. It means if you default they get paid off first, before anybody else including you. 

Second charge lending is a loan that would sit on top of your existing mortgage. Sometimes you do this in a moving scenario. There might be a first charge on the property you’re buying and you then put a second charge on your property. 

It could be that you’ve got a very high value property and a relatively small mortgage. And some people still have very low mortgage rates. They might want to buy a second property, or they get a tax bill or something happens.

You might want to put a second charge on your property rather than paying off your existing mortgage. Certainly for the next few years, second charge lending and not just bridging will be quite a big feature – because you don’t want to lose a mortgage rate that starts with a one. You’re probably going to go onto something that starts with a four at the moment.

The charge is the order in which people get paid back. The higher up the charge hierarchy you go, the more expensive borrowing becomes. I have seen third and fourth charges and as always, the risk determines the price.

How long does it take to arrange a bridging loan?

As with any mortgage, if you want the cheapest terms it’s the slowest. If you’re willing to spend a bit more you get the fastest time. There’s an old analogy – you can never have something fast, good and cheap. You can only get two out of three. 

If you need to move really quickly, you won’t get the cheapest loans. Because they’re cheap, lots of people apply for them. But I have had a bridging loan apply, offer and complete in nine days – I think that’s the quickest we’ve done.

Typically it takes two to four weeks, but with any borrowing the legal work is never done for four to six weeks. The bridging loan is invariably out before the legals. Having said that, I did one that went through in three weeks this year and in fact the solicitor was ready in two weeks – so credit to them.

Can I get a bridging loan if I have bad credit? 

Yes, bridging loans are less sensitive to credit issues. Lenders will look at the exit, so as long as we can evidence that we can get you a mortgage at the end then it’s less of an issue. But again the very cheapest lenders want the very cleanest applications. 

So if you have had any credit issues you might not get the cheapest terms, but it’s really not a big difference. The pricing is all quite similar. It’s just matching the right lender with the right risk profile. Because the loans are short term by nature, they have more security and it’s less of an issue in this space.

What do bridging loans cost?

Typically the cheapest is around 0.5% per month. It might go up to 1% due to credit issues or if you’re looking to do a development. If you’re looking to build or renovate a property that’s a greater risk to the lender so they might charge a higher rate. 

The biggest variance is often around the percentage of the property that you buy. Again this varies over time but typically the most you can borrow is about 75% of the property value. If you’re borrowing under 50% of the value you tend to get the best pricing. 

There are arrangement fees which vary between 1% to 2% of the amount borrowed. You can also do staged drawdowns, where you’re borrowing two or three lump sums that’ll be released at different stages. 

There are also the normal survey and legal work costs. You pay the lender’s costs on top of your own and these tend to be a little bit higher as well. We’ll give our clients a full illustration that covers every single penny of costs so there are no surprises. 

At the higher end, the private banks come in. When the base rate was at 1%, a bank offering 3% was a great rate. Now, as we talk in March 2023, the base rate is at 4% and a 7% bridging rate is comparable.

Private banks are great in this area for the right clients and we do consider them, especially if you need slightly longer facilities.

How do you apply for a bridging loan?

The process itself is always the same – we’ll talk to a client, identify the right lender, then we manage the application. Bridging loans are far less work because it’s so much about the property – your plans and the Loan to Value. The valuation is the key part of that and the operators themselves tend to be pretty slick. 

The most recent one I did involved online ID, where you’re sent a link and you record a quick video to verify your identity. Rather than sending off passports all the ID work is done in less than an hour which is really good. That’s why they can move so quickly.

What are the alternatives to bridging loans?

Bridging loans are for a very specific purpose but we will consider every alternative as well. There have been multiple occasions where a client comes in for a bridging loan and we talk it through and find another way. 

They might be able to remortgage or raise money against another asset. There might be another way of structuring things – even unsecured lending can be an option as well, and that’s a bit more flexible. So we will explore every other avenue – not because bridging is a bad thing, but because we always look to keep clients’ costs as low as possible. That’s why the fact finding process is so important. 

What are your final thoughts on bridging loans?

This is a complex and potentially risky world. You really do need a good adviser to talk you through this. Some bridging lenders have had a bad reputation because they seem keen to repossess properties. We know those guys and we steer miles away from them. There are some really good, reputable firms that offer great terms – they’re the people we work with. 

When you deal with a broker, and specifically in this space, you’ll get access to lenders that don’t deal with the public because of those risks. That keeps costs down and you tend to get cheaper funding. So not only are you looked after better, you tend to get cheaper loans. 

If this is something you are considering, please do speak to an adviser because you will have a much smoother experience and save a lot of money. That’s our job.

Your home may be repossessed if you do not keep up repayments on your mortgage.