Through our website and through google, we often find people asking questions like “How does a bridge loan work?”, “What is bridging finance?”, “How much is a bridging loan?” and “Where can I get a bridge loan?”. For anyone looking for temporary short-term lending, perhaps bridging finance could be for you. Bridging finance is a great solution for people who need a quick, temporary cash injection but don’t want to have to take out a conventional long-term mortgage. In this blog we will go through what a bridging loan is and how it can help you get the most out of your money.
What Is A Bridging Loan?
Bridging finance does pretty much exactly what it says on the tin, it is a loan that bridges a gap in property finance. It is a short-term loan that is there to help people finance a house purchase where a straight sale and purchase is not immediately possible. Bridging finance can be used in many different scenarios, but here are a few of the most common:
- You might buy a property that is in serious need of renovation. Because of the state of the property, a traditional mortgage might not be possible but bridging finance will allow you to purchase the property and make the relevant improvements to the property. Then you can get a traditional mortgage. This can be great if you need to wait for things like planning permission.
- You are purchasing a property in a chain. Through no fault of your own, the chain has fallen through and rather than lose the property, you might want to take-out short-term bridging finance until a new chain can be established.
- A large-scale property developer (i.e. constructing several houses or flats) may outsource a lot of labour and materials from different sources, a short-term bridge can help consolidate all the money needed into one place, making it much more manageable.
- You buy a property or properties through an auction or foreclosure sale or something similar, and you need funds quickly to ensure you get the property. A traditional mortgage might take too long to secure, and you could lose the property.
How Do Bridge Loans Work?
So how does bridging loan work? Bridging finance is similar to a normal mortgage however there are a few differences. A mortgage lender will loan you money and will charge you interest at a fixed rate, like a standard mortgage. Unlike a normal mortgage (which can be taken out over a maximum of 40 years), bridging lenders will want a bridging loan to be paid back within 12-18 months on average. However, the borrower can pay off the loan at any time within the 12-18 months if they like.
You can normally take a bridge out on one of two scenarios, a closed bridge and an open bridge. Here are the definitions:
- Closed bridge: Everything with the bridge is confirmed by a set timeframe. So, this could be a scenario where someone purchases a property at auction and needs to pay the balance of the purchase within a month.
- Open bridge: A plan is in place of how the loan will be paid back but an exact date has not been confirmed. This could be someone building a property who intends to sell the property within 12 months but has not got an exact completion date yet.
Understanding exactly how does a bridging loan work and how to get a bridging loan, can be difficult if you don’t get the right information and guidance from a professional specialist bridge advisor.
How Long Does It Take To Get A Bridging Loan?
A bridging loan, like the main purpose of getting one, can be very quick to arrange. If you are dealing with a bridge specialist, the question of how long does a bridging loan take, won’t need to be of any real concern. The idea of a bridge is to get short term lending as quick as possible, your broker and the lender will know this and as long as everything is correctly packaged and you meet the right criteria, everything should go through very quickly.
So in comparison to a normal mortgage, how long does it take to get a bridge loan? Well depending on how complicated the normal mortgage application is, any chain that might hold up the purchase, and any issues with the legal side of things, a standard mortgage can take anywhere from a few weeks to a couple of months to go through.
In comparison, a bridging loan can potentially take as little as 72 hours to be approved and could take up to a couple of weeks if it is a little more tricky. That means that borrowers looking for quick short term cash to bridge a purchase gap can apply for the loan and get the money offered potentially within a few days. How quickly can you get a bridging loan really depends on how quick you are prepared to apply for one!
How Much Does A Bridge Loan Cost?
One thing that doesn’t get spoken about enough it probably the most important thing that people want to know, how much do bridging loans cost? But before we start asking how much does a bridging loan cost, we need to make sure that everyone is clear on the costs that are associate with mortgages in general. Some potential mortgage costs that come with any kind of loan are:
- Product fee – This is the main one. A lot of mortgage products come with an associated fee in order to have access to it. A standard fee can be anywhere from £995 to £2,000+ depending on the lender and how exclusive it is. With most lenders, they do not expect you to pay this fee upfront and if your affordability allows, you can potentially add the fee to your mortgage total. Other lenders will need the fee to be paid upfront.
- Broker fee – A mortgage broker will charge you a fee to help with securing the mortgage for you. This fee is for the work that the advisor and the admin team put in, in order to get your application packaged, applied for, chased, and offered as soon as possible.
- Valuation fee – Every mortgage lender will need a valuation of the property to be carried out before they offer a loan on a property. This is to ensure that the property is worth what you say it is and that there aren’t any major issues with the property that they are lending money on. Valuation fees can vary greatly depending on the valuation firm and the type of valuation. It can be a couple of hundred pounds to a couple of thousand but you should always check this before agreeing to any valuation.
How much does bridging loan cost?
Bridging loans are more specialist lending than a standard buy-to-let or residential loan. There are also fewer lenders offering bridging finance so getting bridging loans in the UK can come with extra costs. There normally aren’t any additional separate fees but borrowers will often be charged extra on things like product fees or arrangement fees. For example, a product fee for a straight mortgage loan might be £999 which you could add to the loan, however a bridge loan could charge a £2,000 fee that needs to be paid upfront.
This could also be the same for things like arrangement fees. Because there is more work involved with how to get a bridge loan due to the limited market, a broker may increase the fee they charge. Similarly, if you decide to secure a bridging loan through a specialist bridge packager company, they may charge their own separate fee to arrange the loan.
The other thing to consider when asking how much are bridging loans is the interest rate of the loan. The interest rates of bridging loans can vary greatly with some charging high interest rates and some charging low. The best thing to do is to speak with a professional advisor before you do any research and they will find you the best and most sensible deal for your circumstances.
What Are The Pros To A Bridge?
- Fast cash – Bridging loans are often MUCH quicker to secure than a standard mortgage. Right now, there is a huge backlog in standard mortgage application assessments with some lenders saying that they need 35 working days to assess one application. A bridging loan is designed to be quick to offer, although they are never guaranteed, and a specific timeline isn’t written in stone.
- The interest incurred on the loan can be rolled back and paid in one lump sum rather than monthly. The idea of a short-term quick loan is that you are able to access money quickly…not spend it! Rolling back interest allows you to have the loan without having to fork out interest payments every month. At the end of the bridge when you repay the loan (through a new mortgage or sale of assets or otherwise), you would pay back the interest you owe too in one lump sum.
- Usually come with no exit fees – Most traditional mortgages will have exit fees meaning that if you pay back the loan before a certain date, the lender will charge you a fee due to the loss of business. As bridges are designed for the short term, you are not normally penalised for paying back early.
What Are The Cons To A Bridge?
- High interest rate – As these are specialist loans, they often come with high interest rates. Interest rates in general are high across the market at the moment and because not all lenders offer bridges, the products are more scare and therefore demand higher rates. As we have mentioned above, you can choose to roll back the interest and pay it in a lump sum rather than monthly, but this might not be the best option for your own circumstance.
- Bridges will need some sort of security against the loan – Because it is short term lending and can sometimes be a very large amount of money, chances are that the lender will require some sort of security against the loan to ensure that it gets paid back. This is often property. If you use property as security and don’t pay back the loan (plans don’t work out, you aren’t able to finish the development, you aren’t able to re-establish a house sale) then you could risk having your security seized by the lender and losing your assets.
- Fees – Not really bridging lending specific, but definitely something that you need to consider when getting a bridge. The idea of bridging is quick cash and most people who use a bridge don’t have immediate access to money. With a bridging loan (and most other mortgages), you will need to pay certain fees. These are arrangement fees to arrange the loan, broker fees to apply for the loan, valuation fees, and legal fees. If you don’t have money to cover these fees when applying for a bridge, then you won’t be able to get one.
Which Banks Offer Bridging Loans?
The first step that people often stumble on in the process is actually how to get a bridging loan in the first place, and which bridging loans are provided by which lenders. So who offers bridge loans? As we have already said, bridging finance is not as common as say buy-to-let lending or standard residential lending. So that means that when looking at which banks do bridging loans, UK high-street lenders probably won’t be on the list but you may see a couple who offer bridge loans to people they already lend to. That doesn’t by any means mean that the lenders who do offer bridging are sub-par, it just means that they are more specialised and knowledgeable in bridges.
Which banks offer bridge loans? There is not a completely extensive list online as lenders come to the market and drop off the market very often. That is why your best bet is to contact a mortgage advisor who has access to the whole of the market. That way they can search the entire lending market for the best providers. Below is a brief list of some of the lenders who offer bridging loans. A lot of these lenders are only accessible via an intermeidary such as a broker so you will not be able to go directly to them for a loan:
- United trust bank
- TAB HQ
- Precise Mortgages
- Market Harborough Building Society
- Virgin Money
Speak To Mortgage Expert To Learn How To Get Bridging Finance
Hopefully this blog has answered a lot of your questions, but we can stress enough that if you really want to know what is a bridge loan, how much is a bridge loan, and how does bridging finance work, you must speak to a professional mortgage advisor. At Oportfolio we are experts in bridge loans and can help you with any queries you have or guidance you need. Please feel free to give our team a call today to see how we can help.