Short on time – here’s the bottom line in 5:
- Fees – the ‘lenders arrangement fee’ is the largest, typically 0.5-2% of the loan amount [other fees are applicable too]
- Typical monthly interest rates are 0.45-0.8%. Interest payments can be added onto the loan and repaid when the loan is repaid.
- Bridging Loan Example: £500,000 Bridging Loan repayable in 6 months would mean a loan repayment of circa £530,000. [with 80% LTV]
- Nationwide building society and Martin Lewis currently do not offer Bridging Loans
- Most Bridging Loans take about 2 weeks to complete but can be completed quicker
Bridging Loans Explained?
A bridging loan is a finance option designed for a short period of time. It is to ‘bridge’ a financial gap you may have.
A bridging loan is best explained with an example as they are often talked about but never fully understood.
Let’s say that you have found a property you want to purchase but you haven’t yet sold your existing property. You therefore do not have the required capital to purchase it. This is why a bridging loan was designed, it’s a loan to purchase the new property so you don’t miss out on any deal.
The repayment of the bridging loan is typically then done with the capital from the sale of the first property. This could be as short term as a few weeks, or even up to 18 months. Bridging loans are typically anywhere from £100,000 upwards.
Bridge Loan Rates
Bridging Loans Costs and Fees Explained
Lender Arrangement Fees [also known as Lenders Facilities Fees] – the vast majority of lenders charge a 2% fee on the gross loan amount. Scaling as per below
Other Bridging Loan Fees include:
Valuation Fee – the property or asset must be valued and usually surveyed before loan completion.
Lender Admin Fees – some lenders charge a small fee often around £300 that’s payable on completion of the loan. These are often deducted from the loan itself.
Lender Legal Fees – variable amount depending on the lender, these are usually deducted from the loan.
Redemption Admin Fee – a fee charged by the lender upon redemption of the loan. For most lenders this is between £100-£200.
Exit Fees – very few lenders charge exit fees but some still do. It can be 1% of the loan amount paid upon redemption of the loan.
Bridging Loans or Bridging Finance, is actually usually fairly straight forward and readily available to most people.
They still have a stigma of being expensive, but that’s in comparison to say commercial mortgage interest rates. But most commercial mortgages are designed for a term of 25 years so the interest is applied annually over that long period. With short term bridging finance that interest will be applied over a shorter period, making them, in comparison, ‘appear’ much more expensive.
Bridging Loan Example
Example uses of bridging finance or loans are for purchases of property which are currently unmortgageable. For example some auction property, would be a prime example for the use of a bridging loan. The loan covers the property purchase at auction and work is then undertaken within the property to make the property suitable for a mortgage. With a mortgage on the property in place this capital then pays off the bridging loan.
Paying off the bridging loan is called the ‘exit’. Bridging loan lenders like to see the loan recipient has an ‘exit strategy’ for the repayment of the loan.
£500,000 Bridging Loan Example
If you were looking to arrange a bridging loan of £500,000 for 6 months [with 80% LTV], these would be the typical fees and repayments associated with it.
With a monthly interest rate of circa 0.8% this would make the average monthly interest repayments around £4,000.
Repaying the loan in full after 6 months would mean a repayment typically of circa £530,000.
If however you decided you could repay the bridging finance in full after only 3 months the redemption amount would be much smaller at circa £518,000.
Does a Bridging Loan have Monthly Repayments?
Not always. Quite often so the recipient of the loan is not swamped with repayments; those repayments are added onto the loan itself and paid back at the exit.
They are often used to fund developments that, only when sold, produce any ‘income’. This cash is then used to repay the bridging loan. The removal of monthly repayments can afford developers better cash flow.
Bridging loans are also great for cash flow poor situations but when assets are owned to provide the lender with ‘security’.
Bear in mind the interest being added each month or ‘rolled up’ will increase the loan size amount and therefore the interest payments increase each month due to compounding.
Qualifying for a Bridging Loan
Like with any loan, lenders have ‘lending criteria’. Most criteria are flexible meaning you don’t have to meet every point to be accepted. Here are some of the most important points to consider:
- Income – as it’s based on the value of the asset not the income of the person or company applying – this point is very relaxed.
- Credit Score – it’s a great option if you have a low-medium credit score as the bridging loan has to have some security with it usually in the form of the asset you are purchasing or an asset you currently own.
- Exit – can you demonstrate that you have a plan to exit and repay the loan.
- Age – if you have been turned down for a mortgage due to your age, a bridging loan could be an excellent option as the term is typically upto 24 months. Unlike most mortgages which are 25 years.
Types of Bridging Loans
Fixed or Variable Rates – The interest rate can be fixed for the duration of the loan. A fixed interest rate means the interest rate remains the same.
Variable means it isn’t fixed and therefore could change during the duration of the loan. A variable rate will usually change according to the interest rate set by the Bank of England (BOE).
Open Bridge Loans – This loan does not have a date for its repayment. Its repayment date is ‘open’ and is popular for developers who do not have a fixed end date and are reliant on variables like planning permission being granted before building work can commence. Open bridge loans are the opposite to closed bridge loans.
Closed Bridge Loans – This loan has a clear end date when the loan will be repaid.
First and Second Charge Bridging Loans – The Bridging Loan lender will inform you if your bridging loan is 1st or 2nd charge. Charges relate to defaults on any loan repayments. If you own a home for example with a mortgage then your mortgage would be the first charge and any bridging loan would be a second charge.
Martin Lewis Bridging Loans
Martin Lewis, also known as the ‘Money Saving Expert’ has become a financial guru to many. Helping thousands of people with debts, credit card issues and more. He would be the man to offer some pearls of wisdom relating to bridging loans then…unfortunately not.
Martin offers no advice in an article or blog post that we could find on his website. Shame, as he usually offers sensible, pragmatic advice for people requiring loans of all shapes and sizes.
Bridging Loan Nationwide
Nationwide building society does not offer Bridging Loans. Whilst Nationwide offers personal loans up to £25,000 they state clearly on their website that the loans cannot be used as bridging loans or for any speculative or investment purposes.
Nationwide could be seen as quite risk averse as they don’t offer Buy to Let (BTL) mortgages, so it’s no surprise they don’t offer specific bridging loans.
There are many bridging finance providers in the market where you can obtain competitive quotes.
#3 Alternatives to Bridging Loans
Bridging finance is often required on a time sensitive basis meaning it’s usually needed quickly to avoid the recipient missing on the purchase of an asset, like land or a property. There are still a number of other options available however:
- Remortgage of a property to raise the required finance
- A Personal Loan could be an option if you didn’t need the loan to cover the entire purchase. This is because personal loans are often capped at £25,000-£30,000.
- Peer to peer lending, avoiding the conventional lending methods and look at alternative methods of finance.
Bridging Loan Broker vs Going Direct
An independent bridging loan broker will be able to compare the rates of dozens of lenders to offer you the best deal available based on your specific requirements.
Compared to just going to one lender, it’s always better to have more options. The rule of thumb is a minimum of 3 quotes from bridging lenders. It is then far more time consuming to go directly to several loan companies than to obtain those same quotes using one single broker.
Most brokers work on commission paid to them by the lender meaning most brokers have no fees you need to pay anyway. Brokers should also do all the application paperwork and manage the process for you.