How a Bridging Loan Works

home loan

A bridging loan or bridging finance, as it is also known, involves borrowing up to £10 million to ‘bridge the gap’ between purchases, usually of property.

The most common example is when someone is trying to buy a property and needs quick access to a large sum of finance so they don’t miss out on the opportunity. A bridging loan can typically be arranged within a few days when the lender has run some credit checks, affordability checks and checked the values of the property.

This type of temporary finance is common at an auction when someone has put in an offer on a property and needs a loan to pay for it. Or similarly, when they need to raise finance before they sell their own property or get a mortgage.

A bridging loan is typically secured on a property so that if the individual defaults on repayment, the lender will have some ownership in the estate and be able to recover their costs.

What Are The Types?

The two main types of bridging finance are ‘open’ and ‘closed.’

The open aspect refers to the fact that the agreement remains open because the borrower has no fixed date in mind for repaying the loan e.g they haven’t put their own house on the market or applied for a mortgage.

The ‘closed’ loan means that there should be a clear date for the loan to be repaid, maybe because they already have an offer for their own property and know when they will be selling it.

A first legal charge refers to the first loan that the individual has to purchase the property e.g a mortgage of 65% or more of the value of the property. If there is any equity left in the property and this is common with increasing house prices, a second legal charge may be taken out and secured against the property.

(Source: Wikipedia)

Who it is Ideal For?

Bridging finance is ideal for the following parties:

  • Property developers
  • Buy to let property developers
  • Households with expensive homes (over £1 million)
  • Land purchase
  • Divorce settlement
  • Businesses – securing the loan on their business, premises or waiting to get paid from a client

 

Bridging Loan Example

Using an example from MT Finance (www.mt-finance.com), a buy to let property developer wants to buy a property worth £1 million at an auction and wants to borrow the sum in the next 3 days to avoid missing out on the deal.

The individual undergoes various underwriting checks and the lender checks the price of the property and how it might increase over the next few years.

The borrower will pay around 1% per month (usually ranges from 0.99%-1.2%) on a loan to value of 65%.

So overall, they will borrow £650,000 and pay £6,500 per month for around 12 months – a total of £78,000.

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