A bridging loan can be useful if you need to borrow money for a short period. It can help to ‘bridge the gap’ if you want to buy a new home before selling your old one. Bridging loans can also be used if you buy a property at auction, where you’ll need the money immediately but may not have sold your current property yet.
There are two types of bridging loan: ‘closed’ and ‘open’
Closed bridging loans With a closed loan, there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.
With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one year. Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage. They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it, as well as proof of what you are doing to sell your current property if relevant. You should also have a back-up plan in place in case your repayment strategy fails.
Bridging loans are priced monthly, rather than annually, because people tend to take them out for a short period. One of the major downsides of a bridging loan is that they are quite expensive: you could face fees of between 0.5% and 1.5% per month. That makes them much pricier than a normal residential mortgage. The equivalent annual percentage rate (APR) on a bridging loan is between 6.1% and 19.6% – far higher than many mortgages. There are also set-up fees to consider, usually around 2% of the loan you want to take out, so it is advisable to only take a bridging loan out if you are confident that you won’t need it for a long period of time.
In cash terms, bridging loan providers might lend anything between £25,000 and over £25m. But you’ll usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property. If you are taking out a first-charge loan, you’ll typically be able to borrow more than if you were taking out a second charge loan.
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