Bridging Loan To Buy A House - Example Of How It Works

09-August-2024
09-August-2024 12:16
in Bridging
by Jennifer Stevenson
Bridging Loan to Buy A House - Example

If you've found the property you want to buy and need to move quickly, one option is to use a bridging loan to buy a house. We look at some examples of how bridging loans can be used to buy property.

How Can You Use a Bridging Loan To Buy a House?

In the past 15 years, bridging loans have quickly become a mainstream property finance solution. 

Why?

  • They can be fast - A bridging loan can be set up quickly and allows you to act like a cash buyer.
  • They can be flexible - Because it's secured against the value of bricks-and-mortar or your deposit, lenders may consider borrowers whose credit record is less than perfect.
  • They have a diverse usage - Bridging loans can be secured against residential and commercial property, building plots or even land that doesn't yet have planning permission.

While mortgages are still the default route to buying property for many, bridging finance's key advantages can allow you to buy property in circumstances where a mortgage may not be suitable.

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Written bySam O'Neill & Sam Hodgson

Bridging loan to buy a house - example of how it works

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What Is a Bridging Loan?


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What's Different About a Bridging Loan?


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FAQs

In the video below, our Head of Bridging, Sam O'Neill, summarises everything you need to know about bridging loans and how they work:

Sam O'Neill

Sam O'Neill

Head of Bridging

Let us do all the hard work of finding the right bridging lender for your circumstances. 

We secure bridging finance for applications of all types, and we negotiate competitive lending to meet your needs and timescale.

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What is a Bridging Loan

A bridging loan is a short-term secured loan typically used to raise capital to meet a tight timeframe or break a property chain. Bridging finance is popular for its flexibility and relatively easy application process, which can take from as little as seven working days to a few weeks. 

Whether or not you will be eligible for a bridging loan will centre heavily on your plan to repay the loan. Due to the quick turnaround of these loans, they are commonly used to purchase property before the sale of another property has gone through.

This is where the name 'bridging' loan comes from, as they are typically used to 'bridge' a gap in finance. They can be used for a variety of purposes, including buying a new home or buy to let, and are often used for refurbishment projects

In the UK, bridging loans are only available from private lenders, so if you're looking for a bridging loan and don't know where to start, seeking help from a bridging broker can streamline this process. 

Bridging loan terms are typically around 12 months but can be tailored to suit your circumstances if needed. Unlike mortgages, they are usually repaid in a lump sum and don't have early repayment fees.

See the latest market news below.

2024 Bridging Market Update

The bridging market has had quite a transformation in the past few years. With rates starting at 0.55% per month, the costs aren’t dissimilar from those of a mortgage, and the combination of flexibility, quick turnaround time and less stringent eligibility criteria has led to bridging finance growing in popularity.

It’s now seen as a product in its own right instead of an expensive alternative to long-term finance.

Our finance brokers are seeing more repeat clients, particularly investors who have turned their attention to property flipping considering the slim profit margins the buy to let market has been seeing. HMO conversions have also grown in popularity amid more rigid rental legislation.

According to our team of advisers, a high volume of first-time borrowers already have an understanding of bridging loans before approaching us, showing that bridging is becoming more recognised in the industry.

As bridging finance becomes more mainstream, lenders are reviewing and reducing rates more frequently, offering more flexibility around costs.

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When To Use a Bridging Loan

Bridging loans can be ideal for seizing time-sensitive opportunities, from buying a new home before finalising the sale of your existing property to renovating an HMO. They will typically use the purchased property or an existing one as collateral, offering more flexibility in your eligibility compared to traditional mortgages.

You can use bridging finance for:

  • Breaking a mortgage chain - Bridging finance can effectively turn you into the kind of cash buyer given preferential treatment by estate agents.
  • Landlords who need to buy an investment property quickly - Affordable properties that offer the prospect of good returns attract buying competition from other investors and owner-occupiers.
  • Buying property at auction - Auctions are often the most profitable hunting ground for bargain-priced properties, but the requirement to complete payment within 28 days makes ordinary mortgage finance close to impossible.
  • Cash flow restrictions - Bridging finance secured against property can also be used for personal and business purposes when cash is tight.
  • Refurbishments & property flips - If you have the means to repay the bridging loan within the terms, bridging loans can be used to renovate investment properties as well as fund home improvements and maintenance.

Related: Are Bridging Loans a Good Idea?

Bridging loan to buy a house - example of how it works

While you're here, don't forget to check out our complete guide to bridging finance. 

How Is a Bridging Loan Different To a Mortgage?

Most people looking for property finance will approach a traditional lender such as a high street bank or building society to arrange a mortgage.

However, bridging loans have several features that make them a beneficial way of financing a house purchase when a standard mortgage might not work.

Bridging Loans Are Short Term 

While mortgages are designed for long-term property finance, with terms usually ranging from 20 to 35 years (and their cost structures and interest rates are priced accordingly).

A bridging loan is specifically designed for the short term: the maximum period for a "regulated" bridging loan (secured against or used to purchase a residential property) is typically 12 months. However, up to 24 months is possible. There are also bridging loan alternatives available based on your circumstances, e.g. if you earn £100k pa.

The aim is to temporarily "bridge" the gap when there is a shortfall in funding, say between the deadline for completion of a purchase and the sale of a previous home. Or between buying an unmortgageable property at auction and doing the necessary renovations that will make it possible to arrange mortgage finance or sell it on.

Bridge Loans Can Be Arranged Very Quickly

As most purchasers know, standard mortgage finance can take two to three months to arrange, particularly during the busiest buying "seasons" of the year. 

Bridge finance is secured primarily against the value of a property rather than the full range of your finances so that lenders can make decisions more quickly. 

We work with some lenders who can process an application and release funding within seven working days (depending on your circumstances and eligibility).

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Monthly Interest Rate Payments Can Be Deferred

Bridging loans come with the option to "roll-up" interest to be paid at the end of the finance term. This could be advantageous for buying a house because it enables you to avoid monthly interest payments and use the loan entirely to purchase your new property.

If you choose to roll up the interest on your loan, it will be repaid at the end of the finance term and the principal loan amount by your agreed exit strategy. This means that your total loan amount must include the interest cost - meaning you will have less available for the purchase or the renovation works you're funding. 

High LTV Lending Is Available

Not only can bridging loans provide funding quickly, but you can secure a substantial amount of finance through a bridging loan. Most lenders will lend up to 75% loan to value (LTV).

We work with some lenders willing to grant bridging loans up to 80% LTV to property developers on a non-regulated basis (which does not involve your residential property), depending on the set of circumstances and the assets used as security for the loan.

Some lenders can consider 100% LTV bridging finance, but it's rare you'll get accepted and you'll need extra security at the very least.

The most effective way to arrange a bridging loan of the maximum value is to secure the loan against both a property being purchased and an existing property. A single property can be used as security on a bridging loan, but the interest rate charged may well be higher with less "security" for the lender.

Bridging loan to buy a house - example of how it works

You'll Need A Watertight Exit Strategy

You need to have an exit plan agreed upon with your lender to access bridging finance. This is the achievable strategy you intend to use to repay the loan at the end of the finance term, such as the sale of your house or the arrangement of long-term mortgage finance.

A realistically achievable exit plan reassures both the lender and you, the borrower. Usually, three months away from your exit deadline, your lender will be in touch to ensure that your exit strategy is proceeding to plan. They may propose changes to the marketing plan, or it may be possible to arrange a short extension to achieve a realistic price on a property sale.

There Are No Early Repayment Fees

Long-term mortgage lenders are usually reluctant for borrowers to repay a loan in full before the agreed deadline: their interest rates have been calculated with a view to long-term, ongoing repayments. There will usually be Early Repayment Charges within a specified minimum term (often at least two years) which could add up to thousands of pounds.

Bridging loans are designed for short-term finance: the minimum term is usually one month or three months. And most lenders only charge interest on the actual duration of the loan. So if you take out a bridging loan for 12 months but repay it entirely within six and a half months, you will only pay interest on the exact number of days the loan was outstanding.

You Can Buy An Unmortgageable Property

Traditional lenders will not finance properties they deem "unmortgageable" - Examples include:

  • Valued under £50,000
  • With structural issues
  • Without a functioning bathroom or kitchen
  • That is derelict

Bridging lenders are much more flexible in their criteria, provided sufficient security is offered in some other property holding. If you need finance for an unmortgageable building, then a bridging loan is likely your most viable option. 

Get Quote »

Related: How to Use a Bridging Loan to Buy a House in London

How To Apply For a Bridging Loan

The bridging loan lending process can be swift and efficient. A typical bridging loan application will play out as follows:

Initial call

This is where our brokers find out precisely what you need. This will usually require you to provide details of the loan size you want and the asset you intend to use as security.

Indicative terms

Documentation will be sent to you, providing a breakdown of our terms and conditions and a quote for the costs you will incur.

Lender search

Our brokers scour the marketplace to find the lender that will accommodate your financial needs.

Decision In Principle

Lenders provide a document to show they are happy to give the loan size based on their information.

Client confirmation

Upon receipt of the Decision In Principle, you send notification that you want to proceed with the loan application.

Valuation

Our brokers instruct a professional surveyor to value your property and send it to the lender.

Lender confirmation

The lender will send the surveyor's report to their credit community team for proof that the loan is an appropriate size based on your property's value.

Offer

The agreed loan amount will be sent to you.

Solicitors instructed

Solicitors will send all the offer documentation to you to sign.

Funds released

Once you have signed and returned the documentation, your funds will be released.

The time it takes to complete an application and secure the finance will vary from lender to lender and depend on your circumstances.

Bridging loan to buy a house - example of how it works

Explore some of the bridging deals we've facilitated below:

Quick Bridging Loan Secures Completion of Self-Build
Quick Bridging Loan Secures Completion of Self-Build
Area
Lincoln
Capital Raised
£200k
Large Bridging Loan For Grade II Listed Property
Large Bridging Loan For Grade II Listed London Property
Area
London
Capital Raised
£1.1m
Fast Re-Bridge to Complete Loft Conversion Before Sale
Fast Re-Bridge to Complete Loft Conversion Before Sale
Area
London
Capital Raised
£294k
Bridging Finance Enables Below Market Value Purchase in Devon
Bridging Finance Enables Below Market Value Purchase in Devon
Area
Devon
Capital Raised
£103k
VAT Bridging Loan for Hotel Purchase in London
VAT Bridging Loan for Hotel Purchase in London
Area
London
Capital Raised
£3m
Inheritance Tax Bill Probate Finance for London Estate | Case Study
Inheritance Tax Bill Probate Finance for London Estate
Area
London
Capital Raised
£350k

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Bridging loan to buy a house - example of how it works

Get a Bridging Loan

If you're looking to secure a bridging loan, you may need the help of a specialist bridging broker. A bridging broker can use their network of lenders and market expertise to find you the best deal on the market. 

A bridging loan broker can offer comprehensive advice on your options and will help you find the most cost-effective solution. In the right circumstances, a bridging loan can be a quick and affordable means to secure your property.

At Clifton Private Finance, we have an award-winning team of bridging brokers who can guide you through the process.

If you want to discuss how bridging finance could work for you, call us, and an adviser will be able to discuss your situation in detail.

Call us today on 0117 959 5094 to see how we can help, or book a consultation with us below. 

Book Consultation » 

 

Bridging Loan Awards 2023

Bridging Loan Awards 2022

FAQs

Do you need a valuation for a bridging loan?

Yes, a valuation is typically required for a bridging loan in the UK.  

Since bridging loans are often secured against a property or other valuable assets, lenders will want to assess the market value of the property being used as security. This helps the lender determine how much deposit they want you to provide based on the value and condition of the property. 

How much can you borrow with bridging finance?

You can borrow up to £25m with bridging finance, but it’s typically capped at about 80% of the value of the property you’re using as security. 

It's important to note that different lenders have varying policies and criteria regarding the maximum loan amounts they offer for bridging finance. Some lenders have a maximum limit of over £1 million, while others may specialize in smaller loan amounts. 

Additionally, the terms and conditions of the loan, including interest rates and fees, should also be taken into consideration when determining the overall affordability of the bridging loan. 

Do you need a deposit for a bridging loan?

Yes, you typically need a 20-40% deposit for a bridging loan. 

It can be possible to get a bridging loan without a deposit (a 100% bridging loan), but you’ll need other assets in the background to secure the loan against, and more stringent criteria and higher costs could apply. 

Can I get 100% bridging finance?

Yes, it is possible to get a 100% bridging loan (also known as a 100% LTV bridging loan), but it is rare. This means that you won’t need to put down a deposit and can borrow the full value of your property.  

However, the criteria for these loans can be hard to meet, and you’ll need to provide additional assets as security for your loan. 

Interest rates and fees can also be higher to compensate. 

Does a bridging loan make you a cash buyer?

While using bridging finance doesn’t technically make you a cash-buyer, it can allow you to act like one.  

Mortgages take months to process, often leading to an ‘onward chain’ where all parties involved need to wait for funds to be transferred 

Bridging finance can usually be accessed a lot quicker than mortgages so you can bypass the onward chain, giving you an advantage over other buyers and being attractive to sellers.

What is the longest bridging loan term?

Bridging loans typically have a term of 12 months, but some lenders are willing to stretch their terms to 18 months, or even 2 –3 years depending on the case. 

Terms longer than 2 years will usually only be considered for specific cases.  

Can I use a bridging loan to pay stamp duty?

Yes, you can use a bridging loan to pay Stamp Duty.  

This amount could be covered by a bridging loan, providing you have a way to repay the additional borrowing amount to your lender.  

Are bridging loans safe?

Yes, bridging loans are safe when they’re used in the right circumstances with a solid repayment strategy. However, we recommend speaking to a qualified advisor, like our brokers at Clifton Private Finance, before you take out a product. 

The main factors to consider with bridging finance are that the full loan amount will usually need to be repaid within a year, and like a mortgage, it is secured against a property as collateral. 

This means that in the case that you aren’t able to repay your bridging loan, your property would be at risk of repossession.  

But with a watertight exit strategy, bridging finance can be an efficient way to secure property quickly. 

Can an 80 year old get a bridging loan?

Bridging loans are designed to be short-term so there’s no maximum age limit when applying for a bridging loan. This does depend on the lender, as some bridging lenders do have an upper age limit, but there are lenders on the market who offer bridging loans for borrowers aged 70 and over. 

What is the monthly interest rate on a bridging loan?

Bridging loan interest rates usually range between 0.45% - 2% per month, depending on the case and the market rate.

Unlike mortgage interest rates, bridging loan interest is calculated monthly instead of yearly.

This is because bridging loans are short-term and, in many cases, repaid within a year. Bridging loans can be arranged without early repayment penalties, so interest is calculated monthly to ensure you only pay interest on the months you have the loan for.

Do banks still do bridging loans?

Unfortunately, mainstream banks in the UK don’t offer bridging loans.

This means that if you’re looking for a bridging loan, you won’t be able to get one using a lender you’d find on the high street.

There are a variety of specialist lenders that offer bridging loans, but because these lenders are smaller and more niche, you may need a bridging broker to access them.

How much do banks charge for bridging loans?

Banks typically charge two main fees when taking out a bridging loan – arrangement fees and interest.

But there are other costs to consider such as valuation fees, broker fees and administration fees.

Costs can vary from lender to lender, and will also depend on what your bridging loan is for (e.g., residential or commercial purposes.)

Arrangement fees are what the lender charges you to take out the loan and can range between 1.5 - 3% of your overall loan. Bridging loan interest, on the other hand, is calculated monthly. This can catch borrowers out who may be expecting an Annual Percentage Rate (APR) like with a mortgage.

Can you turn a bridging loan into a mortgage?

Yes, you can convert a bridging loan to a mortgage through refinancing, and it is common among borrowers who use bridging finance to buy residential properties.

However, whether or not you’ll be able to refinance to a mortgage is dependent on your financial circumstances, the lender, and the property you’re planning to buy.

It’s important to be sure that refinancing is a viable repayment option before you take out a bridging loan on a residential property.

Is a bridging loan more expensive than a mortgage?

Yes, bridging loans are typically more expensive than mortgages.

Bridging loan interest rates can be much higher than a mortgage, and are calculated and displayed as monthly rates instead of the usual annual percentage rate (APR) that you’ll see on a mortgage.

However, bridging loans are a short-term solution, and you’ll only pay interest on the months you’ve borrowed money for – and you can repay early without any charges (for most loans).

There are many circumstances where bridging loans are an affordable option and a means to an end - for borrowers that need to finance a property purchase quickly, it may be the only option available.

How are bridging loans paid?

The two most common ways to pay a bridging loan are to sell a property or refinance to a mortgage.

You may also need to ‘service’ the loan through the term, which means paying the interest monthly. However, you can opt to ‘roll up’ your bridging interest to be repaid at the end along with the capital.

There are also other ways to repay a bridging loan, such as selling a business or even using money from an inheritance.

The method in which you pay your bridging loan can be flexible, just as long as it is clear in your application that you have a surefire way to repay your loan when the terms are up.

What is the minimum deposit for a bridging loan?

In most cases, a bridging loan will require a minimum deposit of 25%. However, the minimum can vary depending on the lender and the specific circumstances of the loan itself.

Generally, bridging loans are secured against a property or other valuable assets, and the deposit required is often expressed as a percentage of the property's value, known as the loan-to-value ratio.

In some cases, 0% deposit bridging loans are an option, but only if you have other property or assets in the background to provide additional security.

Do you pay monthly payments on a bridging loan?

No, typically, you’ll repay a bridging loan in one chunk at the end of the loan term. Bridging loans are a form of short-term finance and will usually need to be repaid within 12 months, but there can be room for flexibility.

In some cases, borrowers may be required to make monthly interest payments. This means that each month, you would pay the interest accrued on the loan amount while the principal amount remains outstanding until the end of the loan term.

But usually, the interest is "rolled up" or added to the loan balance and paid with the rest of the loan at the end of the term. This option can help protect your cashflow so you can spend it on moving costs or refurbishments, for example.

How long does it take for a bridging loan to come through?

Bridging loans can be arranged in as little as 7 working days.

However, it depends on the complexity of the bridge loan and your specific circumstances. It may also be more expensive for you to rush an urgent application through – but not impossible.

Bridging loans are a popular option for borrowers who are under time constraints, such as buying a property at auction or breaking a chain.

What is the criteria for bridging finance?

The key factors lenders tend to consider are:

Security - Bridging finance is usually secured against property or other valuable assets. Lenders will assess the value and marketability of your security.

Exit Strategy - Lenders will want to understand how you plan to repay your bridging loan. In most cases, this is selling your old property, selling the new property (flipping), or refinancing with a long-term mortgage.

Loan-to-Value (LTV) Ratio - Lenders consider the loan amount compared to the value of the property being used as security as a percentage. The LTV ratio can vary, but most lenders will have a maximum of 60-80% LTV.

Remember, the criteria for obtaining bridging finance in the UK can vary depending on the lender and your circumstances.