Commercial & Residential Finance
Clients often ask us about bridging loans from both a commercial and a residential point of view. Bridging loans can be a very helpful form of finance in some situations, but they do involve some risk.
What is a bridging loan?
A bridging loan is generally a shorter term financing option, where an asset is used as security. That means it can be a high value loan, allowing you to borrow from around £25,000 up to £1 million or more.
A bridging loan is not intended to be long term financing – a typical term is six or 12 months. Meanwhile, some specialists might go up to 18 or 24 months depending on your need.
When do people use a bridging loan?
Bridging loans are usually appropriate when you need to access a large amount of money fast. A typical example is buying property at auction, where you need to pay in full within 30 days. You’re unlikely to get a mortgage in that time, but a bridging loan can usually be arranged quickly.
Another common situation is where a homeowner has found a new property to buy but has yet to sell their existing home. Rather than miss out on a dream property, they use a bridging loan to buy the house and repay it once the first home is sold.
Some people also take out a bridging loan to fund renovations or a refurbishment project and repay it by selling the finished property.
How does a bridging loan work?
A typical bridging loan will offer a maximum 70% to 75% loan to value – with rates rising along with the loan percentage.
You put up an asset as security – usually a home. If you fail to repay the loan, your home is at risk.
What are open bridge loans vs closed bridge loans?
A closed bridge loan is for a situation where you know exactly when you will be able to repay the loan, while an open bridge loan is more flexible. A closed bridge will usually have lower interest rates and is easier to gain approval for.
How is affordability assessed?
One of the key drivers for people taking a bridging loan is that a lot of bridging lenders don’t assess affordability. Because you are usually putting a property up for security, there is less concern about your income and how you will repay the debt.
How does interest work?
There are commonly three different methods of charging interest on a bridging facility.
- Retained interest. This is the most common approach in bridging loans. The lender calculates the interest that will be due over the term of the loan and takes it from the total borrowing upfront. This means there are no monthly payments.As an example, if you wanted to borrow £50,000 but the interest due over the term is £5,000, the amount the lender provides you will in practice be £45,000.
- Rolled-up interest. Rolled-up interest is similar to the above, but the interest is added to the loan amount. So you might borrow £50,000, but a further £5,000 is due at the outset to cover the interest. Your total loan amount is, therefore, £55,000.
- Serviced interest. This type of bridging loan works more like a mortgage – the interest is paid off on a monthly basis. So at the end of your term, you only pay back the loan amount.
What are the costs?
It’s very important to be clear about how your loan will work before you sign up. The rates are high and there are also fees to pay. An arrangement fee is often around 2%, so on a £100,000 loan, you’d be looking at an arrangement fee of about £2,000. This is often retained from the overall loan amount.
Depending on the type of loan, some lenders will also charge an exit fee, which could be anything from a month’s interest to a fixed sum. You may also be charged valuation fees on the asset you are putting up for security.
Some purchases may involve legal fees too, so it’s very important to get total clarity of the costs before you commit to the loan.
Bridging loans for commercial borrowing
Bridging loans are often used for commercial purposes too. Typical examples are to cover a large tax bill or other expense that’s due, where you don’t have the funds today but they will be available soon.
Or, perhaps a business opportunity has arisen where you need to act fast – to buy out a competitor, for example, or take on a valuable project that involves upfront outlay.
There may be other, less risky, and less expensive ways to fund this kind of example – so do seek advice before proceeding with a bridging loan.
What are the main considerations for a bridging loan?
The most important thing to consider when you’re taking out a loan like this is your exit plan. You need to be 100% certain that you can pay back the loan when it’s due, and how you will do it.
Running over your deadline can cause costs to spiral out of control and leave you in a very challenging situation.
Borrowing on a mortgage is usually a safer option, so if you have an opportunity to remortgage or release equity as an alternative, it is worth exploring.