What is a bridging loan?

“Bridging loans” or “bridging” or gap loans are designed as a short term finance solution, secured against residential or commercial property.

Typically they are used where speed is essential, the property is being sold under-value or for whatever reason the deal falls outside of standard term lenders criteria e.g. not classed as inhabitable, due to the lack of a kitchen.

Unlike term lenders that are going to work off purchase price, most Bridging Finance providers work off the open market value (OMV).

Bridging finance lenders are really concerned with three elements:

1. Open Market Value, as verified by a R.I.C.S. surveyor. If you have had a recent valuation carried out by an R.I.C.S member, some bridging finance providers will accept a re-type of the valuation
2. Treatment of interest - are you going to service the interest during the bridge or “roll it up” into the facility
3. Exit strategy- A realistic exit strategy is required from outset, be it sale or re-finance to a long term lender.

There are minimal or no status requirements, depending on whether you intend to service interest or not.

Bridging occupies a unique place in the market, and over the next couple of years the demand for it will no doubt increase, due to some of its more adventurous applications.

What are Bridging Loans?

Quite simply, a bridging loan is a short term loan that is used to bridge the gap between purchasing one property, whilst waiting for the proceeds of the sale of another. Typically a bridging loan will be offered at a fixed term, and at a slightly higher rate than a standard mortgage loan.

A bridging loan can be fairly expensive, and you would need to consider the costs very carefully before applying for a bridging loan. In certain situations it may not be possible to avoid needing a bridging loan, if you simply must pay for your new property or lose it. When the property market is slack, it sometimes becomes a necessity to take up a bridging loan to ensure that you do not lose out on your ideal property.

What Types of Bridging Loans Are Available?

There are two basic types of bridging loans offered to borrowers, the first is known as a “closed” bridge, and is offered to people who have already actually exchanged on their existing property sale, lenders see this as fairly low risk, as it is not often that a property deal falls through after the exchange has taken place. The second kind of bridging loans are named “open” bridge, this type of bridging loans are taken up by people who have not yet sold their existing property, indeed they may not yet have placed their property on the market, but are keen to purchase their new property as soon as possible. Lenders will almost always insist that there is plenty of equity in the existing property and will need to be given good reason as to the reason for the loan before making a decision.

When applying for an open bridge, the lender will usually ask to see the details of the mortgage offer on the property you are looking to purchase, along with full details about the property you propose to buy. They may also insist on proof that your current property has been put on the market, and ask you to provide details of how you intend to make repayments, and what you will do if you have not sold your property within the term of the bridging loan. If you fail to sell your property within the term of the loan, most lenders will allow you to renegotiate, as long as the property market is still healthy and you have been making repayments.

Bridging loans are typically offered at a rate somewhat above other forms of mortgage finance, and will often include an arrangement fee. You may be offered choice of lower interest rate and higher arrangement fee or lower arrangement fee and higher interest rate, which one you should choose will depend upon how long you believe you are going to need the bridge to last.

You should definitely take professional advice from a commercial mortgage broker when considering bridging loans and other forms of finance may well be available to solve your immediate problem.

Bridging Loans

A bridging loan is usually used to cover a short term cash requirement.  Commonly bridging loans are repaid in between six and twelve months, although the option of a timescale greater than twelve months is available.  In simple terms a bridging loan is like a short term mortgage, for example it can be used to pay for a new house if someone is waiting for the sale of their existing house to go through, the sale of their house allows the person to repay the bridging loan often in full after a couple of months.

Bridging loans are not only used for helping with the transitional period of buying a house, in particular for business purposes.  If a business is having a short term cash flow problem, a bridging loan can be used to rectify this situation.  Also if a company is struggling or looking to sell to an investor, a bridging loan can be used to carry that business through until the investor completes the purchase of the business.  Bridging loans can also be used for simple everyday uses such as financing a holiday or the purchase of a new car if the person is going through a short term cash problem.

There are two different forms of bridging loans which are open and closed.  A closed bridging loan has a specified repayment timeframe in the agreement.  An open bridging loan on the other hand has no specific pay-off date which means they are much more flexible.  The average interest rate on a bridging loan is around 12-15%, although this figure can vary depending on numerous factors such as credit rating, repayment timeframe and security.  The bridging loan is commonly secured against property; this property can be private, commercial or a piece of land.  The finance lender has a stake in that property until the short term loan is fully repaid.  It is difficult to find bridging loans on the high street, they are often found from specialist finance companies and commercial mortgage brokers.

Bridging loans offer an effective rest bite for customers, especially if they are going through a high pressure situation of buying and selling a house.  They can also be used for renovating houses, the bridging loan can be used to pay for the property at auction, renovate the property then sell on the private market to repay the loan.  It is important to negotiate a fair interest rate with the lender and estimate a realistic timeframe in which the bridging loan is likely to be fully repaid.