If you have been looking for extra funds to cover something expensive like a home repair, paying an outstanding invoice, or funding a new project, then you have probably already started to consider the idea of applying for a bridging loan.
There are lots of moving parts when taking out a bridging loan, from making sure you are eligible, to finding the best interest rate and repayment terms and choosing the right bridging lender to make the process as simple and stress-free as possible.
It is important that you choose the right provider for your financial needs and for this reason, we have made the decision at Believe to share with you everything there is to know about bridging loans, including how they work, who is eligible, and the best practises for finding the right bridging loan for you.
Are you a homeowner or a tenant?
What exactly is a bridging loan?
Bridging loans are a specific type of loan designed to help you “bridge the gap” financially for a period of time until you find a more permanent solution for your financing needs. They are often popular with people looking to make a property purchase or another large investment that will essentially pay out dividends in order to be able to repay the bridging loan cost.
In simple terms, bridging loans are much like overdrafts in that they’re designed to provide you with short-term credit, often while another lender sorts out your long-term financing arrangements, such as securing a mortgage.
Bridging loans are often also referred to as gap loans, interim loans, swing loans, bridging finance, or simply a bridge loan, so if you’re wondering what the difference is between these there is no need to worry, there aren’t any!
Bridging loans are most often used to bridge the gap between selling your current home and buying your next one so they are designed to help you avoid having to sell your home at a time when it is likely to be worth less than the optimal value.
The money is usually repaid when your own house sells or when you have sold it yourself, and to that effect, the term of a bridging loan can vary from six months to several years but it is most commonly used for a period of around six months.
Do I need a first, second or third charge bridging loan?
There are different types of bridging finance available, and even different types of a bridge loan that you can take out, which can make it all very confusing if it’s your first time.
A first charge bridging loan will always need to be paid back first, so it essentially takes priority over any other loans against the same asset (which is usually a property). A first charge loan will usually have the best interest rates, as it is the least risk to the lender.
A second charge loan is a type of loan that a borrower will take out when they already have an existing loan secured against the asset in question. As a result, the second charge loan provider has second priority over the lender of the original loan.
Third charge bridging loans are used when you already have two other loans secured against an asset. For example, you could have a mortgage on your property and a secured loan against it. This makes them relatively hard to apply for, and any successful applicants will find that the interest rates are higher and the terms are especially strict.
How do your credit score and income affect your ability to get a bridging loan?
There are a number of factors that can affect how much you pay for your bridging loan, including your credit score and your income. Here we will look at how these factors might affect your ability to take out a bridging loan and what impact they could have on the terms and conditions and interest rate of that loan.
Credit history & bridging loans
With many lenders, your credit score can have a significant impact on the terms that are offered to you when taking out your bridging loan.
If you have a bad credit (determined by a poor or average credit score), lenders will often demand that you pay a higher interest rate than someone with an excellent credit history. This is because they consider it more likely that you will default on your loan (fall behind on payments) if you fall into financial difficulties in the future.
You can find out what your credit score is by searching for it on free online websites such as Experian or Equifax. If you have an average or poor credit rating, there are steps you can take to improve it, including paying off any outstanding debts, being on time with payments and making sure that no new negative information appears on your credit report.
If you are struggling with paying outstanding debts already, then you might want to consider looking into a debt consolidation loan first, which can help you get out of financial trouble.
Income & bridging loans
Your income can also have a significant impact on the terms of your bridging loan, so you’ll want to work out in advance what your income is and if it’s combined with someone else like a spouse or business partner, what the total comes to.
If you earn a high income, lenders will be more likely to offer you a lower interest rate because they estimate that you have a higher chance of being able to afford to pay them back. If your income is lower, lenders may charge a higher interest rate in order to make sure that they are still able to get their money back.
If you are self-employed, lenders may want to look more deeply into the amounts that your company is turning over, as they might have more difficulty verifying your income and assets.
There is little difference in the outcome when determining who is paying your income, and once a figure is reached they will use this to work out a realistic rate of interest to apply to your loan.
Who is eligible to take out a bridging loan?
Bridging loans are designed to help people who need cash quickly for another investment, so if this sounds like the situation you are in, then you’re probably looking into a bridging loan already.
If your property is in good condition and there’s an agreed offer on it, then it could be used as security against a bridging loan, meaning that the lender can claim this item off you to sell in the case of you defaulting.
Bridging loans are available from high-street banks and specialist lenders alike, so it is important to shop around to find the best deals in advance of applying for one.
If you’re looking for a bridging loan and need some advice or want to find out if you are eligible, then feel free to get in touch with us today. We have been helping people throughout the UK find the best possible deals on their bridging loans for years and will be happy to help you out too.
When to apply for a bridging loan
If you are looking to borrow money quickly and you have a solid exit strategy in place, e.g. the assurance of the sale of a property to pay it back, then you might want to apply for a bridging loan as soon as today.
If you are buying property, you can work out the full bridge loan amount that you need by calculating the difference between the expected payout of your existing property and the cost of the new property, plus any fees that you might expect to pick up along the way (more on that below).
You might be in a situation where you have a currently uninhabitable property which is in need of refurbishment in order to be put back out on the market. Property developers in this predicament often choose to close the financial gap by taking out a short-term loan in the way of a bridging loan, so if this is familiar to you, it might be time to apply.
How to apply for a bridging loan
There are different types of bridging loans, e.g. regulated bridging loan and unregulated bridging loans. Depending on what you require the money for, will determine what type of bridging loan you should apply for.
If you have an existing mortgage, you will need to find out the amount of the outstanding mortgage remaining, because just as with any other type of secured loan, the lender will be interested to know that you have sufficient equity for them to secure it against.
You will need to get all of your figures lined up in order to apply, and you will need to come up with a range of what interest rate you think is agreeable, whether you will accept fixed or variable rates, and what monthly payments you think are achievable in your financial position.
Once you have these, along with your assets, income and anything else that a lender might want to see, it is time to start shopping around for which bridging loan to apply for.
What to look for when comparing bridging loans
Your first port of call may well be to research traditional lenders, such as the usual high street banks and high street lenders that you see around town and on the television. Your own bank might be a good place to start, but don’t expect amazing rates from the big names.
The fact is there are so many options out there. Keep an eye out for lenders who specialise in the type of finance you’re looking for, and what rates they are offering. Fixed rates tend to be preferable because they don’t increase with inflation, whereas a variable rate might mean you get a changing monthly interest rate.
Work out what the monthly repayments are expected to be, and what the fixed repayment date is so that you know that it is an achievable solution for you.
You will also want to compare upfront fees for your bridge loan such as the broker fee or arrangement fee, as well as any potential legal fees, exit fees or valuation fees for your property because these can all quickly add up.
Taking out a bridging loan with Believe
Bridging loans are relatively short-term loans, which are used to cover a temporary shortfall in finances. So if you are considering a bridging loan to help you when your current property is on the market, it could be a great option.
A bridging loan allows you to use your home as collateral and exchange it for cash until your sale goes through. This can make the process of buying a new home much easier and more welcoming on your wallet.
If you are considering taking one out and seeing what we can do for you, feel free to get in touch with us with what it is you are looking for, and we’ll be happy to help.
Believe Loans Ltd, FCA 786476, is an Appointed Representative of Believe Advisor Limited which is authorised and regulated by the Financial Conduct Authority under FCA number 841395.
How much deposit is needed for a bridging loan?
The deposit you’ll need for a bridging loan depends on your circumstances and the lender’s eligibility criteria. Most bridging loan deposits generally range from 20% to 40% of the property’s value.
Lenders have deposits for security, and a larger deposit often increases your chances of securing a loan. However, the good news is, you don’t need a cash deposit, as most lenders will also accept equity from an existing property.
Can bridging loans be repaid early?
In most cases, bridging loans can be repaid early – but terms and conditions are attached. Before getting a loan, check the paperwork because the lender might have early repayment fees and penalties attached.
You might have to pay a set fee, usually a percentage of the outstanding balance, or make up the interest repayments that the lender will lose when you pay everything back early.
Checking your lender’s terms before getting the loan ensures you know exactly what you’ll pay if you want to pay it back.
What fees and charges apply to bridging loans?
There are numerous fees and charges that apply to bridging loans, but each lender is different. Charges include:
- Arrangement Fees: All lenders have arrangement fees which is an amount they charge food setting up the loan. Most are around 1% to 2% of the loan amount.
- Exit Fees: Also known as redemption charges, some lenders impose them, but that’s not always the case.
- Valuation Fees: Lenders want to know that you’re a sound investment, so they’ll often ask you to pay for a property valuation to determine its worth.
- Legal Fees: Legal fees include solicitor and conveyancing charges, and you, as the borrower, are responsible for them.
- Broker Fees: Brokers find the right provider for your needs, so they have a small service fee. However, our fees are added to your loan, so you don’t need to worry about upfront payments.
What are the average bridging loan interest rates?
Interest rates for bridging loans vary depending on the borrower’s creditworthiness, loan term, and the lender’s policies. The interest rates are usually higher than with traditional mortgages, as there’s more risk with bridging loans due to their short-term nature.
You’ll also need to consider whether fixed or variable interest rates suit your needs, so there’s no average interest rate for bridging loans.
How can bridging loans be used?
- Property purchases: Bridging loans help bridge the financial gap between purchasing a new property and selling an existing one.
- Property development: They can fund property development and buy-to-let projects, such as renovations, refurbishments, or conversions.
- Auction purchases: Bridging loans can provide quick access to funds for purchasing properties at auctions, where you might not be able to make an immediate payment.
How It works
Simple, easy application
We search our panel of lenders to find the deal that’s right for you
When you confirm your chosen deal, we get your application moving
The money lands in your bank
account – usually within two weeks
We compare loans from our panel of the UK’s top lenders to get you the best deal.
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