Bridging loans explained.
Most people have heard of a mortgage and, generally speaking, have a basic understanding of its uses. A bridging loan on the other hand tends to be one of the more misunderstood forms of finance, but it’s becoming increasingly popular – mainly because its speed and flexibility allows borrowers to keep going when they need to move forward.
First things first, what is a bridging loan?
A bridging loan is a short-term loan, typically lasting up to 12 months, which is designed to bridge the gap between money going out and money coming in. They are most commonly used when time is of the essence, as they can often be arranged quickly – and much faster than a long-term mortgage.
In other words, a bridging loan can be used when you’ve got an expense you need to pay now, while you’re waiting for some money you’ll receive later, or you’re waiting for a mortgage to be arranged.
How does a bridging loan work?
A Together Bridging loan lasts for an agreed term – typically 12 months – and you’ll repay whatever you've borrowed in a lump sum, as soon as you're able to.
As with all loans, you'll be charged interest each month. Depending on what type of bridging loan you have, you may need to pay this each month, or it may be added to the lump sum you’ll pay at the end of the loan instead.
Your interest is calculated on a monthly basis – so the longer you have your loan, the more it'll cost you. If you repay the lump sum before the term ends, you may be charged less interest in total.
Any fees associated with the loan can be added to the lump sum as well.
The different types of bridging loans
Bridging loans can be used for all sorts of reasons, which fall under two umbrella terms; personal bridging loans and commercial bridging loans
What is a personal bridging loan?
Personal bridging loans are regulated by the Financial Conduct Authority, and are secured against your home, or another property defined as personal property – like one you've inherited.
The main reason you may choose to use a bridging loan as a personal customer, is to repair a broken chain, or to secure a new home before selling your old place.
Unless you’re a first-time buyer, it’s likely that any house purchase will be part of a chain.
While your chain might just be two people, it could be many more, which increases complexity and the odds of something going wrong. And just one hiccup can trigger a major domino effect that could scupper the whole process, wasting huge amounts of time and money, and causing unnecessary heartache for everyone involved.
So if you’re stuck in a slow chain with a vendor who wants to move quickly, or it’s on the verge of collapsing because a buyer has pulled out, a bridging loan might provide the ideal solution.
The short-term loan could effectively turn you into a cash buyer, meaning you wouldn’t need to wait for the sale to complete on your existing house before you can purchase your new home.
There are no monthly repayments on Together Personal Bridging loans so you won't end up paying for two mortgages at the same time.
Instead, interest is charged monthly and 'rolled up' to be repaid in a lump sum, with the initial loan and any fees and charges. Once your sale has gone through, you’ll simply use the proceeds to pay off your bridging loan in full, within the 12 months of your loan.
What is a commercial bridging loan?
Commercial bridging loans, or unregulated bridging loans, are secured against properties you've bought (or are buying) either as an investment, or business premises.
With a commercial bridging loan, you’ll make interest payments each month while you have your loan, which you can bundle any fees into (please be aware, if fees are included in the loan, additional interest will be applied). You’ll then repay your bridging loan when your term ends – or earlier, if you choose.
Here at Together, we offer more than one type of bridging loan within commercial finance, depending on your circumstances and what you’ll be using your loan for.
Commercial bridging loans on a commercial property
When time is of the essence, you can use a Together Commercial Bridging loan to purchase a variety of commercial and semi-commercial property types, including:
- Office buildings
- Retail units, restaurants and takeaways
- Factories and warehouses
- Working farms, and land
What is a residential investment bridging loan?
Bridging loans are also popular with landlords and property investors, when they need to fund a new deal or bridge a gap between existing deals.
A bridging loan allows landlords and investors to act as cash buyers when purchasing a property. For example, if you’ve found a great property deal, but the vendor needs a quick sale and is prepared to offer the property at a discount.
At Together, you can also take out a commercial bridging loan on a residential property. A second charge loan (also known as a Secured loan) is one which is secured against a property that already has a mortgage (or a first charge) outstanding.
If you’re looking to raise funds to do a loft conversion, extension, or other improvements to your residential investment property (such as one you let out) and you already have a buy-to-let mortgage outstanding for example, this would enable you to raise the required funds.
You could also take out a commercial bridging loan against an existing residential property in your portfolio, to raise the deposit to purchase a new property. In order to pay off your bridging loan, you could then choose to refinance onto a Buy to Let Secured loan.
What is Auction Finance?
Investors also sometimes use a bridging loan to buy a property at an auction before doing it up and selling it on for a profit, Great House Giveaway style. This type of bridging loan is most commonly referred to as ‘auction finance’.
Auction houses usually require buyers to complete within 28 days, so often auction finance is the best or only viable route. It’s designed for investment properties of all kinds – including a wide range of residential, semi-commercial, and commercial properties.
You’ll have up to 12 months to repay the loan in a lump sum – leaving you ample time to get the longer-term finance you need, or sell the property on.
If you're buying a house at auction to live in yourself, we can also help with this (which would be classed as a personal bridging loan) – and you won't make any monthly payments while it's in force.
What is a capital raising bridging loan for business owners?
There’s no time to waste in business, so a bridging loan can also be used when you quickly need an injection of cash. For example, if:
- You’ve secured a large new account: If you need to invest in raw materials to complete a large order, or need to hire staff to increase capacity, while waiting for your first invoice to be paid.
- You need to pay an unexpected tax bill: Clearing the bill leaves you free to concentrate on the important task of running your business.
- You need to secure new premises: Whether your business is booming, or just moving, you can use a bridging loan to secure a new site while your old one sells.
- You have up-front expenses to cover: Such as a new shop-fit or the purchase of stock, before you can begin trading from a new outlet.
- You have outstanding invoices: If too many clients have bought on credit, or are late in paying their invoices.
If you know cash will be coming in over the next couple of months, you could save yourself paying the interest you might have accrued on a fixed term loan, as a bridging loan can be paid off as soon as you have the funds to do so.
This short video gives a simple example:
What is development finance?
If you’re looking to build or convert a property (or complete a larger development), you may choose to take out development finance – a bridging loan specifically designed for these types of projects.
With Together, you can borrow over two years, giving you the time you need to complete your project and sell the property/properties, or arrange longer-term borrowing based on its ultimate market value.
Projects may include:
- Residential developments: including student accommodation.
- Commercial developments: including industrial, retail units and mixed use.
- New builds and conversions.
- Part-developed sites.
What is a development exit bridging loan?
If a development is going to be completed later than expected, or sales are taking longer than planned, a commercial bridging loan could allow you to exit your development finance loan (whether that’s with us, or another lender) onto a short-term loan. This could bridge the gap between the end of your original investment term and releasing the capital in your project.
This type of bridging loan is also commonly known as a development exit bridging loan, and can offer property developers the breathing space to find buyers (so they aren’t forced into accepting lower offers), or finish off minor development works.
A development exit bridging loan could also be used to release capital from a development before sales come through, giving you the funds to start working on your next project.
Who can apply for a bridging loan?
Anyone can apply for a Bridging loan with Together, including:
If you’re self-employed
Whether you’re a sole trader, freelancer or side-hustler, we can accept self-employed applicants with just 12 months trading history, and you’ll get the same rates as someone with a regular income.
We’ll look at your last three months’ earnings, so even if you took advantage of the Self-Employed Income Support Scheme in 2020, you’ll still be considered. If you’re applying for a Personal Bridging loan with Together, we won’t need to complete any affordability checks, as you won’t need to make any monthly payments.
If you’re retired
We’ve no maximum age on our Commercial Bridging loans, and our maximum age for our Personal Bridging loans is 85 years at the end of term. We’ll consider a wide range of income (including your pension) when it comes to assessing affordability.
So if you’ve found the perfect retirement property, you don’t need to wait around for your current one to sell, and you’ll have plenty of time to organise your move and make the transition gradually.
If you’ve got adverse credit
If you’ve got less-than-perfect credit, such as a small blip that’s caused a big impact on your credit score – we’ll use our common sense when reviewing your application, and look at your credit history instead.
We can also ignore adverse credit that’s over 12 months old when it comes to deciding your interest rate.
How does the loan work?
How long does it take to get a bridging loan?
Together have decades of experience in getting bridging cases over the line quickly – and much faster than a typical fixed-term loan or mortgage. This means a Together Bridging loan could get you the cash you need while waiting for longer-term borrowing to be arranged.
How do you decide my interest rate?
The rate you're offered may be influenced by several factors, including:
- What you're using your Together Bridging loan for (whether it’s for personal or commercial purposes).
- How much you need to borrow (both in total, and as a percentage of your property's value).
- Whether you have any other loans secured against the property, that won't be repaid by this loan.
- Your credit history (but not your credit score).
How do you repay a bridging loan?
While you have your loan, one of two things will happen:
- You'll make interest payments each month, whilst you have your loan (which you can choose to add any fees to). Please be aware, if fees are included in the loan, additional interest will be applied.
- Or, your interest could be added to the lump sum you repay at the end instead. Here at Together, this is the route we give to customers who are buying a property to live in, so you won’t have to make interest payments while you have another mortgage.
How you’ll repay your bridging loan at the end of term will depend on your ‘exit strategy’ – we’ll ask you about this when you’re applying for your bridging loan.
For example, if you were taking out a commercial bridging loan for your business, it may be that you're using the loan to manage cash flow while you wait for a customer to pay a large invoice. Once this invoice has been paid, you’ll use this money to repay your loan and any associated fees.
Or you might be planning to use the proceeds from the sale of a property, or from an inheritance that's currently in probate. Again, once you’ve got the necessary funds in place, you’ll use this to pay off your bridging loan within the 12 months of your loan.
What should I consider before taking out a bridging loan?
There are some things you should mull over before proceeding:
Is my repayment method realistic?
If you're planning on selling a property to repay the loan for instance, is 12 months long enough to find a buyer and the sale to complete? Would you be able to repay the loan if you were forced into a quick sale at a lower price? Remember that if you're unable to repay your loan within 12 months, your property may be at risk of repossession. In conjunction to this, it’s important to consider that additional fees and charges may be applied if you cannot repay your loan.
How much does a bridging loan cost?
It's important to remember that the longer you take to repay your loan, the more it will cost you so think about what it would potentially cost if circumstances meant you took the full 12 months to repay it.
You should also compare more than just the interest rate and factor in any fees and charges – like a Lenders Arrangement Fee, Exit Fee (a Repayment Admin Fee), or similar.
What are the alternatives to a bridging loan?
Bridging finance can often provide the best borrowing option in terms of speed and flexibility, however depending on your situation, an alternative finance solution may be more appropriate.
If you’ve already got a mortgage on an existing property, one alternative could be to remortgage in order to withdraw some equity. However, if you’ve already got a good deal and you’re happy with your current monthly repayments, this may not be the most cost-effective option – especially if you’ll have Early Repayment Charges to contend with.
- Second charge mortgages
If you've built up equity in an existing property (like a rental one), you can leverage it to borrow without remortgaging out of your current deal – to pay for renovations or upgrades, for example.
This kind of loan is known in the industry as a 'second-charge' mortgage, or a ‘secured loan’. It runs alongside, but independent of, any existing mortgage you have. It has its own rate and terms, so you could borrow over a shorter period than remains on your current mortgage.
If you’re unsure, a specialist broker will be able to help you by talking through your available options.
Talk to us to see how much you could borrow.Speak to an expert
Your home may be repossessed if you do not keep up repayments on your mortgage.
Together offer a range of regulated products and unregulated products. Together Personal Finance Limited are authorised and regulated by the Financial Conduct Authority (FCA) and offer products including (but not limited to) Personal mortgages, Secured loans, Consumer Buy to Let mortgages and regulated Bridging loans.
Our unregulated products are provided by Together Commercial Finance Limited and include (but are not limited) to unregulated Bridging loans, Buy to Let mortgages, Auction finance and Development finance.