Bridging Loans Explained

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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.

In this simple guide, we explain how bridging loans work, who they might be right for, and the situations where bridging finance might be the most suitable option.

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.

What are the different types of bridging loan?

Bridging loans can be used for all sorts of reasons, which fall under two umbrella terms; personal bridging loans and commercial bridging loans.

Personal bridging loans 

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 changes. Once your sale has gone through, you’ll simply use the proceeds to pay off your bridging loan in full, within the 12 month term of your loan.

Explore Chain Break Bridging loans
Commercial bridging loans 

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

• Hotels

• Working farms, and land

• Hotels

Explore Commercial Bridging loans
Residential investment bridging loans 

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 second charge 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 second charge 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, or you could choose to Remortgage.

Explore Residential Bridging loans

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.

Explore Auction Finance

Capital raising bridging loans 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:

Explore Capital Raising Bridging loans
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 up to 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.

Explore Development Finance

Development exit bridging loans 

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.

Explore Development Exit Bridging loans

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, first charge residential mortgages, second charge 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, Auction Finance and Development finance products.

Please be aware, if fees are included in the loan, additional interest will be applied and more costs will be incurred. Lending is subject to an affordability and creditworthiness assessment.

Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.