A bridging loan for a house purchase is a short-term financial solution that helps buyers secure a new property before selling their existing one or securing a long term alternative source of financing.
These loans provide quick access to capital, making them ideal for those facing time-sensitive transactions, such as auction purchases or chain breaks.
Statistically speaking, the percentage of homeowners using bridging finance to avoid chain breaks nearly doubled – from 15% in Q4 2022 to 25% in Q1 2023 – highlighting the growing reliance on short-term finance to secure house purchases amid market uncertainty.
Unlike traditional mortgages, bridging loans are designed for short durations, typically ranging from a few months to two years.
This guide explores how bridging loans for house purchases, their benefits, costs, eligibility criteria, and key considerations.
Table of Contents
What is a Bridging Loan for House Purchase?
A bridging loan is a secured short-term loan that provides immediate funds to purchase a property.
It is commonly used by homeowners, investors, and developers who need to act quickly in the property market.
Unlike standard mortgages, which can take weeks or months to arrange, bridging loans can be approved within days, making them a valuable tool for buyers in competitive situations.
These loans are typically repaid once the borrower secures long-term financing or sells their existing property.
How Does a Bridging Loan Work?
Bridging loans are secured against property, meaning the borrower must provide a valuable asset as collateral.
The lender assesses the property’s value, the borrower’s financial situation, and the exit strategy, which defines how the loan will be repaid.
Funds are usually released in a lump sum, and interest is either paid monthly or rolled up into the total loan amount.
There are two main types of bridging loans:
- Open Bridging Loans: These have no fixed repayment date but require repayment within a set period, usually up to 12 months.
- Closed Bridging Loans: These have a fixed repayment date, often used when the borrower has a guaranteed exit strategy, such as a property sale with a set completion date.
Often most bridging loans have a maximum 12 month repayment term.
When to Use a Bridging Loan for House Purchase
Bridging loans are useful in several scenarios, including:
- Buying Before Selling: If a buyer wants to purchase a new home before selling their current property, a bridging loan provides the necessary funds.
- Auction Purchases: Auction properties often require full payment within 28 days. A bridging loan ensures quick access to funds for a successful purchase.
- Chain Breaks: If a property chain collapses, a bridging loan allows the buyer to proceed without waiting for their buyer’s mortgage approval.
- Unmortgageable Properties: Some properties may not qualify for a standard mortgage due to their condition. A bridging loan helps secure the property while renovations are completed.
- Investment Opportunities: Property investors use bridging loans to quickly acquire properties before refinancing with a long-term mortgage.
Costs and Interest Rates
Bridging loans typically have higher interest rates than traditional mortgages due to their short-term nature and the risk involved.
Interest rates usually range between 0.4% and 2% per month, depending on the lender, loan-to-value (LTV) ratio, and borrower profile. Additional costs include:
- Arrangement Fees: Typically 1-2% of the loan amount.
- Exit Fees: Some lenders charge a 1% fee upon repayment, however some do not charge an exit fee at all.
- Valuation Fees: The property used as security must be professionally valued.
- Legal Fees: Covering both the borrower’s and lender’s legal costs.
For example, a £200,000 bridging loan with an interest rate of 0.7% per month and a 2% arrangement fee would result in:
- Monthly Interest: £1,400
- Arrangement Fee: £4,000
- Total Cost (6-month term): £12,400 (excluding other fees)
Eligibility Criteria
Lenders assess several factors when approving a bridging loan:
- Loan-to-Value (LTV) Ratio: Typically, up to 75% of the property’s value can be borrowed, however with many lenders this can be much less.
- Exit Strategy: A clear repayment plan, such as selling the property or securing a mortgage, is essential.
- Credit History: While credit checks are conducted, bridging loans are more focused on asset security than credit scores however this will play a part.
- Property Value: The property being purchased and any additional assets used as security must be professionally valued.
- Borrower Type: Available to individuals, businesses, and property developers.
How to Apply for a Bridging Loan
Applying for a bridging loan involves several steps:
- Assess Borrowing Needs: Determine how much is required and the expected repayment timeline.
- Choose a Lender: Compare rates and terms from various lenders.
- Submit an Application: Provide details about the property, finances, and exit strategy.
- Property Valuation: The lender arranges a valuation of the property.
- Receive Loan Offer: The lender issues terms and conditions.
- Legal Process: Both parties complete legal agreements.
- Funds Released: The loan amount is transferred to the borrower.
We recommend working with an experience broker to guide you during this period.
Risks and Considerations
While bridging loans provide fast access to funds, there are risks to consider:
- Higher Costs: Interest rates and fees can add up quickly if repayment is delayed.
- Short-Term Repayment: If the exit strategy fails, borrowers may face financial difficulties.
- Property Repossession: If unable to repay, the lender can seize the secured asset.
- Market Fluctuations: Property values may decline, impacting resale/exit potential.
- Alternative Financing: Consider whether alternative funding options, such as remortgaging or secured loans, are viable as these will often be cheaper.
Frequently Asked Questions (FAQs)
1. Who can apply for a bridging loan for a house purchase?
Homeowners, property investors, developers, and businesses can apply, provided they have a viable exit strategy and security.
2. How quickly can I get a bridging loan?
Depending on the lender, bridging loans can be approved within 24 hours to a few weeks.
3. Can I get a bridging loan with bad credit?
Yes, as bridging loans focus more on asset security and exit strategy than credit history.
4. What happens if I can’t repay the loan on time?
Lenders may offer extensions, but additional fees and higher interest rates may apply. If repayment fails, the property used as security may be repossessed.
5. Can I use a bridging loan for a second home?
Yes, bridging loans can be used for second homes, holiday homes, and investment properties, this will all be dependant on the lenders criteria.
6. Are bridging loans regulated?
Regulated bridging loans are available for residential property purchases and fall under FCA (Financial Conduct Authority) regulations. Unregulated loans are typically used for investment or business purposes.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.
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