Residential Bridging Loans: A Guide to Bridging Loans for a House Purchase

– Introduction
– How Does a Bridging Loan Differ from a Traditional Mortgage?
– How Much Does a Residential Bridging Loan Cost?
– How is a Residential Bridging loan repaid?
– Types of Residential Bridging Loans Available
– When Would You Need a Residential Bridging Loan for a property purchase?
– How to Obtain a Residential Bridging Loan
– Alternatives to Residential Bridging Loans

In this article we’ll be exploring what a residential bridging loan is, how they differ from a term mortgage arrangement and how they can be utilised to support the purchase of a residential property.

A bridging loan is a form of short-term lending, secured against a property. Bridging finance can support cashflow before a more long-term arrangement can be made. Bridging loans are often seen as ‘bridging the gap’ between property purchases, if a chain collapses during a property transaction, however, are also very common in cases of property investment and development.

The reason it’s important for individuals to understand when and why a bridging loan might be appropriate for them, is because, whilst they are an amazing resource to access fast finance in challenging circumstances, they can also come with some risks and considerations.

The biggest advantage of a bridging loan is the speed in which it can be arranged, allowing cash to be available within a very limited timescale. Bridging loan funds have been paid out by BIG Property Finance in a matter of days, whilst a high street lender would normally finalise a mortgage in 4-6 weeks at the fastest, as part of a standard property transaction.

Another significant difference between a mortgage versus a bridging loan, is the term in which it runs for. Whilst many mortgages will now run for up to 35 or 40 years, bridging loans only have a term of circa 1 month to 2 years and are therefore intended to be a temporary form of finance. This in turn means that there needs to be an intended repayment vehicle for a bridging loan. Whilst a mortgage is regularly structured on a capital repayment basis, where the monthly payments pay down the added interest and gradually reduce the outstanding capital, a bridging loan would only be repaid in full at the end of the loan term. A serviced bridging loan might still be a possibility, if the monthly payments are affordable with the borrower’s current income, allowing them to clear the accrued interest each month. However, the borrower will still need to have a clear exit strategy to the loan, so that they can pay back the funds borrowed with any outstanding fees or interest.

It is important to mention that bridging loans aren’t considered to be the cheapest form of finance, as you pay for the convenience. The current average mortgage rate for a five-year fixed rate mortgage is 4.69%, according to the site ‘Rightmove,’ with bridging rates ranging from around 6.6% to 24% annually! You also need to consider legal fees, valuation costs and potentially broker fees, arrangement fees or exit fees. Added fees and extra costs can be a feature of many forms of lending, but at BIG we are always transparent upfront on what is payable.

There are several possible exit strategies to a bridging loan, with the most common as follows.

Refinance: The loan is repaid with money from a traditional mortgage or similar loan. The borrower will be able to use the bridging loan term to secure funding from another provider and agree their finance to be repaid over a longer term. This could include the borrower securing a Buy-to-let mortgage, for example, while they rent the property for income.

Sale of property: The subject property may be renovated, marketed, and sold during a bridging loan term, with the proceeds of the sale repaying the loan with a residual profit.

Sale of other assets: A borrower may look to repay a bridge with the sale of other investments/assets such as stocks and shares, businesses, or a secondary property. When relying upon the sale of another asset, it’s required for a borrower to provide supporting documentation to their bridging lender to support the ownership and value of the asset.

There are two key categories of bridging loan, either regulated or non-regulated. At BIG Property Finance we currently offer unregulated bridging loans only.

An unregulated bridging loan is lending against a property that is not occupied by the borrower or their immediate family and is used for business or investment purposes.

A regulated bridging loan relates to securing a loan against a property that is currently, or will be, occupied by the owner or an immediate family member. Regulation means that consumers are protected from incorrect advice or miss-selling from lenders or brokers.

So, in what circumstances would a bridging loan be preferential? When traditional avenues just cannot support the speed or complexity of your property transaction. This might include.

• An auction purchase when completion is required within 28 days.
• The property requires significant refurbishment and is not thought suitable for immediate habitation. (To be considered as security by a high street lender a property normally needs a functioning bathroom and kitchen as a minimum.)
• Chain breaks in the house buying process. A bridging loan can support the onward purchase of a property before the client has secured a buyer for their current home.

Bridging finance can be obtained by approaching a lender directly or working with a broker/adviser who can support you through the research and application process.

At BIG Property Finance we are happy to receive enquiries through telephone, email or enquiry form on our website.

We are normally able to provide indicative loan terms within hours and a potential loan offer in a matter of days. A standard application would be completed within 3 weeks; however, we would look to align with our client’s timescale and can have funds available as soon as required, subject to completion of the required legal documents/valuation.

Alternatives to a residential bridging loan include.

1. Traditional mortgage
2. Personal loan
3. Equity release options

 To conclude, when you are entering into a bridging loan, it is for you to complete your research and obtain the necessary advice to be confident that this is the best decision for you and your property goals.

At BIG we want to provide all our clients with a positive experience and quality service. Therefore, we like to work with investors and experienced individuals who fully understand the risks and responsibilities of obtaining a bridging loan. We are always happy to provide further information.