Bridging Loans: A Genius Guide

A bridging loan is often referred to as a “short term” mortgage, typically ranging from 3 to 18 months in length. The loans compared to conventional mortgages can seem expensive but they serve their purpose.

Bridging loans are often used where conventional mortgage lenders are unable to assist due to several factors.

Open & Closed Bridging Loans

Closed bridging loans aren’t particularly common because the main use for a closed bridging loan is when there’s a defined repayment date.

In some scenarios, a closed bridging loan can help resolve an issue. For example if you’re looking to purchase a new home and are relying on the sale of your home to fund your move but have not been able to complete the sale, you can purchase your new home via a bridge. You can then pay off this debt upon the sale of your previous home.

We always recommend taking advice from a suitably qualified consultant in every circumstance especially bridging loans.

Open bridging is the more common and popular option, this is when there’s no fixed repayment date for example, the purchase of a home which requires heavy renovations.

Always ensure you’ve discussed how you plan to exit from a bridging loan if this is something you’re interested in, whether it be a remortgage or sale of property. Most bridging lenders will not lend without a reasonable and plausible repayment strategy.

Let’s look at some of the scenarios where bridging loans may be appropriate…

Un-mortgageable Properties

Investors and even residential owner-occupiers often find properties in great locations or even at a great price but cannot get a mortgage via traditional lending.

The general rule of thumb is if the property is not habitable or lettable, e.g., there is no kitchen or the structure is unsafe etc. a conventional mortgage will not be available.

Once the property is purchased via a bridging loan, renovation works can begin as you’re now the owner. That new kitchen or perhaps some structural changes to get more out of the property can start!

Upon these works being completed, your property will now be “mortgageable” due to the property being habitable or lettable, meaning you can now look to refinance via a conventional mortgage product

Auction Purchases

If you’re looking to purchase a property via an auction house, speed is an absolute necessity. Most auction houses will require you to exchange contracts on the transaction when your offer has been accepted and you’ll be required to complete on the funds typically within 28 days (this can vary depending on the auction house).

Many mortgage lenders may not be appropriate as conventional lenders may not be able to work within these deadlines. Due to the nature of short-term lending bridging lenders don’t require as much underwriting to offer and complete on the loan, meaning many bridging lenders can complete on the entire transaction well within 5-10 working days, this of course depends on the lender.

First and Second Charges

Upon completing on a bridging loan, the lender will place a charge on your property. In the event of a repossession, the lender who has a first charge will be repaid first.

For example, if a bridging loan is taken out on a property which is owned and mortgaged the bridging loan will be a “second charge bridge”. This means if the property is repossessed the lender which has the “first charge” secured will be paid first and then the bridging lender will be paid next due to the nature of the charge being a “second”.

First charges are typically cheaper than second charge bridging loans as the risk for the lender is minimised.

Always take advice from a qualified professional!

The nature of bridging lenders can be complex with many different factors being involved, always speak to a professional if this something you’re interested in utilising.