A GUIDE TO
Bridging Loan Comparison
LEADING UK BROKER FOR BRIDGING LOANS SINCE 2004
Bridging loans have widespread applications and are usually regarded as secure loans. As such, you need to have property, land, or any other high-value asset to be used as collateral to obtain this loan. Several financial institutions in the UK offer bridging loans with varied interest rates, terms, and conditions. Read on to learn more about the types of bridging loans, what they can be used for, what they are suitable for, pros and cons, as well as a comparison of bridging loans offered by various financial institutions and banks across the UK.
An Insight into Bridging Loans
Bridging loans, also referred to as bridge loans, are short-term, high-interest finance options to ‘bridge’ the gap between the sale and purchase of a new property. Bridging loans are obtained mainly by people or a company looking to buy a property but are unable to obtain mainstream mortgages or when a mortgage is not practical for the project at hand.
If your current home is taking ages to sell, and you cannot obtain another mortgage until your old home is sold, you can get a bridging loan and move into your new home as you await the sale of your old property.
Like mortgages, bridging loans are secured loans and one must have a high-value asset attached to the loan as collateral. However, unlike mortgages, a bridging loan can be secured against a property that cannot secure a normal term loan. Such property can be a property whose ownership will change soon, an uninhabitable property awaiting renovation, or a property whose class of use will be changed with the acquisition of new ownership.
Bridging loans are processed much quicker than a mortgage- it takes 3-4 weeks to be processed. In addition, a bridge loan is based on the OMV (Open Market Valuation) of a property instead of the purchase price. Additionally, bridging loans offer flexibility in repayment. For instance, one can opt to forego making monthly interest payments, and instead have them rolled up throughout the term by the loaning institution.
How Does a Bridge Loan Work?
Types of Bridging Loans
Open Bridge Loan
As the name implies, an open bridge loan has no restrictions regarding the date of settling or repaying the loan. Open bridge loans can be repaid whenever the borrower receives the needed funds. It can take up to a year or more for open bridge loans to be settled. Open bridge loans are usually more expensive than closed bridging loans due to their flexibility in terms of payments.
When Can an Open Bridge Loan Be Used?
Open bridge loans are applicable for situations where the borrower is uncertain of when their funds might become available. This could occur due to legal hold-ups in the sale of the former property, an extremely lengthy mortgage process, etc.
Open bridge loans are ideal for individuals who want to purchase and move into a new house but haven’t found a buyer for their current home. This loan is also suitable for property flippers to buy and renovate a property before selling it to make a profit and repay the bridging loan.
Closed Bridge Loan
Unlike an open bridge loan, a closed bridge loan comes with a fixed repayment date. Individuals taking this type of bridge loan are required to know precisely when they’ll obtain funds to pay back the bridging loan, i.e. exit strategy.
When Can a Closed Bridge Loan Be Used?
In most cases, a closed bridging loan is only applicable when someone that’s selling a property has already found a buyer, and they are only waiting for the payments to be completed.
A good example of a closed bridge loan is the bridging mortgage loan, which can be obtained when a property seller has already exchanged ownership contracts of a property and is only waiting to complete the property sale.
Other Types of Bridging Loans
Apart from closed and open bridge loans, there are other types of bridging loans as described below.
Fixed Vs. Variable Bridging Loans
Bridging loans can either have fixed or variable rates- just like mortgages. A fixed bridging loan has a constant monthly interest rate. The interest rate doesn’t fluctuate based on prevailing factors such as economic performance or changes in currency exchange rates. On the contrary, variable bridging loans have fluctuating interest rates. The lender usually determines the interest rates in line with the base rate set by the Bank of England (BoE), which is adjusted after every six weeks.
When Can Fixed/Variable Bridging Loans Be Used?
If you are considering taking a variable bridging loan, it’s best to have it for a short time so that your loan is not impacted by the changing interest rates, thereby costing you more. It would be best if you also kept a close eye on the lender’s dynamic rates. Alternatively, fixed bridge loan borrowers tend to be individuals seeking out longer-term loans.
First Charge Vs. Second Charge Bridging Loan
Suppose you obtained a mortgage to purchase your old home and are now taking a bridging loan to finance your new home; your mortgage will be considered a first charge loan against your new home. The bridging loan would be considered the second charge loan against your new home. During repayment, the mortgage loan will take priority over the bridge loan.
The mortgage loan is first repaid fully before your bridge loan is registered as a first charge loan. In some cases, the bridging loan is used to repay the original mortgage before it’s elevated to be a first charge loan against the property. Second charge lenders (bridge loan lenders) require the permission of the first charge lender (mortgage lender) for the second charge loan (bridging loan) to be added to the property.
In case you have no mortgage or outstanding loan on your old house, a bridge loan will automatically be the first charge loan. In such cases, there are no second charge loans.
When Can First/ Second Charge Bridging Loans Be Used?
Second charge loans are mostly secured to help in the renovation of a property. Real estate agents that have already exhausted the advance awarded as a first charge can acquire this loan to help flip the property before a sale. Second charge loans can also cater to urgent emergent issues relating to a property such as paying inheritance tax.
You can obtain a second charge loan in circumstances where it would take longer to secure funds from mainstream sources. Additionally, after taking the first charge loan, your credit rating may not leave you eligible for mainstream refinancing options. In such scenarios, the borrowers can consider taking a second charge loan.
Regulated Vs. Unregulated Bridging Loan
Unregulated bridge loans are usually short-term loans often used when mainstream mortgage funding is unavailable or impractical for a particular property. It is important to note that the Financial Conduct Authority (FCA) does not offer protection for borrowers intending to secure commercial property; thus, all commercial bridging loans are considered unregulated.
When Can Regulated/ Unregulated Bridging Loans Be Used?
Regulated bridge loans are offered for a maximum loan term of 12 months and are given out if the individual taking the loan or their close family member plans to live in the newly acquired property.
Unregulated bridging loans are short term loans given to property flippers to finance property refurbishment in an effort to enhance the market value of a property- then sell or refinance on a buy to let mortgage.
What are Bridging Loans Used For?
Bridging loans can be used for different reasons, including buying an unmortgageable property, financing property refurbishments, and more. Bridging loans are usually obtained by homeowners, landlords, and property developers for:
- Buying a property
- Finance property developments and renovations
- Business ventures
- Financing buy-to-let investments
- Pay tax bills
- Pay divorce settlements
- Purchase an uninhabitable property/ in an uninhabitable area
- Buy land for development
- Buy a property at an auction
Bridging loans are available for virtually all types of property, including industries, offices, residential buildings and assets, houses of multiple occupations (HMO), pubs, hotels & B&B’s, land, retail premises, petrol stations, student accommodation, farms, permitted development(PD), mixed-use properties, restaurants, nursing/care homes, golf courses and more.
Eligibility Criteria for Obtaining a Bridge
While bridging finance is faster to process than mortgages, lenders employ vigorous eligibility criteria taking into account borrower’s credit history/ credit checks, past mortgages, and their commitments, as well as the market value of their current property and the one they’re looking to purchase. Bridging loan approval also depends on factors such as the efficiency of the exit strategy, the borrower’s experience if the loan is meant for property development or refurbishments, and the stability and financial strength of the borrower.
Most, if not all, lenders require property as collateral. Depending on the loan amount, you may need to offer more than one property to qualify for the loan. All properties must be valued to ascertain the market cost. Besides, you might need to provide proof of income as a further guarantee to the lenders that you’ll be able to service the loan.
You may also need a business plan if you’re obtaining the loan for commercial purposes. If you’re getting a loan for property development, some lenders will ask for a plan or your track record in property development. The loan decision is often given 24 hours after submitting your application. However, you may have to wait up to three weeks for the loan to be processed if you’ve qualified.
Best Practices for Obtaining the Best Bridge
Loan for Your Needs
- Determine your specific objective for obtaining a bridge loan. Decide on the specific amount you’ll want to borrow, the intended purpose, and your ideal loan timeline.
- Assess your current situation. Check on the status (if any) of your mortgage, determine the value of your property, prepare income statements and project portfolio, and determine the equity in your current home. All this information will be instrumental in enabling you to obtain the bridge loan.
- When valuing your property, seek the services of a vendor or estate agent rather than a RICS surveyor- they tend to value property on the lower end, plus their valuation services are pretty expensive.
- When applying for a bridge loan, carry out a bridging loan comparison to find the best rates. If you’re unable to do this, consult your trusted broker for a recommendation.
- Ask your preferred bridging loan lenders to recommend a solicitor with experience in dealing with bridging loans. This is crucial to get every detail of the loan and have the loan processed faster.
- Consider obtaining bridging loans from established lenders rather than small firms, which usually don’t abide by anti-money laundering regulations. Ensure the lender is regulated and has at least three SRA-approved managers.
- Ensure you follow up on your loan after applying. Expect feedback after 24 hours or less.
Need for an Effective Exit Strategy
Bridging loans are generally expensive as long-term loans thanks to their high interest. As such, it’s vital for the loans to be repaid in full within the agreed time for the interest of both parties. An effective exit strategy is essential for the success of a bridging loan, especially a closed bridge loan. A failed exit strategy means that your account will be placed under default affecting your credit file. Besides, some lenders will institute harsh penalties in the form of extra payments in addition to the default charge you’ll have to pay.
If you’re unable to implement your exit strategy and run out of options, the lender can repossess the property, causing massive financial loss with substantial credit history damage. With this in mind, it’s crucial to get your exit strategy right at all costs. If you’re unsure of your exit strategy, it’s best to consider a long-term loan rather than run out of time repaying the loan.
Property sales take quite some time to go through. Worse off, buyers may drop out of the deal or take a long time to pay the agreed sum. As such, you shouldn’t have your entire exit route depending on the property sale- have different options.
Some of the most effective and practical exit strategies you can consider include:
- Sale of primary property
- Sale of secondary property
- Sale of shares
- Sale of other investments
- Refinancing the loan to a longer-term mortgage lender
If any of the above exit strategies fail and you quickly run out of options, you can refinance the loan to a new lender or extend the loan repayment period with your current lender and roll-up interest. Most lenders would charge higher interest to extend the loan. All in all, you need a guaranteed exit strategy when taking a bridge loan, especially a closed bridging loan.
PROS & CONS OF BRIDGING LOANS
- Processed quickly
- Provides great flexibility in the case of open bridge loans
- One can borrow a great deal of money in a short period
- Interest rates are pretty high, making them really expensive
- You must have a clear exit strategy to avoid losing your property before reaching the end of the loan
- Bridge loans come with additional fees such as the exit fee, legal fees, valuation fees, broker fees, administration fees, a facility fee, a lender fee, an arrangement fee etc. This makes them pretty costly.
- Obtaining a bridge loan can be time-consuming, with a complicated application process.
- Bridging loans have a low loan to value ratio.
BRIDGING LOANS COMPARISONS
As mentioned earlier, bridging loan interest rates, loan terms, and other loan conditions vary widely depending on a lender, especially in the UK. Some bridging lenders may charge a high-interest rate with less strict loan terms. Others may charge reasonable interest but with more stringent loan terms. Therefore, it’s essential to compare bridging loans before choosing the one you’re comfortable with. You can use a bridging loan calculator to establish bridging loan rates, excluding additional fees such as legal fees, exit fees, broker fee, etc. The table below is a comparison of bridging loan rates offered by different bridging lenders and banks across the UK.
|Lender’s Name||Maximum LTV||Loan Term||Loan Amount||Monthly Interest Rate|
|United Trust Bank||1st charge: 70% & 2nd charge: 60%||1 month to 3 years||£ 75, 000 to £ 25, 000,000||0.48% to 1.10%|
|Hope Capital||75%||3 months to 2 years||£ 50,000 to £ 500, 000||0.54% to 1.05%|
|LendInvest||75%||3 months to 2 years||£ 75,000 to £ 25,000,000||0.55% to 0.94%|
|Octane Capital||65%||1 month to 2 years||£ 150, 000 to £ 25,000,000||0.55% to 1%|
|MFS||1st charge: 75% & 2nd charge: 70%||3 months to 18 months||£ 100, 000+||0.70% to 0.80%|
|Octopus Property||60%||1 month to 2 years||£ 50,000 to £25,000,000||0.70% to 0.90%|
|MT Finance||65%||3 months to 2 years||£50,000 to £10,000,000||0.75% to 0.95%|
|Kuflink||1st charge: 70% & 2nd charge: 60%||3 months to 18 months||£50,000 to £500,000||0.75% to 1.49%|
|Mint Bridging||60%||1 month to 18 months||£50,000 to £3,000,000||0.75% to 2%|
|Bridging Link||60%||1 month to 18 months||£50,000 to £3,000,000||0.80% to 0.85%|
|Tab||60%||3 months to 18 months||£100,000 to £5,000,000||0.80% to 1.50%|
|HF Bridging Solutions||1st charge: 70% & 2nd charge: 60%||1 month to 1 year||£5,000 to £250,000||0.95% to 2%|
|Goldcrest Bridging Loan||70%||3 months to 18 months||£27,500 to £5,000,000||0.99% to 1.50%|
|Affirmative Bridging Loan||1st charge: 75% & 2nd charge: 65%||Up to 18 months||£10,000 to £5,000,000||1.15% to 1.50%|
|Lowry Capital||70%||Up to 1 year||£25,000 to £2,500,000||1.25% to 1.40%|
Alternatives to Bridging Loans
- Personal loan– Depending on the lender, personal loan costs could be cheaper and more suitable for your needs.
- Bank Overdraft– An overdraft is another economical financial option. However, it depends on your account balance and the amount of money you want to borrow.
- Remortgage– How about remortgaging your current home and earn some extra cash to buy your next home
- Second mortgage-You can consider taking a second mortgage to purchase a new property.
- Peer-to-peer– P2P loans are quite flexible and come with reduced interest charges. However, there is a limit to what you can borrow.
Final Thoughts on Bridging Finance
Bridging loans allow you to borrow significant amounts of funds in the short term to fill the gap between selling a property and purchasing a new one. Bridge loans have different use cases, including buying a property, paying tax bills, financing property development & renovations, paying divorce settlements, and more. If you’re considering taking a bridge loan for whatever purpose you have in mind, take note that they are more expensive than other long-term finance options. Besides, exercise due diligence and develop a clear exit strategy to avoid finding yourself in a financial fix that may ruin your credit history.