We put together a blog for you a number of months ago and thought we would touch on the subject again due to the increased volumes of bridging loan enquiries we have received over the past few weeks.

Bridging loans are very popular for several reasons, such as the fact that there are no monthly payments required to service the loan.

But, if there are no monthly repayments, how is the loan repaid?

Bridging finance is a form of short-term finance that usually needs to be paid within 12 – 18 months. The bridging finance provider lends you the money, puts a charge against your property(s) and interest accrues and compounds on the debt. The loan is paid off in full by way of an exit strategy. This can be at anytime within your contracted period without the need to pay an early repayment penalty charge.

What is an exit strategy?

An exit strategy is how you intend to repay the bridging finance agreement. The most common repayment methods are either by way of selling the property or re-mortgaging onto a residential mortgage or buy to let mortgage (Depending on your intention for use of the property).

If you intend to re-mortgage the property once the relevant works have been completed on the property, it is common for mortgage lenders to request proof of the re-finance being possible. This is where a mortgage broker can put everything in place for you to save you the hassle.

What are common reasons for taking out a bridging loan?

One of the most common reasons we have seen for taking out a bridging loan is to purchase a property that isn’t in a habitable state and therefore cannot be mortgaged with a high street bank or building society. Non-mortgageable properties are typically low-priced and commonly placed in auctions, so we have seen clients use bridging loans to purchase the home, fix the issues that made the property “non-mortgageable”, then take out a mortgage to pay it off at the end of the term.

Although bridging loans are typically used for purchasing property, they can also be used for many other reasons, one of them being to ‘break a chain’. We see it a lot when there are multiple buyers and sellers within the property chain then one party withdraws, causing the entire chain to potentially collapse. Bridging finance may provide a suitable finance solution to allow the remaining buyers and sellers to continue.

How does interest work on a bridging loan?

The interest on a bridging loan is compounded and rolled up. This is important to understand because the longer you keep the bridging loan, the more expensive it can be. PLUS, keep in mind that if you were to add any lenders fees to the loan then you are being charged interest on those fees and you will be eroding the equity you have in the property(s).

At the point you sell the property or re-mortgage, the charge will be released from the property(s) and the bridging lender will only charge you for the original net loan advance, plus the interest and any fees charged up to the point of repayment of the debt.

Finally, how much can I borrow with a bridging loan?

In cash terms, you can borrow anything between £25,000 and £25,000,000! But, in terms of the property you are lending on, bridging loans are typically capped at 60%  net loan advance of the property(s) value.

Did you know you can secure bridging finance against multiple properties?

Yes, this is true. We have arranged many bridging finance loans across 2 or 3 properties. This is fantastic way of reducing the loan to value and thus attaining a lower rate of interest. Of course, there are higher risks with doing this because you will be using multiple properties as security for the loan and your fees will be higher than in comparison to securing the debt against 1 property. To ensure you are making the right decision, speak to the professionals who can guide you through the advice process with bridging finance.

If you are considering taking out a bridging loan

If you are considering taking out a bridging loan, we always recommend that you speak to a mortgage professional before making any decisions. A Mortgage Broker will explore your options as widely as possible and find the most suitable form of finance required to meet your needs and circumstances.

If you have any more questions about bridging loans, feel free to contact us via our:

Telephone: 0117 251 0083

Or our email: enquiries@integraf.co.uk

Thank you for reading, and we hope to hear from you soon!

PLEASE NOTE: The financial conduct authority does not regulate some forms of bridging finance.