Bridging Loans

How does a bridging loan work?

Bridging loans are normally taken out for between 1 month and a year. The loan is repayable at the end of the term.

There are two kinds of bridging loan:

• Closed bridging loan

  You will need to know exactly how you will pay off the loan from the outset (your ‘exit strategy’).

  For example, if you are selling a property, the repayment date might be the agreed completion date. Bridging loans are repaid back in a shorter period than a typical mortgage. These loans are repaid within a couple of months.

• Open bridging loan

  You will not need a clear exit strategy for settling the loan from the outset and will normally have a year to repay the loan.

Unlike conventional mortgage lenders, most bridging loan lenders do not charge a penalty fee for early repayment. So, if you were to take out a 10-month bridging loan but have the financial funds to pay back the loan after 3 months you can do so, saving yourself money on the monthly interest payments.

Bridging loans usually have higher interest rates than conventional mortgages, although they are becoming increasingly competitive.

Failure to repay a bridging loan at the end of a term is likely to incur significant costs and can lead to repossession of your property.

What are the requirements for a bridging loan?

A bridging loan lender will take into account several factors when considering your eligibility for the loan. If you have or have previously had a mortgage with the lender already this may be taken into consideration and seen as an advantage.

You will typically need to be an existing property owner to be eligible to take out bridging finance. The bridging loan lender is likely to secure the loan against your property. If your property has an existing mortgage, then the bridging loan lender will take out a ‘second charge’ against your property. This means that if you fail to make repayments on your property your mortgage provider takes priority over the bridging loan lender because they have a ‘first charge’ against the property.

You will also need to provide:

• Proof of your income.
• An exit strategy. The lender will want to know and see proof of how you plan on repaying the loan.
• A business plan (if your property purchase is a commercial venture).
• A proven track record of success (if you are planning to use the bridging loan to develop a property).