Bridging Loans Mortgage Advice
Welcome to Fox Davidson, we are an award-winning bridging loan broker based in the South of the UK.
We have offices in Bristol, Bath, Exeter and London.
Working with Fox Davidson will give you access across the UK bridging loan market.
We secure fast bridging loans on residential and commercial property and land.
What Is A Bridging Loan?
A bridging loan is a short-term lending facility for buying property. It is called a bridging loan as it effectively ‘bridges the gap’ in your finances.
An example of a bridging loan might be:
You are stuck in a property chain and you require additional funds to enable you to move into your new home before you have sold your current property. A bridging loan would be the perfect solution.
Another bridging loan example could be:
You wish to buy a property at auction and need to move quickly. A bridging loan can be used to facilitate a speedy purchase of a property in just a few days.
Bridging loans may be taken out personally or as a limited company.
Advantages Of A Bridging Loan
If you find yourself in a similar situation to the ones described above, a bridging loan may seem like the perfect solution for you. Indeed, there are many advantages to a bridging loan:
Receive the loan quickly
You may see promises from certain lenders offering bridging loans within 24 hours. While this may be possible in some cases, it is definitely the exception rather than the norm.
Here at Fox Davidson, we aim to receive a decision in principle within 24/48 hours and release the bridging loan funds within 7-10 working days.
Bridging loans offer a financial solution for situations which many high street lenders would consider “high risk”.
Disadvantages Of A Bridging Loan
Bridging loans are an ideal short-term solution for individuals who require funds quickly. However, as they present a larger risk to the lender, bridging loans are more expensive than traditional loans. Fox Davidson will work with you to ensure you have an exit for your bridging loan. This exit may be the sale of a property or a refinance on to cheaper funding.
Higher interest rates
Being able to secure finance that is fast, flexible and convenient comes at a cost. Although interest rates for bridging loans are now much more competitive than they were previously, you should still expect to pay around 0.4% per month for the cheapest bridging loans (£400 per month for every £100,000 borrowed).
Bridging loan fees
Multiple parties are involved in organising a bridging loan, with each requiring payment for their services. The below fees are typical and are calculated on a case-by-case basis.
Some brokers charge a fee for processing an application on your behalf. It is not usually possible to add these fees to the loan and they must be paid in advance. Fox Davidson will typically get paid by the bridging loan lender but may need to charge a fee depending on the loan size and complexity of the case.
A valuation fee is charged for the completion of a survey on the property that will be used as security against the bridging loan. The survey itself just covers the essential criteria such as:
- Valuation of the property
- Is the property suitable as security for the bridging loan
- Does it have any issues that may affect the value (subsidence etc)
(Note: Some bridging lenders may carry out a desktop valuation to streamline the process)
Lender arrangement fee
The lender who arranges the loan is paid an arrangement fee. In most cases, this fee can be added/deducted to the loan.
A typical arrangement fee is 1-2% of the value of the loan amount (£1,000-£2,000 for every £100,000 borrowed).
Both parties (the applicant and the lender) will require legal representation during an application for a bridging loan, with the fees for both sides being paid by the applicant. If a lender is familiar with a particular legal firm, then they may allow them to represent both parties.
Different Types Of Bridging Loan
With the fast-paced nature of bridging loans, it is easy to get carried away without fully exploring your options.
We have already explored the additional fees involved with bridging loans, but you must also ensure that you are getting the correct bridging loan for your individual situation.
There are several different types of bridging loans, each of which is explained below:
Closed bridging loan
A closed bridging loan means that the lender knows how and when you will repay the loan at the end of the term.
If you are waiting for the sale of a house to complete, the maturity of an investment or inheritance money to clear, you will have a fixed date of when to expect the funds.
As the exit strategy is pre-defined, it is a lower risk to the lender and they will be able to offer more attractive interest rates than for an open bridging loan.
Open bridging loan
An open bridging loan is the opposite of a closed bridging loan.
Although you will still need a clear strategy as to how you will repay the loan, the repayment date won’t be confirmed and you will typically have up to 18 months in which to repay the loan (with some bridging lenders offering a repayment facility of up to 36 months).
As an open bridging loan carries more risk, the interest rates are usually higher and, if the loan isn’t repaid within the agreed timeframe, further penalty charges will apply.
First charge bridging loan
A first charge bridging loan is offered when the property being used as security has no other finance outstanding i.e a mortgage or home improvement loan. It is possible to borrow up to 100% loan to value using a mix of security including a first charge on a property and a first/second charge on a subsequent property.
What Can A Bridging Loan Be Used For?
Although the majority of bridging loans are arranged to purchase residential property, it can be used for almost any purpose. Here are some examples of what a bridging loan can be used for:
Buying a property
A bridging loan can be used to buy a property when time is constrained and a mortgage application would take too long. Another scenario might be a break in the chain of sale for your existing property. A bridging loan would allow you to move into your next property, then repay the loan once the sale completes.
Buying a property at auction
Buying a property at auction requires a speedy completion, usually within 28 days. Bridging loans are ideal for auction purchase as they provide funds quickly. Properties sold at auction often have some kind of quirk which may mean they are not mortgageable on the high street. Again, this is where bridging loans come into their own.
Paying for renovation work
Property developers often use bridging loans to fund renovation work on an investment. Often referred to as refurbishment loans, they can be taken on as “light refurbishment” loans (which cover heating and/or electrical installations, replacement windows/doors and kitchen or bathroom remodelling), or “heavy refurbishment” loans (which covers structural work, extensions or any work that requires planning permission being granted or change of use).
Purchasing an uninhabitable property
An uninhabitable property presents a higher risk than a property that is fit to live in, so many mortgage lenders would decline funding. If the property can be transformed within a certain timeframe, a bridging lender would be much more likely to offer a financial solution.
Buying land for development
A bridging loan can be used to buy land for commercial or residential development purposes. As with all bridging loans, there must be a solid exit strategy in place for the loan to be agreed by the lender.
Paying a tax bill
If you have an urgent tax bill that needs to be settled with HMRC, then a bridging loan can offer the perfect solution. The funds can be raised quickly, enabling you to pay the bill promptly and offer some breathing room until you find a long-term solution.
How Much Deposit Do I Need For A Bridging Loan?
In some cases, it is possible to secure a 100% bridging loan. However, instances like this are the exception rather than the rule, with most bridging loans requiring 25%-35% deposit, leaving a loan-to-value ratio (LTV) of 65%-75%
How Is Interest On Bridging Loans Calculated?
Although there are many ways to calculate interest on a bridging loan, we will explore the three ways which are most common.
This is arguably the most common method of charging interest on a bridging loan, where the borrower isn’t required to make any payments on a monthly basis.
On a retained interest basis, the total interest is calculated and added to the loan amount. The loan effectively pays the interest payments each month without the borrower having to do anything.
Similar to retained interest, a bridging loan with rolled-up interest sees the interest payment added to the total amount of the loan.
Whereas a bridging loan with retained interest effectively pays the interest on a monthly basis, a bridging loan with rolled-up interest is paid in a lump sum at the end of the term.
Like a traditional mortgage, serviced interest is when the accumulated interest is paid off on a monthly basis. This type of arrangement is also available with a bridging loan.
How Quickly Can I Secure A Bridging Loan?
A lending decision is usually made within 24 hours of submitting your bridging loan application. Although strict eligibility checks are made, you can still expect receipt of funds within 7-10 working days.
What Are The Qualifying Criteria For A Bridging Loan?
Loan providers will require property as security. Underwriting for bridging loans is primarily based on the security and the exit route, therefore income and affordability are not underwritten in the same way as a traditional mortgage would be.
Where Can I Get A Bridging Loan?
Bridging loans are a niche product and aren’t usually offered by high street banks and building societies. Finance brokers such as Fox Davidson are able to offer bridging loan advice and are able to obtain a lending decision quickly on your behalf.
Bridging Loans From Fox Davidson
Fox Davidson is an award-winning broker who are able to provide you with expert advice on all aspects of property finance, including bridging loans.