Bridging loans can be an effective way to borrow large sums for short periods, but they can be risky if you find yourself unable to pay back the funds. Before taking out any kind of loan, it’s vital that you fully understand the terms and conditions associated with it so you can be sure you’re making the right decision for you and your finances.
How does a bridging loan work?
A bridging loan is designed to allow you to borrow money to tide you over or ‘bridge the gap’ while waiting on other funds – hence the name. For example, a bridging loan could be helpful if you need to complete on a new home before your old one has sold. Lenders can make a bridging loan suit any situation, though, whether you’re a property developer in need of purchasing funds or you simply need a larger deposit for a house.
The most important thing to know about a bridging loan is that they are ‘secured’ against some form of asset. If you’re using the bridging loan to buy a property, the loan will likely be secured against that property. So, if for some reason you were unable to repay the loan, your lender would be entitled to seize that asset and you could lose your property.
Let’s take a simple example to see how bridging loans work in principle.
- You’re a property developer with your eye on a two-bedroom flat you’d like to buy, renovate and sell on for a profit.
- You take out a bridging loan that allows you to buy the flat and complete renovations.
- You sell the flat on, making a profit.
- You use the proceeds of the sale to pay off the capital and interest associated with your bridging loan.
Typically, if you pay off your loan capital before the end of the loan term, you won’t need to pay interest for the remainder of the term. You can choose a closed bridging loan, which has a fixed repayment date, or an open one for more flexibility. As you might expect, the more flexible open bridging loans are more expensive, but offer greater convenience if your circumstances aren’t certain.
Bridging loans can help you to support you with significant purchases when, for whatever reason, you need to buy before you can receive the necessary funds. However, it’s important not to think of bridging finance as easy money. You’ll have to pay back everything you’ve borrowed, and any delay during the term of the loan could result in higher amounts of interest to pay back. Taking out a bridging loan should be a carefully considered decision.
How much can I borrow with a bridging loan?
Bridging loans are designed to be used for significant purchases such as property, so you can borrow large amounts of money with this kind of loan. But what does that mean for you personally?
Lenders will typically have their own maximums and minimums for bridging loans, so it’s best to check with specific lenders to find out if you can get the funds you need. At Ascot Mortgages, our lenders can offer between £15,000 and £15 million through this kind of finance.
However, that doesn’t mean you’ll automatically qualify to borrow £15 million from one of our lenders. We’ve mentioned that all bridging loans are secured against an asset. The value of this asset can have a big impact on how much you can borrow.
Generally, most lenders will allow you to borrow up to 75% of the value of the asset you’re securing the loan against. So, if you’re using a £400,000 house as your security, you might be able to borrow as much as £300,000 against it.
Think you might need more than that? There are exceptions to every rule, and some bridging loans may allow you to borrow at a higher loan-to-value (LTV) ratio. There may be conditions attached to this, such as a higher interest rate or other fees, so it’s worth double-checking all the information about a loan before making a decision.
How soon can I receive my bridging loan funds?
Need a bridging loan quickly? You’ll be pleased to learn that bridging loans are much quicker to access than some other loan types like mortgages.
With large quantities of money changing hands, your lender will naturally want to take some time to assess your credit history and value the asset you’re using as security. This helps them to make the decision of whether they want to offer you a loan.
Like LTV ratios, bridging finance approval timelines can vary from lender to lender. Our lenders can usually make funds available within five to 10 days, but if you need the money sooner, we can help you. Just let us know your requirements, and our team can prioritise lenders who are best suited to get you what you need.
