How a Bridging Loan Works when Buying a House

Updated: Jun 26

If you’ve found a property that you would like to purchase and move quickly, a Bridging Loan is a form of finance that’s now considered mainstream, used by a wide range of borrowers to help make an important purchase.


Bridging loan applications can be completed in a matter of weeks, sometimes faster, which can be ideal if you’re buying a house at an auction or need to act quickly to pip a rival buyer to a property.


Accelerated Finance looks at examples of bridging loans and how they can be used for different types of property purchases.


We Cover the Following Topics:


What Are The Common Scenarios Of Using A Bridging Loan When Buying a House?


Examples Of When A Bridging Loan Is Used?


What’s Different About A Bridging Loan?


Example Of The 10-Step Bridging Loan Process


Use Cases of Bridging Loans


Calculations of a Bridging Loan


Upfront Costs For Bridging Loan


What Impacts Eligibility For A Bridging Mortgage?


Why Use A Broker When Getting A Bridging Mortgage?



What Are The Common Scenarios Of Using A Bridging Loan When Buying A House?


When you need to complete fast- A Bridging Loan can be set up quickly and allows you to act like a cash buyer.


Flexibility- Bridge Lenders are more flexible in their assessment of providing a loan for the purchase or refinance of any property. Seasoned investors are always on the lookout for competitive short-term loans which they use for acquisition, but bridge lenders also entertain newcomers in the property world and assist them with fulfilling their ambitions.


Applicants having adverse credit are considered because short-term loans are more about the quality of the security and a viable exit route.


Different Property Types- Bridging loans can be secured against commercial and residential property or even land that does not have planning permission yet.


Examples of When A Bridging Loan Is Used


Purchasing a new property before your existing home has sold- This could be downsizing, upsizing, moving abroad or moving closer to a family member.


Breaking a mortgage chain- Bridge Finance effectively turns you into a cash buyer given preferential treatment by estate agents


Landlords who need to buy an investment property quickly- Affordable properties that provide good prospective returns often have higher competition from investors with the need to complete quickly.


Buying property at auction- Often the most profitable hunting ground for bargain-priced properties is at an auction. However, the requirement to complete within 21 to 28 days makes a normal application for a property loan with a mainstream bank difficult to achieve. There are bridge lenders who have a very fast processing system and can complete it quickly, sometimes within 10 days.


Cash flow restrictions- Bridging finance secured against property can also be used for personal and business purposes when receivables are rolled over for a longer period. Lenders then secure the invoices or any other assets in the company who provide short-term finance to alleviate their cash flow problems.


For further examples of bridging loans, please you can read specific case studies here


What’s Different About A Bridging Loan?


The majority of borrowers looking for property finance approach traditional lenders such as high street banks and building societies to arrange a mortgage and this often fails because of time constraints or because they do not meet the lending criteria. However, bridging loans can assist in alleviating some of these constraints and making the deals work.


1. It’s short-term:


Mortgages are designed for longer-term finance and can range from 15 years to 35 years as a term length. The aim of ‘bridging’ the gap, when there is a shortfall in funding, makes the loan specifically designed to be short-term. For example, when there is a deadline for completion on a purchase or buying an unmortgageable property at auction and doing the necessary renovations to make it possible to arrange longer-term finance or sell on is the main use case.


2. It can be arranged quickly


Standard purchase mortgages can take two or three months to arrange during busier buying seasons in the year. Most bridging finance is approved based on the security and not the profile of the client, although the applicant must pass the normal KYC and AML procedures. Accelerated Finance has worked closely with lenders to complete cases within several working days.


3. Monthly Interest can be retained


Since bridging loans are short-term, most lenders prefer to retain the interest over the term by tapping into the equity whereby the gross loan will be at a certain LTV (Loan to Value) and the net loan will be after the interest is deducted. As an example, if the loan was agreed to at 75% LTV, the net drawdown will be approximately 71-72% after fees.


Early Repayment fees are not normally applied, but if they do that is the only cost at the time of exit. For larger loans, lenders prefer serviced interest.



4. Higher Loan to Value Lending is available


We have access to lenders that are willing to grant bridging loans up to 80% LTV (Loan to Value), on a non-regulated basis, depending on the set of circumstances and the assets used as security for the loan. The most effective way to increase to the maximum value is to secure the loan against the property that is being purchased and an existing property the borrower already has. There are lenders who can use a single property, but with less ‘security’, it is important to bear in mind that the lender may charge a higher interest rate.



5. You need to have an exit route agreed


Like all loans with banks or financial institutions, the borrowers must have a clear plan for exit to avoid repossessions. Bridging Loan Exits can consist of refinancing in the form of Buy to Lets or a Development Loan.


6. There are no early repayment fees


Bridging Finance are designed for short-term finance with a minimum term being usually one to three months and a maximum term of 18 months. Most lenders will only charge for the duration of the loan with no early repayment fees. For example, if you take out a 12-month bridge but pay within 6 months, then you will only pay for the duration of when the loan is outstanding. This differs from longer-term mortgages where lenders are reluctant for borrowers to repay the loan in full before the agreed deadline. An early repayment fee could add up to thousands of pounds.


7. Un-mortgageable properties


Bridging lenders are a lot more flexible in their criteria in comparison to traditional lenders. For example, they will be more open to the following:


- Building with structural issues

- Low Market Value properties

- Derelict Areas

- Without a Functioning bathroom or kitchen

- Non Habitable Properties


Example of The 10-Step Bridging Loan Process.


1. Initial Introductory Call: This is a requirement call to find out exactly what type of loan is required and the asset you intend to use as security.


2. Fact Find: You will be invited to our secure portal which will allow you to complete information about yourself, securely upload documents and review status updates


3. Lender Search: We will share documentation and quotes for different bridging loans available in the market as well as a breakdown of the costs involved.


4. Decision in Principle: Lenders provide a document to show they are happy to provide the loan based on the current information they have.


5. Client Confirmation: Upon receipt of the decision in principle, the client will decide whether to proceed with the terms offered.


6. Valuation: A professional surveyor will be instructed to value the property with a report sent to the lender.


7. Lender Confirmation: The lender will send the surveyor’s report to the underwriting team to assess whether the loan is the appropriate size based on the value of the property.


8. Offer: The agreed loan amount will be sent to you by way of a formal offer.


9. Solicitors instructed: The lender's solicitors will send the facility letter and documentation required to sign to your solicitors.


10. Funds Released: Once the documents have been signed and returned, the funds will be released. The speed of the transaction varies from lender to lender as well as your current set of circumstances.


We have a more in-depth article showing our mortgage process


Use Cases of Bridging Loans


1. Purchase and Refurbishment of a Buy-to-Let Property


The clients are established buy-to-let investors who have just bought a large residential property with vacant possession and the plan was to refurbish the building and then refinance into a buy-to-let property. The client wanted to use their own funds of £40,000 for the refurbishment and borrow the extra capital to complete the sale.


Auction Properties require completion within a few weeks, so time was of the essence to acquire, refurbish and rent out the property. The client required the maximum LTV (Loan to Value) available to raise enough cash to buy the property.

A Decision in Principle (DIP) was provided quickly at 80% Loan to Value (LTV) for a gross amount of £480,000 against a property value of £600,000. This gave the client the required funds to complete the refurbishment and pay within the agreed period of 6 months. At the point of exit and refinancing the property uplift was valued at £750,000, providing the client with a healthy return of investment over the 6 months.


2. 1.2m to Purchase and Refurbish a Semi Commercial Investment against Market Value


The client has purchased a semi-commercial property containing five flats and a trading bookstore downstairs. The building was on the title for £1,200,000, but the market value was estimated higher at £1,610,000. Arranging a loan of 75% on the market value allowed the client to purchase at the full purchase price of £1,200,000.

During the 6-month term, the property was completely refurbished, and the one-bedroom flats were converted into two-bedroom flats with the lease also extended. The market value rose to £2,400,000 within the six months and the client refinanced onto a longer-term loan to exit the bridging loan and use the left-over equity to move to another development project.


3. Purchasing a Property When Traditional Funding is not available


When a client is struggling to secure finance via a traditional route to purchase an investment property that is an in uninhabitable condition, we have access to lenders who can provide funding to allow for refurbishment and then later convert to a buy-to-let mortgage.

A short-term bridge between the purchase of the property and completing the renovation later makes traditional finance accessible once the works are complete.


Calculations of a Bridging Loan


Taking the above example to purchase and convert into a buy-to-let, let’s have a look at the breakdown of the costs involved for this example.


Current Property Valuation: £600,000


Gross Amount Borrowed at 80% LTV: £480,000


Retained Interest at 0.59% Interest (Taken upfront from the Gross Loan so there are no monthly interest payments): £16,992


Arrangement Fee (1% of the Loan)


£4,800


Admin Fee: £165


Net Bridging Loan Amount: £475,035


Generally, the lower the loan to value (which is the percentage size of the loan compared to the value of the property used as security, the better the interest rate). Due to this, it can be advantageous for the borrower to use more properties if available to reduce the interest rate charged.


After the refurbishment is complete with a new valuation after 6 months, the property value stands at £750,000. Let’s have a look at the sums below:


New Property Valuation: £750,000


Outstanding borrowing on current property: £475,035


New Buy to Let Loan Required to exit existing Bridge Loan (75% Loan to Value): £562,500


Arrangement Fee (1% of the loan): £ 5,625


Admin Fee: £165


Balance to Borrower after Refinance: £81,675



Upfront Costs for Bridging Loans


The upfront costs with a bridging loan are very similar to that of traditional mortgage finance with valuation and legal fees.


To obtain a breakdown of the costs try out our bridging loan calculator. Here you can get a simple illustrative breakdown with an indication of all the costs involved when taking out a bridging loan.


What Impacts Eligibility For A Bridging Mortgage?


When looking for a bridge loan to purchase a house, the best strategy to obtain the most competitive rate is to convince the lender that you are a low-risk borrower, and this means ticking off as many boxes as possible based on their eligibility criteria. The following points below are what a lot of lenders look for when assessing a case:


a. The strength of the exit strategy


We have briefly touched on the exit strategy, and they are vital to bridging loans. In most cases, the exit vehicle will be to remortgage or pay off the capital by selling the security property. You will need to show evidence to the lender through an agreement in principle or a sale contract that either are the suitable exit strategies you wish to take.


Some lenders will accept ‘non-standard’ exit vehicles using investments, endowments, or inheritance to settle the loan. They will need evidence that the funds are due to enter your account within a certain timeframe, and may charge interest daily, rather than monthly if the exit is ‘non-standard’.


b. Your credit rating


Fortunately, there are bad credit mortgage lenders we work with, but generally, borrowers will need a clean credit rating to show a lower risk to the bridging finance lender. You will be able to check your credit rating by following the CheckyMyFile report which downloads data from the top credit rating agencies including Experian and Equifax.

If the exit strategy is to refinance onto a bad credit mortgage, some underwriters will approach the application with higher caution with the possibility of increasing the interest rate to lower the risk for the lender during the loan term.


c. The security property


This is mutually exclusive with your exit strategy, as the lender will need to be confident that your security property will be easy to sell. They will take into consideration the construction type of the property and any variables that may delay the sale such as the leasehold agreement. The easier it is likely to sell, the better.


d. Experience in property development


Again, this is more of a factor than a deal breaker as there are many bridging lenders who specialise with clients who have no development experience, but to secure a better rate and more favourable terms, the higher amount of property development experience you have the lower the risk to the lender.


Why Use a Broker When Getting A Bridging Mortgage?


Because they know exactly which lenders to approach for these often-complex agreements and can negotiate the most favourable deal on your behalf. Since the bridging finance market is vast, it can be difficult to find a bridging finance provider with the right expertise to cater to a customer in your circumstances.

You may need a specialist lender if any of the following applies to you…

  • You’re taking on a complex development.

  • The property is unusual – e.g., of non-standard construction or un-mortgageable

  • You have severe adverse credit.

  • You’re looking for a deal with more than 70-75% LTV.

  • You want 2nd or 3rd charge bridging finance.

The best way to get a bridging loan to invest in a UK property is via a broker who specialises in bridging mortgages, regardless of whether your application is complex. That way, you’ll have access to the best deals you’re eligible for.


Contact us at Accelerated Finance


If you want to complete a property purchase quickly, we have strong relationships with lenders who are offering bridging finance to suit a wide variety of circumstances. With our connections to private banks and specialist lenders, we help secure the best finance for you.


Call us to arrange a suitable time to speak:


0208 952 5280





Disclaimer:


This article is intended to provide a general understanding of the topic. The contents should not be treated as advice. Your home may be repossessed if you do not maintain repayments on your mortgage.