Bridging Loan To Buy A House - Example Of How It Works

Did you know a mortgage isn't the only way to fund a property purchase? You could use a bridging loan to buy a house. 

Time is of the essence when buying a home. In this guide, we look at the numerous ways bridging loans can be used to buy property.

How Can You Use a Bridging Loan To Buy a House?

In the past 15 years, bridging loans have quickly become a mainstream property finance solution. 

Why?

• They can be fast - A bridging loan can be set up quickly and allows you to act like a cash buyer.

  
  

• They can be flexible - Because it's secured against the value of bricks-and-mortar or your deposit, lenders may consider borrowers whose credit record is less than perfect.

  
  

• They have a diverse usage - Bridging loans can be secured against residential and commercial property, building plots or even land that doesn't yet have planning permission.

While mortgages are still the default route to buying property for many, bridging finance's key advantages can allow you to buy property in circumstances where a mortgage may not be suitable.

What is a Bridging Loan?

A bridging loan is a short-term secured loan typically used to raise capital to meet a tight timeframe or break a property chain. Bridging finance is popular for its flexibility and relatively easy application process, which can take from as little as seven working days to a few weeks. 

Whether or not you will be eligible for a bridging loan will centre heavily on your plan to repay the loan. Due to the quick turnaround of these loans, they are commonly used to purchase property before the sale of another property has gone through.

This is where the name 'bridging' loan comes from, as they are typically used to 'bridge' a gap in finance. They can be used for a variety of purposes, including buying a new home or buy to let, and are often used for refurbishment projects. 

In the UK, bridging loans are only available from private lenders, so if you're looking for a bridging loan and don't know where to start, seeking help from a bridging broker can streamline this process. 

Bridging loan terms are typically around 12 months but can be tailored to suit your circumstances if needed. Unlike mortgages, they are usually repaid in a lump sum and don't have early repayment fees.

2024 Bridging Market Update

The bridging market has had quite a transformation in the past few years. With rates starting at 0.55% per month, the costs aren’t dissimilar from those of a mortgage, and the combination of flexibility, quick turnaround time and less stringent eligibility criteria has led to bridging finance growing in popularity.

It’s now seen as a product in its own right instead of an expensive alternative to long-term finance.

Our finance brokers are seeing more repeat clients, particularly investors who have turned their attention to property flipping considering the slim profit margins the buy to let market has been seeing. HMO conversions have also grown in popularity amid more rigid rental legislation.

According to our team of advisers, a high volume of first-time borrowers already have an understanding of bridging loans before approaching us, showing that bridging is becoming more recognised in the industry.

As bridging finance becomes more mainstream, lenders are reviewing and reducing rates more frequently, offering more flexibility around costs.

When To Use a Bridging Loan

Bridging loans can be ideal for seizing time-sensitive opportunities, from buying a new home before finalising the sale of your existing property to renovating an HMO. They will typically use the purchased property or an existing one as collateral, offering more flexibility in your eligibility compared to traditional mortgages.

You can use bridging finance for:

• Purchasing a new property before selling your current home - This could be when downsizing, upsizing, moving abroad, or moving closer to a family member.

  
  

• Breaking a mortgage chain - Bridging finance can effectively turn you into the kind of cash buyer given preferential treatment by estate agents.

  
  

• Landlords who need to buy an investment property quickly - Affordable properties that offer the prospect of good returns attract buying competition from other investors and owner-occupiers.

  
  

• Buying property at auction - Auctions are often the most profitable hunting ground for bargain-priced properties, but the requirement to complete payment within 28 days makes ordinary mortgage finance close to impossible.

  
  

• Cash flow restrictions - Bridging finance secured against property can also be used for personal and business purposes when cash is tight.

  
  

• Refurbishments & property flips - If you have the means to repay the bridging loan within the terms, bridging loans can be used to renovate investment properties as well as fund home improvements and maintenance.

How Is a Bridging Loan Different To a Mortgage?

Most people looking for property finance will approach a traditional lender such as a high street bank or building society to arrange a mortgage.

However, bridging loans have several features that make them a beneficial way of financing a house purchase when a standard mortgage might not work.

Bridging Loans Are Short Term 

While mortgages are designed for long-term property finance, with terms usually ranging from 20 to 35 years (and their cost structures and interest rates are priced accordingly).

A bridging loan is specifically designed for the short term: the maximum period for a "regulated" bridging loan (secured against or used to purchase a residential property) is typically 12 months. However, up to 24 months is possible. There are also bridging loan alternatives available based on your circumstances, e.g. if you earn £100k pa.

The aim is to temporarily "bridge" the gap when there is a shortfall in funding, say between the deadline for completion of a purchase and the sale of a previous home. Or between buying an unmortgageable property at auction and doing the necessary renovations that will make it possible to arrange mortgage finance or sell it on.

Bridge Loans Can Be Arranged Very Quickly

As most purchasers know, standard mortgage finance can take two to three months to arrange, particularly during the busiest buying "seasons" of the year. 

Bridge finance is secured primarily against the value of a property rather than the full range of your finances so that lenders can make decisions more quickly. 

We work with some lenders who can process an application and release funding within seven working days (depending on your circumstances and eligibility).

Monthly Interest Rate Payments Can Be Deferred

Bridging loans come with the option to "roll-up" interest to be paid at the end of the finance term. This could be advantageous for buying a house because it enables you to avoid monthly interest payments and use the loan entirely to purchase your new property.

If you choose to roll up the interest on your loan, it will be repaid at the end of the finance term and the principal loan amount by your agreed exit strategy. This means that your total loan amount must include the interest cost - meaning you will have less available for the purchase or the renovation works you're funding. 

High LTV Lending Is Available

Not only can bridging loans provide funding quickly, but you can secure a substantial amount of finance through a bridging loan. Most lenders will lend up to 75% loan to value (LTV).

We work with some lenders willing to grant bridging loans up to 80% LTV to property developers on a non-regulated basis (which does not involve your residential property), depending on the set of circumstances and the assets used as security for the loan.

Some lenders can consider 100% LTV bridging finance, but it's rare you'll get accepted and you'll need extra security at the very least.

The most effective way to arrange a bridging loan of the maximum value is to secure the loan against both a property being purchased and an existing property. A single property can be used as security on a bridging loan, but the interest rate charged may well be higher with less "security" for the lender.

You'll Need A Watertight Exit Strategy

You need to have an exit plan agreed upon with your lender to access bridging finance. This is the achievable strategy you intend to use to repay the loan at the end of the finance term, such as the sale of your house or the arrangement of long-term mortgage finance.

A realistically achievable exit plan reassures both the lender and you, the borrower. Usually, three months away from your exit deadline, your lender will be in touch to ensure that your exit strategy is proceeding to plan. They may propose changes to the marketing plan, or it may be possible to arrange a short extension to achieve a realistic price on a property sale.

There Are No Early Repayment Fees

Long-term mortgage lenders are usually reluctant for borrowers to repay a loan in full before the agreed deadline: their interest rates have been calculated with a view to long-term, ongoing repayments. There will usually be Early Repayment Charges within a specified minimum term (often at least two years) which could add up to thousands of pounds.

Bridging loans are designed for short-term finance: the minimum term is usually one month or three months. And most lenders only charge interest on the actual duration of the loan. So if you take out a bridging loan for 12 months but repay it entirely within six and a half months, you will only pay interest on the exact number of days the loan was outstanding.

You Can Buy An Unmortgageable Property

Traditional lenders will not finance properties they deem "unmortgageable" - Examples include:

• Valued under £50,000

• With structural issues

• Without a functioning bathroom or kitchen

• That is derelict

Bridging lenders are much more flexible in their criteria, provided sufficient security is offered in some other property holding. If you need finance for an unmortgageable building, then a bridging loan is likely your most viable option. 

How To Apply For a Bridging Loan

The bridging loan lending process can be swift and efficient. A typical bridging loan application will play out as follows:

Initial call

This is where our brokers find out precisely what you need. This will usually require you to provide details of the loan size you want and the asset you intend to use as security.

Indicative terms

Documentation will be sent to you, providing a breakdown of our terms and conditions and a quote for the costs you will incur.

Lender search

Our brokers scour the marketplace to find the lender that will accommodate your financial needs.

Decision In Principle

Lenders provide a document to show they are happy to give the loan size based on their information.

Client confirmation

Upon receipt of the Decision In Principle, you send notification that you want to proceed with the loan application.

Valuation

Our brokers instruct a professional surveyor to value your property and send it to the lender.

Lender confirmation

The lender will send the surveyor's report to their credit community team for proof that the loan is an appropriate size based on your property's value.

Offer

The agreed loan amount will be sent to you.

Solicitors instructed

Solicitors will send all the offer documentation to you to sign.

Funds released

Once you have signed and returned the documentation, your funds will be released.

The time it takes to complete an application and secure the finance will vary from lender to lender and depend on your circumstances.

Get a Bridging Loan

If you're looking to secure a bridging loan, you may need the help of a specialist bridging broker. A bridging broker can use their network of lenders and market expertise to find you the best deal on the market. 

A bridging loan broker can offer comprehensive advice on your options and will help you find the most cost-effective solution. In the right circumstances, a bridging loan can be a quick and affordable means to secure your property.

At Hilo Finance, we have an award-winning team of bridging brokers who can guide you through the process.

If you want to discuss how bridging finance could work for you, call us, and an adviser will be able to discuss your situation in detail.

Call us today on 07387 594 274 to see how we can help, or book a consultation with us.