This information should not be interpreted as financial, tax or legal advice. Mortgage and loan rates are subject to change.
Whether you are buying a house or flat, renovating a property, or purchasing at auction, short-term bridging loans can provide the timely funds you need.
A short-term bridging loan “bridges” the gap between needing funds and the time it takes to get a traditional mortgage, or where you are renovating and selling a property with the aim of profiting from an increase in its value.
These loans are also useful when you do not have the time available to secure a mortgage, such as buying a property at auction, or where you cannot get a mortgage because the property cannot be lived in.
The interest rates associated with these loans are typically higher than a mortgage, and so they are only meant to be taken out for a short period, usually between 3 to 18 months.
In this article, we highlight everything you need to know about short-term bridge loans. We explain how they work, the uses, and how to apply for and manage these short-term loans.
- How bridging loans work
- Uses for short-term bridging loans
- Benefits of short-term bridging loans
- Risks of short-term bridging loans
- Applying for a short-term bridging loan
- Can I get a short-term bridging loan with bad credit
- Managing a short-term bridging loan
- Fast and affordable short-term bridging loan advice from Commercial Trust
Bridging loans will need both a ‘how’ and a ‘when’. How do you intend to pay back the loan (also known as an exit strategy), and when do you intend to pay back the loan?
The borrower and the bridging lender will agree on a time that the borrower must repay the funds, and the borrower will provide an asset (typically the property you are borrowing the money for) against which the loan is secured.
For example, imagine you are buying a new investment property with the money you receive from releasing equity from your portfolio. You know when you will be receiving the funds, but need faster access to money to buy the new property. In this situation, a short-term bridging loan is a good choice, as you can set an end date that matches your needs.
Regulated bridging loans
The Financial Conduct Authority (FCA) in the UK monitors and controls what are called ‘regulated’ bridging loans.
This type of loan comes with consumer protections, because it is for scenarios where a borrower is not a professional property investor and as such may not be familiar with the way the product works. For instance, where the loan is secured against a property the applicant will or has lived in.
Unregulated bridging loan
A financial authority like the FCA does not regulate an unregulated bridging loan.
These loans are no less legitimate, but the FCA does not regulate them, as the borrower should be familiar with how these loans work.
They are often used for business or investment purposes, such as buying a commercial building or rental property.
Given unregulated loans do not offer the same protections as regulated loans, there is a higher level of risk. Borrowers should work with a reputable lender or bridging broker to ensure that they are making the best choice for their needs.
You can use short-term bridge loans for many reasons, including:
- Buying a new property: If you want to buy a new property, before you have sold an existing one, you could use a bridging loan, then pay off the bridge as soon as the money from the sale comes through.
- Buying a property you could not mortgage: Mortgages need properties to be of liveable standard. If the property you plan to buy does not meet these standards, you can use bridging financing to buy it. You can then perform the necessary work to qualify for a mortgage.
- Fixing up a property: If you own or are buying a property and want to raise funds to fix it up and either sell or rent it out, you can use a short-term bridging loan to pay for the repairs.
- Buying a property at auction: This loan can provide quick funds to buy a property at auction. You can then apply for a mortgage once you have bought the property.
Short-term bridging loans offer these benefits:
- Fast: You can get loan approval in as little as 5 working days. This is much faster than getting a regular mortgage.
- Flexible: You can use this loan for many different purposes, such as buying a property at auction or purchasing an uninhabitable property to renovate.
- Profit: You can use bridging finance to buy a property to fix and flip, allowing you to quickly repay the loan and make a profit.
There are also some risks with this type of loan:
- They can be expensive: Short-term bridge loan interest rates are higher than mortgages. This means they can cost more per month than a mortgage. You can use a bridging loan calculatorto see the potential costs of your loan.
- They can be risky: As with any lending secured against a property, if you cannot repay the loan you could lose your security property, if ultimately the lender has to take possession of it to sell it and recoup your debt.
You need to find a bridging lender with a product suited to you, to apply for a short-term loan. You can do this by talking to a specialist lending company (although if you only talk to one or two, given there are lots available to you, you could not be confident the products were your best option).
You could use a bridging loan broker, like Commercial Trust, who can look at a range of lenders and their products from across the UK, to find a deal as closely matched to your requirements as possible, whilst also seeking to keep your costs down.
To secure a loan, you will be asked for information about the deposit you will put down, how long you want to borrow the money for and how you will use the money (e.g. are you flipping property, buying at auction, renovating to rent the property out).
You will also be asked about the type of property, its value now and in the future (if you are renovating) and how you will repay the loan.
Some of the information you give will need to be evidenced with appropriate paperwork (e.g. a bank statement demonstrating you have the deposit, a schedule of works if you are renovating a property).
You may be able to get a bridging loan with bad credit.
While it is not as easy to get a bad credit loan, as a specialist bridging loan broker we can research lenders we know who are set up specifically to help applicants with challenges with their credit profile.
Careful loan management will ensure that you can repay the loan within the required timeframe.
Here are some tips to manage your short-term loan:
Have a plan for repayment
All bridging loans have to have a predefined exit strategy that outlines the timeline and method for paying back the loan. By planning for this, it will help you keep your finances on track and reduce the risk of defaulting on the loan.
Keep track of your spending
Keep track of your spending to ensure that the loan money is spent only on essential items related to the loan's purpose. You can create and follow a budget to prevent unnecessary spending that could affect your loan repayments.
On a renovation project, having a lump sum of money as a contingency fund will put you in a good position in case an unexpected cost arises.
Stay in touch with the lender
Keep a strong line of communication with your lender, especially if you face any challenges in meeting your payments. Lenders are often willing to provide support and work with you to find a solution. Proactively addressing any issues with your lender will help ensure a smoother loan repayment process.
Commercial Trust provides advice on affordable and fast bridging loans. We work with many different lenders so that we can find the best loan for your needs amongst them. Our team of experts will help you through the whole process, from applying for the loan to managing it and paying it back.
If you need a short-term bridging loan, get in touch with a specialist advisor at Commercial Trust.
The minimum term on a bridge loan is usually 3 months. That is not to say you can’t exit a bridging loan sooner than this, many lenders will allow it, but you will be charged a minimum of 3 months interest, in order to make the product viable for the lender.
Bridging loans are intended to be a short-term solution, over 3-24 months. If you reach the end of a bridging loan term and still require the bridging funding, you may be able to extend your borrowing with your existing lender, or “re-bridge” with a different provider. A broker can help you explore all the options.
If you do not have a deposit in cash savings to meet the terms of a bridging loan, it may be possible to borrow against any available equity in another property to raise funds. So, whilst this is not borrowing at 100% loan to value, it can mean you do not have to find any cash savings to raise a deposit.