How Does a Bridging Loan Work?

A bridging loan can be a helpful form of funding for those who are hoping to complete the purchase of a property before selling an existing property. Bridging loans are typically short-term, bridging the gap between the sale and completion dates in a chain in order to help someone planning to move quickly.

Bridging loans can be very beneficial for landlords, homeowners and property developers, but it’s important to understand how they work before applying for one. Watts Mortgages & Wealth Management Ltd offer their insights into how a bridging loan works and what you should know about them.

What is a bridging loan used for?

A bridging loan can be used by homeowners or property developers to buy a property, initiate property development or even invest for buy-to-let purposes. The loan could also be used to pay tax bills. Bridging loans are short-term with high interest rates, and are secured against the value of a property.

The loan can be used for a number of different circumstances, such as supporting chain breaks when purchasing a property or if you are experiencing a time-sensitive purchase. In some cases, bridging loans can be used to downsize when you haven’t yet sold your home or to raise capital.

Those who take out bridging loans are often first-time property developers or the elderly hoping to purchase a smaller property.

What are the different types of bridging loans?

There are two main types of bridging loans: regulated and unregulated. A regulated bridging loan is regulated by the Financial Conduct Authority and falls under the same regulation as a residential mortgage.

Regulated bridging loans mean the loan is secured against a property that is currently occupied or will be occupied by the borrower or their immediate family. A regulated loan of this kind can be first or second charge; either it is the only loan secured against the property, or there is enough equity after a mortgage for the loan to be placed behind the first charge lender. 

Unregulated bridging loans mean the property being used as security will never be occupied by the borrower or their family. If the loan is taking out under the name of a business instead of a person, it will also be classed as unregulated.

You should also be aware of closed and open bridging loans. This refers to how you will pay back the loan. A closed bridging loan requires you to know exactly how you will pay off the loan, and you can tell the lender from the outset. An open loan does not require an exit plan, and is usually used for urgent transactions. 

Applying for a regulated bridging loan

It can be helpful to approach a regulated broker to help with a bridging loan. They can help with your application and place it with a suitable lender, depending on your needs. Bridging loans are typically arranged with 12 month terms, with rolled up interest. This means there are no monthly repayments and the total amount due is paid back at the end of the loan.  

The advantage of a bridging loan is that you can receive money quickly and you can usually borrow a large amount. However, there are high interest rates and you risk losing property if you can’t pay back the loan. For these reasons, it’s important that you understand the terms of the loan and seek professional advice before borrowing money.