Bridging Mortgage Rates in the UK
Here in the UK, we use the term bridging loan or bridge loan to refer to any short-term finance instrument used to immediately acquire funds for various purposes.
This loan has the proviso that an exit plan is in place to assure lenders that the amount and any interest will be paid within a stipulated time period. In other parts of the Commonwealth, particularly our neighbours across the pond in Canada, this type of short term finance is referred to as a bridging mortgage by both individual and institutional lenders.
In principle, it works in pretty much the same way as any bridge loan offered here in the UK. But what does it take to get a bridging loan? Can you use it to buy a house or any other form of commercial or industrial property the way it’s done in the UK?
Can it be used to purchase real estate properties at an auction? What sort of security do you need to put down in order to get a bridging loan?
Read on; we have the answers for you.
What Exactly is a Bridge Mortgage?
The name itself ought to be a dead giveaway: all forms of bridging loans are short term financial instruments meant to bridge the gap between transactions.
But in this particular context, these are specifically used to fund the purchase, construction, or refurbishment of different forms of real estate from houses and other residences, to office spaces and retail enclaves, and even industrial estates and factories.
What are Bridge Mortgages Used For?
In Canada, as in other parts of the Commonwealth, these may be taken out for the following reasons:
- Get funds to pay for the purchase of one property whilst waiting for the sale of another;
- Finance the construction and/or refurbishment of a property pending its sale – the proceeds from which will cover the cost of the loan;
- Refinance another loan; and
- Get funds for property purchases that require immediate payment such as those acquired at an auction.
Where Can I Get Bridging Finance?
Unlike standard mortgages and loans, bridge finance is not normally offered by high street banks. Indeed, you need to get in touch with bridge loan lenders who specialise in these short term loans.
In the UK, reputable bridging lenders are regulated by the Financial Conduct Authority, or FCA, any may also be recognised by the Bank of England. In other countries under the Commonwealth, it would be best to check if the lender you’re interested in is regulated by the financial authority in your home state, and that they have the relevant certifications and/or accreditation to offer such financial products.
Rather than sticking to one lender at the onset, try to shop around by calling local listings or checking out different lenders and lending agencies online.
In doing so, you will be able to compare bridging loans from different companies, consider the rate of monthly interest payments, what sort of security you need to put up against the loan, and go over the service fees each lender charges prior to committing to one.
How Does a Bridging Loan Work?
As short term financial products, bridging loans need to be repaid within a twelve-month period, though some lenders can stretch the maturity period for as long as eighteen months.
Bridging loans involve an exit plan: essentially a strategy where the borrower details how – and when – they intend to pay off the loan.
Most of the time, the loan is paid off with the proceeds from a property sale, usually that of the borrower’s old house in the case of a home bridging loan. However, there are numerous ways by which one can pay off a bridge mortgage.
Depending on your lender of choice, your loan may be structured in various ways. Nevertheless, all of these will have what’s known as a balloon payment at the end of the stipulated period wherein they have to pay the full amount on the date agreed upon with the lender.
In some cases, depending on what sort of loan approved for you, you may need to wait a few months after the closing of your bridge loan before you need to start making payments. Again, this is something you will need to clarify with your lending agency.
What Types of Bridge Loan can Borrowers Consider?
In principle, there are two types of bridging finance: open-ended bridging and closed bridge loans. The type of loan will be dependent on what sort of exit plan you have lined up to ensure the payment of the bridge mortgage.
Open-ended Bridging Loans
These loans involve an exit plan with no fixed date. These are usually taken out when one knows that he or she can use the proceeds from the sale of property or funds from a different source to pay off the loan; however, this works on the premise that they are not sure when these funds will become available.
Note that many lenders tend to charge higher interest rates and service fees on open-ended loans are these pose a considerably higher level of risk.
Closed Bridging Loans
These, on the other hand, have everything delineated clearly from the beginning. Closed bridging involves an exit plan with a termination date already set and the assurance that the borrower will have the repayment funds available.
Borrowers who avail of this type of bridging finance usually back their loans up with ample security in the form of a second property or physical assets of a similar value. It is interesting to note that closed bridging loans will cost borrowers considerably less: interest rates on these are lower and service fees practically minimal because the loans have a lower level of risk.
A Few Things to Remember About Open and Closed Bridging Finance
Because lending risks are considerably higher for open-ended bridging loans, not many full-service banks or even independent loan companies offer them and these are even harder to secure during periods of economic crisis, political upheaval, or even unusual circumstances such as the ongoing COVID-19 pandemic. Closed bridging, on the other hand, is almost always on offer regardless of the situation.
In which case, it is recommended that potential borrowers perform due diligence to see which institutions or individuals offer such loans and whether these are worth the cost.
What Are the Advantages of Getting Bridging Finance?
The pros of getting a bridging mortgage are practically the same as those for getting bridging loans in the UK.
You get your money faster
In the case of more conventional mortgages and traditional loans, it may take days or even weeks before you can receive your funds. This is not the case where bridging loans are concerned: you can apply for one in the morning and, depending on your lender, get your money within the day.
It accords a greater level of flexibility
Getting an application for bridging finance approved means you can close the deal on a new house (or any other piece of real estate, for that matter) even before you’ve sold your old home.
Anyone can apply for one
One aspect of bridging loans that appeals greatly to people – especially first-time home buyers and those hesitant about applying for loans in general – is how some restrictions are relaxed when it comes to applying for one.
In many cases, so long as there is ample security and a workable exit strategy, lenders will not bother to look at one’s credit score or look too hard at one’s financial status. For this reason, people who would normally be turned down for a regular mortgage happily turn to bridge mortgages as a viable alternative.
You don’t need contingencies for your offer
Sellers will look more favourably at purchase offers which are not contingent on the sale of one’s old home or any other piece of real estate.
A bridge mortgage can be arranged as a second charge loan
A conventional mortgage is usually arranged as a first charge loan, which is to say that your lender will have first call on any proceeds resulting from the sale of your property. Bridge loans, on the other hand, are usually arranged as a second charge loan (and, in some cases, even a third charge loan), allowing them to sit behind any financial instrument already in place.
Exit fees – what exit fees?
Banks and lenders that loan out mortgages sometimes charge exit fees upon the early repayment of such instruments. Those specialising in bridging finance, for the most part, don’t; this is mostly because they earn their keep through interest rates and arranging fees.
Are There Any Disadvantages to Getting a Bridge Loan?
Any sort of loan or financial instrument will pose certain risks on the part of both borrower and lender. Bridging loans, in particular, can be fraught with risk and there are various bridging loan pros and cons to assess before taking out an agreement.
Even when you compare bridging loans to see which one will give you more bang for your buck with the least number of headaches to deal with, you may encounter any of the following disadvantages:
Interest rates for bridging finance are considerably higher
Monthly interest for such loans is usually pegged at 1 to 1.5 per cent. Contrast this with the five per cent annual percentage rate (APR)charged on more conventional mortgages; a bridging loan can set you back by as much as 13 to 19 per cent in terms of annual interest.
You need to check the fine print for additional charges
These charges include your lender’s arrangement fee, the broker’s fee, valuation, and – in more extreme cases where a legal opinion needs to be sought – fees for legal services.
Bridging loans tend to be unregulated
In the UK, commercial bridging finance remains unregulated and this means borrowers cannot seek the protection of the Financial Conduct Authority in the event of serious concerns. It would be good to check with your lending agency or independent lender if the same rules apply in the Canadian context or in any other part of the Commonwealth.
How Much Can One Borrow for a Bridging Loan?
In the UK, the average amount which one can avail of would be between 70 to 75 per cent loan to value (LTV), depending on your lender of choice. Note, however, that you need to make a deposit worth 25 to 30 per cent of the total value of the property or any other asset you seek to purchase.
Some lenders can actually give you 100 per cent of the amount you want to borrow, but this is contingent on the security you offer as loan collateral.
In which case, it’s good to know that there are lenders that accept multiple assets as security, provided that the overall cumulative value is enough to ensure that their risk is measured accordingly.
What Should You Watch Out For When it Comes to Bridging Loans of Any Type?
Different lenders and lending firms offer a wide range of products to suit their clients’ needs and budgets. But while you’re shopping around for the best possible deals, be sure to keep an eye out for the following:
- Some bridging loans are structured in such a way that they can pay off the full amount of the old home’s first mortgage as the bridge loans closes;
- Some lenders may stack old debts on top of any new loans you apply for;
- There are such things as straight bridge loans, or instruments that don’t require monthly payments as long as the amount is paid in full at the end of the stipulated time period;
- Some lenders demand upfront interest payments on their loans; and
- Always check out your end of term interest payments regardless of which type of loan you’ve taken out.
What is the Criteria for Getting a Bridge Loan mortgage Application Accepted?
As with any other type of financing, bridging loan specialists and lenders usually have a set of requirements and qualifications for potential borrowers to compile or comply with prior to application.
Most lenders in the UK and parts of the Commonwealth will ask for the following:
- Loan Size: technically, bridging loans are available from a pound (or a dollar) up to any value a home buyer or property developer deems necessary. Realistically, however, the amount may run between £50,000 to £1 billion.
- Payment Term: this can be as short as 24 hours or as long as 12 months in the case of regulated loans. Lenders that offer unregulated loans can extend this for as long as 18 to 36 months.
- Security: this is collateral put up against the loan and is usually in the form of property, though other sizable assets such as vehicles, jewellery, and antiques may be used. The lender and borrower usually enter an agreement where the former takes ownership of the property used as security in the event that the latter fails to pay under the stipulated conditions. Loans are typically secured when the lender takes charge of the property and this is registered at the local land registry via a first charge, second charge, or even a third charge.
- Property Types: these may include residential property in the form of houses, flats, and bungalows; hospitality venues like hotels, hostels, and holiday homes; commercial property such as offices, shops, restaurants, bars, communal garages and parking spaces, and clinics; mixed-use properties; industrial estates and facilities; agricultural land and structures; and even raw undeveloped land. Note that the loans with the best possible interest rates and fees are usually secured on residential property.
- Property Condition: believe it or not, some lenders will accept as collateral property that is in a less than ideal state, is in serious need of refurbishment or restoration, or even close to demolition. For this reason, many people – particularly property developers – use bridging finance as a way to raise funds for the renovation and/or improvement of a property that may be considered decrepit by more conventional lenders.
- Location: be sure to work with a lender whose services cover your area of residence or operations. However, if you’re eyeing overseas properties, you ought to look for bridging loan providers that specialise in overseas bridging finance for assistance.
- Loan Availability: bridging loans are normally made available for a broad spectrum of borrowers, including private or individual borrowers, limited companies, offshore companies, and partnerships.
- Applicant’s Age: most lending agencies insist that borrowers must be at least 18 years of age. Check if your lender imposes a maximum age limit, though many do not impose such limits. Note that, unless a Power of Attorney is in place, applicants need to be aware of what they are applying for.
- Loan Use: while most borrowers utilise funds from a bridging loan for transactions related to property, they can be used for numerous legal purposes including travel insurance and the refinancing of previous loans.
- Exit Plan: also called an exit strategy, this serves as proof to the lender that the loan will be repaid within a time frame mutually agreed upon by both lender and borrower.
In the Market for a Bridging Loan? You’ve Come to the Right Place
With access to over 200 independent and institutional lenders working with us, we can help set you up with the right lender who can help you buy the home of your dreams, develop raw land into lucrative commercial establishments, and do refurbishments on properties that need improvement.
Need a quick quote? Fill in our online bridging loan calculator to know what you might get based on your requirements or, better yet, send us an online enquiry to get the process started.