A guide to Bridging mortgages & brokers
Using a bridging loan for a mortgage
Bridging loans have been known to be a short term flexible finance option when looking to move quickly on a home purchase. They are more commonly used by buy to let landlords but residential borrowers can also access bridging loans or bridging mortgages.
The instant benefits of bridging loans or bridging mortgages are that they are relatively easy to set up and you can have access to finance pretty quickly.
This, of course, means you can purchase a property much quicker than you might have been able to if you had to wait for a mortgage offer.
A bridging loan can be a short term alternative to a mortgage and many borrowers are beginning to use it in this manner.
What is a bridging loan?
A bridging loan or bridging mortgage is usually defined as a loan used to bridge the gap between buying and selling a home. It is usually used by home buyers who are in the process of selling their homes but haven’t received the proceeds for the sale as their buyers are far back in the mortgage process or completion is taking much longer and they need to complete on the home purchase of their new homes sooner than later.
Bridging loans are not solely used for a property but are well known due to their use in property transactions. Bridging loans or bridging mortgages are more common with buyers at the auction house than they are with residential borrowers.
The amount you can borrow with a bridging loan or bridging mortgage is determined by the value of the building. With a bridging loan or bridging mortgage, the lender will take a first charge over the property. During the bridging loan or bridging mortgage term, your monthly repayments will only be made up of interest and not the capital borrowed.
You will repay the capital borrowed at the end of the term, similar to an interest-only mortgage.
The bridging loan or bridging mortgage can also be a fixed rate, tracker rate or variable rate product.
Getting a bridging loan may be difficult if any of the below apply to you:
You have very bad credit
You are looking for a deal with more than 70-75% loan to value
You want 2nd or 3rd charge bridging finance
You are taking on a complicated development
The property is a niche type – e.g. non-standard construction, unmortgageable etc
What is a bridging mortgage?
The term bridging mortgage or bridge mortgage isn’t a product on its own. It is simply used interchangeably with the term bridging loan or bridge loan
How does a bridging loan work?
Bridging loans or bridging mortgages can be either:
Closed bridging loan or bridging mortgage
Open bridging loan or bridging mortgage
A closed bridging loan is a loan which has a fixed repayment date. This may be because your house sale has been agreed but there are some delays and you need to complete on the property you want to purchase so cannot wait for the mortgage funds to be released.
An open bridging loan is a loan which doesn’t have a fixed repayment date but will usually be expected to be repaid within a year. The open bridging loans may suit borrowers who are less certain on when they will have access to funds.
For you to get a bridging loan or bridging mortgage the lender will want to see your repayment vehicle or plan. This could be by getting a mortgage on the property which you are using the bridging loan to purchase or it could be from the sale of your own property which made you dependent in a house sale chain.
The lender will also want to see a backup plan in case your bridging loan repayment plan fails.
The bridging loan lender will also want to see proof of what you will be using the funds they lend you for.
Bridging loans or bridging mortgages can be very expensive and it is best to utilize them as a short term alternative rather than rely on them.
Bridging loans can also be regulated or unregulated.
Regulated bridging loans
Regulated bridging loans are loans used for houses where you want to live or make changes to a home you plan to live in.
Regulated bridging loans are regulated by the Financial conduct authority this means you have some recourse and may be able to claim compensation from the financial services compensation scheme if you are mis-sold a bridging loan product or given poor advice.
Unregulated bridging loans
Unregulated bridging loans are for borrowers who need bridging loans or bridging mortgages for commercial purposes. This could be for buy to let properties etc.
When assessing a buy to let property for a bridging loan the lender will want to see the potential of the property to make rental income rather than your personal annual income. This means you could potentially borrow more than you would have been able to if you had to borrow with your own income.
With unregulated bridging loans, you won’t have much recourse if anything goes wrong or if you are given wrong financial advice.
The difference between a bridging loan and a mortgage?
A bridging loan is much more flexible than most mortgages. It is quicker to arrange and you can still get access to the sort of amounts you may require with a mortgage. Bridging loans are however short term and should only be used for 12 months or less. Bridging loans are also much more expensive than mortgages over a similar term.
Bridging loans and bridging mortgages are often assessed differently. The bridging loan lender is more concerned with how you will return the capital borrowed to them and less with your affordability for the bridging loan whilst the mortgage lenders are more concerned with your mortgage affordability and your ability to make these mortgage repayments every month.
How much deposit do you need for a bridging loan or bridging mortgage?
You will usually need a deposit of at least 30% for a bridging loan and some bridging loan lenders may require as much as a 40% mortgage deposit for a bridging loan.
Bridging loan lenders usually offer a loan to value rate of around 70 to 75% for customers who they deem as low-risk customers and for high-risk customers loan to value rates of between 60 and 70%.
You may be able to get a bridging loan with no deposit down but you may need to put up collateral to secure the loan.
What are the eligibility requirements for a bridging loan or bridging mortgage?
Bridging loans or bridging mortgages are usually assessed on a case by case basis but you want to ensure the bridging loan lender sees you as a low-risk borrower. Below are the key points bridging loan lenders may look at when considering your application.
If you are a buy to let landlord or you have been involved in the property market for a long time then the bridging loan lender may consider this when looking at your bridging loan application to determine if they will give you a bridging loan.
A more experienced applicant may find it much easier to get a bridging loan than one who isn’t.
Your credit score & history
When considering a borrower for a bridging loan the lender will usually look at their credit scores and history to see what their repayment behaviour has been like and if they deem them creditworthy to lend to. Whilst this is an important factor it isn’t the most important factor.
Your repayment plan
The bridging loan lender will focus more attention on your plan to repay the bridging loan. Will you be getting a mortgage? Do you plan to release equity from another property? Do you have savings and investments which you can use to pay off the bridging loan? Are you waiting on the sale of your property to pay off the bridging loan?
Your repayment plan is the real measure by which a bridging loan lender will determine if you meet their eligibility requirements for a bridging loan.
Most bridging loan lenders will require some evidence of your repayment plan before they will lend to you.
Your security property
If the way you plan to repay your bridging loan is via selling a property then the bridging loan lender will consider the property and its ability to sell fast and at a reasonable price sufficient to clear the bridging loan. If the property is built with non-standard construction or is a Grade 2 listed building for example then the bridging loan lender may want to see further evidence such as proof of an ongoing transaction as it may consider these types of buildings harder to sell.
Can you get a bridging loan or bridging mortgage with bad credit?
You may be able to get a bridging loan with bad credit as most bridging loan lenders focus more on the repayment plan rather than your credit score and history when trying to determine your eligibility for a bridging loan.
That being said, most bridging loan lenders will look at things on a case by case basis.
If your repayment plan is something that requires you to get further credit such as a mortgage or a remortgage then the bridging loan lender may consider your application more carefully as you may not be able to access further credit with bad credit or you may not be able to get approved for a mortgage or remortgage.
When considering bridging loans or bridging mortgages, bad credit could be:
A debt management plan
A home reposession
Can you get a bridging loan or bridging mortgage as a self-employed borrower?
You may be able to get a bridging loan or bridging mortgage if you are self-employed but this will be based mainly on your ability to repay the bridging loan at the end of the loan term.
The bridging loan lender may still request to see your:
Your bank statements for 3 months
How much can you borrow with a bridging loan or bridging mortgage?
The amount you can borrow with a bridging loan will mainly focus on your ability to repay the said amount and how you intend to repay it. The bridging loan lender will also consider your ability to make the monthly repayments but the prime indication of how much you can borrow will be your repayment plan.
You may want to consider speaking to a mortgage broker with experience dealing with bridging loans or bridging mortgages.
When you may need a bridging loan?
Bridging loans are known for being flexible and quick to arrange but in what practicable situations could you end up needing one?
There are many scenarios where you could potentially need a bridging loan and it will be impossible to drum all of them up in this post but the main benefits about bridging loans are that they are quick to arrange, you can get the same amount you may normally get with a mortgage and they are flexible.
Below we will touch on a few situations where a bridging loan may have been relevant.
If you are turned down for a mortgage
If you have just been rejected for a mortgage and you have already incurred some expenses in trying to buy the house and don’t want to pull out of the transaction then a bridging loan may be exactly what you need.
A bridging loan will give you time to either build credit or increase your mortgage affordability so you have more mortgage lenders who may be willing to offer you a mortgage.
If you are in a property chain
If you are in a property chain (when you are selling your house but also buying a house) then you may find that you need to move quicker on your home purchase but your home sale is taking a bit longer and you aren’t able to get the funds from your home sale to use to purchase your new home. In this instance then you may find that a bridging loan or bridging mortgage may be suitable to ensure you don’t miss out on your new home and give you enough tie to complete on your home sale at a suitable price. A similar benefit can be gained from let to buy mortgages.
To buy an unmortgageable property
Bridging loans may also be given to borrowers who want to buy an unmortgageable property so that they could renovate the property and then sell it or remortgage to a standard mortgage lender.
The bridging loan lender will want to see reports on the current structural status of the property to ensure they are happy to lend to you.
If you buy from auction
When buying from auction you will usually need to get your mortgage offer from the mortgage lender quickly and complete on the home purchase within 28 days if not you risk losing on the property. Mortgage lenders can take their tie when considering a mortgage application and can take up to 4 weeks to even produce a mortgage offer in some cases.
A bridging loan could be a good option to allow you to complete on the auction home purchase without the uncertainty of a standard mortgage lender as bridging loans are usually quicker.
To develop a property
Some bridging loan lenders will loan to you if you plan on using the funds to develop a property within a given timeframe and then sell it on for some profit. The bridging loan lender will like to see proof of planning permissions, a surveyors report and any other documents that can give an indication of the properties future value once all the renovations are done.
To refurbish a property and then remortgage
You may want to refurbish a property and then get a remortgage on its increased value. A bridging loan may be able to give you access to theses funds to do the refurbishment work and then the remortgage could be your repayment plan.
If you plan to buy and sell a property quickly
Bridging loans can also be very good for property investors who have spotted a property with value and intend to buy it , do some little work on it and then sell it on for a profit. The bridging loan lender will want to see some documents indicating what the future value of the property will be after you have completed the work on it as this will be your repayment plan.
Bridge to let agreements
A bridge to let agreement is when a bridging loan lender provides a bridging loan to a borrower who uses it to renovate a property which they intend to then get a buy to let mortgage on. In most cases, the buy to let mortgage will be given to them buy the same lender. You will of course need to meet the eligibility requirements for a buy to let mortgage.
Alternatives to a bridging mortgage or loan
Due to the flexibility and ease of using bridging loans, there aren’t that many alternatives.
Let to buy mortgage
If you need a bridging mortgage or a bridging loan you may be able to use a let to buy mortgage instead. With a let to buy mortgage, the mortgage lender will convert your current mortgage to a buy to let mortgage which its monthly mortgage repayments are being covered by the rent payments and give you a residential mortgage by using the equity in your current home as a mortgage deposit. This means you will be able to move into a residential property you want and still keep your old home to sell when the market prices have rebounded or whenever you see fit.
You should consider the tax implications of getting a let to buy mortgage
Borrow from your family.
If you have family or friends who may be able to loan you the money you need then borrowing from them could potentially be a cheaper alternative to getting a bridging loan or bridging mortgage.
Get a secured loan
You may be able to get a secured loan which could potentially provide you with the capital you need. Secured loans may certainly be cheaper than bridging loans over the same timeframe but secured loans can take up to 6 months to arrange.
Release equity from a property
Depending on your circumstances you may be able to release equity from a property you own as an alternative to getting a bridging loan.
Use a Buy to let mortgage
You may be able to get a buy to let mortgage which could serve as a suitable alternative for a bridging loan but this will all depend on your circumstances.
You may want to consider speaking to a mortgage broker who can advise you on bridging loans or bridging mortgages.
Bridging loan brokers
When seeking a bridging loan, using bridging loan brokers may help you maneuver through the bridging loan market and find the right products for you.
You may be able to find bad credit bridging loan brokers, new investor bridging loan brokers, residential bridging loan brokers, bridging loan brokers for non standard property, bridging loan brokers for commercial property, nd charge bridging loan brokers and more.
A bridging loan brokers can either be regulated or unregulated. An unregulated bridging loan broker will deal with buy to let bridging loans and commercial bridging loans whilst a regulated bridging loans broker will deal primarily with residential briding loans.
Using a regulated bridging loan broker will of course ensure you have suitable regulatory cover should anything go wrong.
Some bridging loan brokers will also charge a fee which they should tell you about upfront. This fee could be a percentile of the bridging loan or a fixed fee they charge upfront. In some cases, they may charge an additional fee if the bridging loan becomes a very complex case. The bridging loan broker will inform you about this prior.
The fees charged by most bridging loan brokers is usually around 1% of the bridging loan.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.