What is a bridging loan?
A bridging loan, also known as a bridge loan, is a short-term loan that is secured against property. The loan is used to bridge a gap in property transactions pending the arrangement of longer-term financing, typically a residential mortgage or a buy-to-let mortgage.
The bridging lender will place a first or a second legal charge over your property. This is a legal agreement that protects the lender. If you fail to repay the loan, they will be able to sell the security property to recover the loan amount plus interest.
At Sigma Knight we provide bridging loans from as little as 1 month to 24 months for a wide range of purposes including residential, semi-commercial, commercial and land transactions.
Take a look at the Bridging Loans Explained case study examples below to learn more about how bridging loans can be used to finance property projects and house renovations.
Bridging loan options
Loan size: £20,000 to £40M
Loan term: 1 month to 24 months
Security : First and Second charge
Property type: Residential, Semi-Commercial, Commercial and land
Rates: From 0.40% per month
Maximum loan to value: 80%
Case Study Examples
Property Renovation
The borrower had a HMO that he was converting into two 2-bed houses which would increase the value of the unit to approximately £1 million - £500,000 for each house after renovations were complete.
He was looking to borrow £100,000 for 10 months to renovate the houses. However, he was concerned that he would not be able to secure a loan on the property because he already had a buy-to-let mortgage on the unit with a first legal charge.
The existing mortgage wasn’t a problem as we were able to provide a bridging loan with a second legal charge over the property. This allowed the borrower to complete the renovations and remortgage the unit as two separate dwellings. When he remortgaged, he was able to repay the bridging loan plus interest.
Property Purchase
The borrower was looking to invest in a second property as a buy-to-let. The owners of the purchase property were looking to sell as quickly as possible, however the borrower didn’t yet have a buy-to-let mortgage offer in place. The sale was about the fall through and she didn’t want to miss out on the opportunity to buy.
She took out a bridging loan of 75% of the property value, approximately £206,250 to ensure completion on the purchase. 4 weeks later the borrower had secured a buy-to-let mortgage and was able to repay the bridging loan plus interest.
Property Developer
A property developer, who has a portfolio of rental properties, was looking to invest in a 3-bed semi-detached house, although his funds were tied up in the sale of another property that was not yet complete.
He was looking to borrow £200,000, approximately 45% of the property value, for 3 months to complete the purchase. The bridging loan allowed him to progress the purchase without being reliant on and waiting for the sale of another property to complete.
Once the sale had completed, the borrower refinanced with a buy-to-let mortgage and repaid the bridging loan plus interest.
Bridging Loans Explained
How do I repay the bridging loan?
To repay a bridging loan, borrowers typically refinance by taking out a residential mortgage with a mainstream lender. Or, if they were waiting to complete on the sale of another property, once that property is sold, they can use the proceeds from the sale to repay their bridging loan.
What is a first legal charge?
When you take out property finance you provide your property as security for the loan. If you own the property outright and there is no existing mortgage on the property then the lender will take a first legal charge over the property. This means if you fail to repay the loan, the property will be sold and the lender will be repaid first.
What is a second legal charge?
When you take out property finance you provide your property as security for the loan. If you have an outstanding mortgage on your property then your mortgage lender will have a first legal charge in place. If there is already a first legal charge in place your specialist finance lender will take a second legal charge. This means if you fail to repay the loan, the property will be sold and the mortgage lender will be repaid first, and your specialist finance lender will be repaid second.
Can I get a bridging loan if I have poor credit?
Yes, you can still obtain bridging finance if you have bad credit. Lenders look at the security property, loan to value and the exit route to assess the level of risk. Providing you can satisfy the lender’s requirements on these factors, your credit history should not affect your chances of securing finance. Although, lenders have different criteria and so it’s best to speak to a broker who can identify the most suitable lender and product for your requirements.
What is the different between a bridging loan and development finance?
Bridging finance and development finance are very similar, they are both used to purchase residential or commercial property (or land) and they are both secured loans. Bridging finance is typically used to purchase property at auction or to bridge the gap between the purchase of one property and the sale of another, whereas development finance is used to fund new build and extension projects. With bridging finance, the funds are released in one lump sum, whereas development finance is released over time in instalments.