Bridging loans helps borrowers bridge the financial gap that often arises between property transactions. As the name suggests, they provide short-term funding to ‘bridge the gap’ between a property purchase and the subsequent sale of an existing home.

How Do Bridging Loans Work?

Bridging loans work by providing interim financing that allows borrowers to complete purchases before they have received the proceeds from selling their current property. Some common scenarios where bridging loans are used include:

• Purchasing a new home before your existing home has sold. This prevents buyers from having to wait for their old house to sell before moving into their new property.
• Taking advantage of a good deal on a property purchase before being able to liquidate other assets or wait for funds from another source (e.g., insurance payout).
• Avoid chain breakdowns when purchasing in a sale chain, which is dependent on other sales completing first.

The basic process usually involves:

• Applying for the bridging loan and providing documentation of the purchase and sale transactions.
• Loan approval and funds are then received to complete the new property purchase.
• Repaying the bridging loan in full once the original property sale goes through, plus any applicable interest and fees.
• Settling into the newly purchased property once the bridging loan is repaid.

Bridging loans allows deals to proceed smoothly with minimal disruption, which is highly valuable in time-sensitive or complex property transactions.

Eligibility Requirements

To qualify for a bridging loan, borrowers typically need to meet the following basic criteria:

• Creditworthy with a good credit history and no adverse credit issues reported. Most lenders will perform standard credit and income checks.
• Current property owner with plans to sell their existing home. Documentation of the sale listing/agreement is required.
• Made deposit and satisfied all legal/regulatory criteria for the new property purchase. Proof of purchase agreement is needed.
• A repayment plan is in place, such as selling existing property or access to funds from another source. Proof of funds/backup plan required.
• The loan purpose clearly relates to bridging a genuine financing gap between property purchase and sale timelines.
• Sufficient equity in property being sold to cover loan amount sought, plus interest and other costs.

As bridging loans bear higher risks, lenders will thoroughly assess borrowers’ ability to repay on time. Strong documents and clear repayment plans are crucial for approval.

Types of Bridging Loans

Once approved, borrowers can choose between different loan structures to suit their specific needs:

Short Term

As the name implies, short term bridging loans are suitable when the timing gap is brief, say 3-6 months max. Interest rates tend to be lower than longer term options. Repayment usually at predetermined date or upon property sale completion.

Medium Term

For gaps up to 12 months, medium term bridging loans provide flexibility. Interest compounds monthly but repayment can sometimes be interest-only to minimize costs. Extended terms usually involve higher rates.

Long Term

Longer gaps over a year are bridged through long term structures, which have the highest interest rates due to increased risk. Monthly loan repayments including interest and sometimes capital are required.

Revolving

A revolving or rolling bridging loan acts like a credit line – borrowers receive funds as needed and repay without premium fees when the property sells. Drawdown periods are flexible within the maximum term.

Choosing between these options depends on the individual situation and the projected time needed to bridge transactions. Structuring is key to minimizing costs.

Application Process

To apply for a bridging loan, borrowers gather relevant documentation and submit an application through the lender of their choice. Common steps involve:

• Initial discussions will be held to determine loan eligibility and needs.
• Complete the application form with personal and financial details.
• Providing purchase/sale documentation like contracts, valuations, and estimates.
• Credit/affordability assessment, including income verification.
• Property Searches to confirm ownership and legal charges.
• Agreement on terms including rate, fees, and early repayment charges.
• Acceptance of offer and signing of loan agreement if approved.
• Exchange of contracts for new property purchase upon loan drawdown.
• Loan completion and drawdown of funds for purchase.

Times timelines vary by lender, but most bridging loans can be completed within four weeks if all underwriting is in order. The faster a sale is expected, the quicker approvals tend to be issued too.

Costs and Interest Rates

The costs involved with bridging loans have higher charges compared to traditional mortgages due to their short-term nature and risks assumed by lenders. Some typical costs may include:

• Interest – Variable rates usually apply, compounded monthly. Rates range from 0.5-3.0% per month depending on loan size, term and circumstances.
• Arrangement Fees – Upfront fee charged by lenders, often 1-3% of the loan amount.
• Legal Fees – Borrowers need independent legal representation, costing £1000-£2000 on average.
• Valuation Fees – A lender valuation is required on security property, typically £350-£500.
• Early Repayment Charges (ERCs) – An ERC may apply if the loan is repaid before the agreed term ends. Usually, 3-5% of outstanding balance.
• Additional Penalty Interest – Charged on delayed loan repayment after term finishes. Rates vary widely.

While costs are higher than conventional loans, bridging finance remains affordable for many compared to alternatives like personal loans with even steeper rates. Sound advice from a broker also helps minimize costs through competition and structuring options.

Types of Bridging Loans in More Detail

Now that we have covered the basics let’s delve deeper into some of the specific bridging loan products available on the UK market today:

Residential Bridging Loans

By far the most common type, residential bridging loans help homebuyers and investors bridge transactions involving residential properties like houses and flats. Also known as ‘house bridging loans’, they are secured against the residence being sold. Key features include:

• Term lengths from 3 months up to 2-3 years maximum
• Interest-only monthly payments
• Both regulated and unregulated options are available
• Lower rates and documentation required for regulated loans

Residential bridging suits many home movers and provides the flexibility needed to manage multiple property deals over time. Regulation offers added protections for borrowers.

Commercial Bridging Loans

Also known as bridge finance for business property, commercial bridging loans cater to landlords, developers, and investors bridging deals around commercial buildings such as offices, retail units, pubs, and more. Features include:

• Terms up to 5 years for larger development projects
• Interest-rolled options allow capitalizing interest
• Rates tend to be higher than residential bridging
• Valuations based on investment/development potential
• Flexible security through business assets and cash flow

Commercial bridging opens up deals for businesses and property portfolios that may require longer-term bridging of funds.

Development Bridging Loans

A specialized variant is used during property renovation or redevelopment projects, where bridging is needed to bridge funding gaps until completion. Development loans:

• Support projects like home extensions, refurbishments, or conversions
• Provide staged/phased drawdowns as project milestones are met
• Feature interest roll-up so capitalized interest is added to the loan
• Security usually through fixed and floating charges on the property
• Strict project timelines and monitoring by lenders

Development bridging enables valuable improvements for both residential and commercial spaces that add long-term value.

Bridging Finance for Asset Sales

When other assets need to be liquidated to raise funds for purchases, bridging asset loans temporarily finance the gap. Examples include:

• Bridging loans secured against investment portfolios
• Art or collectible auction sales bridging loans
• Insurance payout bridging for home redevelopment
• Bridging using personal asset equity-like overseas properties

By using personal wealth, bridging loans provide an alternative to traditional property-based bridging when needed. bespoke solutions structure deals creatively.

Bridging Facilities

For active property investors with frequent transactions, bridging facilities offer revolving credit up to pre-agreed limits based on a flexible security package. They work like revolving credit bridging loans but with added features like:

• Umbrella drawdown facilities up to £5 million+
• Interest is charged only on amounts utilized
• Rollover and re-draw abilities within set periods
• Early repayment charges on undrawn balances
• Tailored for portfolios and rapid turnaround times

Bridging facilities empower investors to bridge multiple deals simultaneously with ease and efficiency.

As this overview highlights, there are many different types of bridging loans tailored towards various property and financing needs. A good broker can help evaluate the best options based on individual circumstances and help navigate applications seamlessly.