Types of Bridging Loans: How They Work

If your property transaction hasn’t gone to plan, you might be searching for a quick financing solution to keep things moving. That’s where bridging finance can make all the difference. Whether you’re waiting for a property sale to complete, need to make urgent renovations, or want to secure a deal that won’t wait for a mortgage to come through, using a bridging loan can quickly get you the funds you need.

There are different types of bridging loans available, so it’s worth spending time familiarising yourself with each one so you choose the best option for your circumstances. As conveyancing solicitors, we are experienced in all kinds of property transactions, including those that require bridging loans. 

Are residential and commercial bridging loans the same?

The types of loans that are available are the same, regardless of whether you are looking for financing for your business or for your family home. However, the actual bridging loans available will have different terms and conditions depending on what you want to use the loan for.

Residential bridging loans are usually for you if you need a short-term loan for buying, selling, or refinancing a home that you or your family will live in. When deciding whether to approve these loans, lenders look at your other loans, credit history, and the value of your home. If you’re applying for a bridging loan for a property where you or your family will live, it has to be a regulated bridging loan overseen by the Financial Conduct Authority (FCA). This guarantees fair lending, checks that you can afford the loan, gives you a cooling-off period to change your mind, and provides a way to resolve complaints if needed.

If you’re buying a residential property for investment, renting it out, or using it for any purpose other than living in it yourself, you’ll need an unregulated bridging loan. Unregulated loans are used for business and investment purposes, where you need quick access to money, more flexible terms, and larger loan amounts. They’re meant for borrowers who understand the risks involved, so it’s especially important to use a residential conveyancing solicitor to check the loan terms to avoid unexpected issues down the line.

Commercial bridging finance is more focused on business needs and is unregulated. These loans are designed for investment and business purposes, so they work better for property investors, developers, and businesses as they don’t have the regulatory requirements that apply to residential loans. Lenders consider the business’s financial health, the property’s potential income, and the overall business plan. This added layer of complexity affects how long bridging loan conveyancing takes, so you need to bear this in mind when planning for loan approval. 

Overview of the Different Types of Bridge Loans

Different Types of Bridging Loans

Open Bridging Loans

Open bridging loans are designed for situations where you need flexibility, especially if you’re not sure when you’ll have the funds to repay. These secured loans don’t have a fixed repayment date, making them a good choice if you’re waiting for a property sale or another financial windfall that doesn’t yet have a set timeline. However, because the lender doesn’t have a guaranteed repayment date, open bridging loans often have high interest rates. The lender may also expect you to provide more details about your repayment plans to get approval.

Imagine you’re expecting an inheritance, but the funds are tied up in probate, which can take months. Whilst you are waiting, you find the perfect holiday cottage to buy, but without the inheritance, you cannot afford it. An open bridging loan will give you the cash to go ahead, knowing that once the inheritance is released, you can pay off the loan.

Closed Bridging Loans

Closed bridging loans have a fixed repayment date that’s usually aligned with a specific event, such as the completion of a property sale or a confirmed refinancing arrangement. This makes them more predictable for the bridging loan lender, so they tend to offer lower interest rates compared to open bridging loans. 

If you have a clear exit strategy and can commit to a repayment schedule, a closed bridging loan could be a good option for you. However, closed bridging loans are typically less adaptable if your plans change. If your property sale or other source of repayment is delayed, you’ll need to make sure you can still meet the repayment deadline to avoid extra fees or penalties.

For example, let’s say you’re selling the current premises for your retail business, and the sale is set to be completed in three months. However, you’ve found a new property that would be perfect for expanding your business, and you need to move quickly to secure it. The seller of the new property won’t wait until your shop sale is finalised, but you’re confident that the funds from the sale will come through in time. In this situation, a closed bridging loan can help. 

First Charge Bridging Loans

A first-charge bridging loan is a short-term loan that uses your property as security, similar to a mortgage. It takes priority for repayment, which means if you sell the property, the bridging loan lender gets paid first, before any other lenders. 

These loans are often used when buying a new property without an existing mortgage or when refinancing an existing property. Since the lender is first in line to get their money back, they often offer lower interest rates compared to second-charge loans, where the lender takes a backseat and gets paid only after the first lender. However, they often require you to pay off the entire loan before accessing additional financing, which can limit flexibility.

If you’re moving house and are currently mortgage-free, but your chain has broken, a first-charge bridging loan can be a great option. You’ll be able to access the money to buy your new home quickly, and then once your old house sells, you can repay the bridging loan.

Second Charge Bridging Loans

A second charge loan is taken out on a property that already has a mortgage or another loan secured against it. You will continue making regular mortgage payments and pay the interest on the bridging loan, and then, when it comes to the time to repay the bridging loan (usually because the property is sold or refinanced), you will repay this in a lump sum after you’ve paid your mortgage or other loan.

This type of loan can be a useful way to raise extra funds without changing your current mortgage. However, it comes with added risk for lenders, as they are second in line for repayment. Because of this, interest rates for second-charge loans are generally higher than those for first-charge loans. They are often used to finance renovations or other projects while keeping an existing mortgage in place. You should be aware that if your property’s value decreases during the application, it can affect how much you’re able to borrow, as the lender needs to be sure there’s enough equity left after the first charge is settled.

Let’s say you own a warehouse with a mortgage, but you need additional funds to convert part of it into a distribution centre. You can take out a commercial second-charge bridging loan using the same warehouse as collateral. Once the conversion is complete and you’re able to attract new clients or increase rental income, you could either sell the upgraded warehouse or refinance it to pay off the bridging loan.

Development Bridging Loans

Development bridging loans are specifically for property development projects. They’re great for developers or investors who need quick cash to renovate a property, build something new, or take on other construction projects.

You usually repay the loan when the project is done, either by selling the property or getting long-term financing. Because building and development projects can be risky, these loans often come with higher interest rates. However, they give you the quick funds needed to get a project off the ground, and you can pay off the loan once the project is finished.

Things To Consider When Choosing A Loan

Before you make a decision about a bridging loan, make sure you have thought through each of the following factors:

Bridging Loan Interest Rates

Bridging loan rates will vary depending on the type of loan, the lender, and your specific situation. Generally, open bridging loans and second-charge loans tend to have higher rates because they are more risky to the lender. Closed bridging loans and first-charge loans might offer lower rates since there is more certainty about repayment.

The size of the loan and the loan-to-value (LTV) ratio determine how much interest is charged. A higher LTV ratio, where a larger percentage of the property value is added to the loan, can lead to higher rates because it’s riskier for the lender.

To accurately estimate your total repayment costs, you need to be aware of how often interest is charged (monthly or at the end of the loan). Compare rates and review the terms to see how much you’ll need to pay each month to make sure it fits your financial plan.

Bridging Loan Cost

Before committing to this kind of finance, you need to know how much a bridging loan costs. As well as interest, you need to keep in mind there are other costs like arrangement, legal, valuation, and exit fees. To avoid surprises, you should ask your lender for a full breakdown of the costs involved.

Bridging Finance Exit Strategy

Lenders will ask to see a clear plan (called an exit strategy) to repay the loan, like selling a property, securing long-term finance, or using an expected lump sum, such as an inheritance. A strong exit strategy increases your chances of getting the loan and guarantees you’re prepared to repay it without extra stress.

Loans for Bad Credit

If you’ve got a bad credit score, bridging loans can be an option, but you’ll have to explain to the lender how you plan to pay the loan back and have valuable collateral like property. However, lenders will charge you a higher interest rate, so you need to decide if the convenience and speed of a bridging loan are worth the extra costs.

Need Help Making Sure You’ve Got the Best Bridging Loan?

When you’re under pressure to get your finances sorted quickly, researching bridging finance options to find the best loan for your situation can feel overwhelming. 

Our conveyancing solicitors at Triangle Legal Services are here to guide you through the process, helping you fully understand what each option means for your financial situation. With our help, you can confidently move forward with your property transaction, knowing you’ve secured a bridging loan that’s right for your needs.

Contact us today for a conveyancing quote and we’ll make the process stress-free so that you can focus on your next steps.