What is a Bridge Loan for a House?

Mistiming your application can risk a house sale falling apart.

To prevent this, bridge loans can be extremely useful.

Read on to find out what they are and when to use them.

What is a bridge loan for a house?

A bridging loan is a short-term secured loan that can be used when buying a house.

(Secure loans are a category of loans which must be secured against an asset, such as a property.)

Bridging loans are for making purchases before the funds are available. I.e., they ‘bridge the gap’ between obtaining and paying for something.

Borrowers take out the loan for a short while. Once their funds come through, they can pay back their lender.

A bridging loan is offered by a bank. Borrowers typically need to contact a bridging loan broker to apply for one. They’ll also advise on whether it’s right for your situation.

When is a bridge loan used for a house?

To save property chains

The most common reason someone uses this when buying a house is to wait for their current one to sell.

This means that the seller of their new home wants to proceed but doesn’t currently have the funds to do so. A bridge loan can thus stop the property chain falling apart.

For work on properties

Bridge loans are also used for renovations and structural changes or additions to homes such as:

Buying a property at auction is another case when a bridge loan is useful.

At auctions

You’ll need to make an up-front deposit on the day. This is often 10% of the total value.

A bridge loan can make this possible while your finances are in order.

How to apply for a bridge loan

1. Prepare your documents

The first step in applying for a bridging loan is preparing your documents.

The bank will need to see these to know whether you’re a viable candidate to receive a loan.

The documents should include:

Proof of identity
Details about the properties involved
Proof of income.

2. Speak to an expert

Your next step is to speak to a bridging loan broker.

They can answer all your questions about a bridging loan and help you find a suitable bank for a loan.

3. Complete your application

It’s time to complete your application form and submit it to a bank.

Your bridging loan broker can guide you in avoiding common application mistakes.

4. Look through their offer

The bank will review your application and decide whether you meet their criteria.

This will be followed by a valuation of the property involved. You’ll then receive a conditional offer outlining the following:

The loan amount
Interest rates
Loan terms
Any other specific information.

A solicitor can help you with legal checks involved with the loan. This might relate to the title deeds, or existing charges on the house.

5. Receive your funds

If everything is in order, the funds will be sent to you. Your solicitor can facilitate this process and answer any questions about it.

The full process of getting a bridge loan, from start to finish, often takes roughly one month. It can sometimes be done faster.

What’s the criteria to get a bridge loan?

Each bank has its own criteria for giving out a bridging loan. Your bridging loan broker can advise you on these, including which ones suit you better.

In most cases, you need to meet all the following criteria:

Aged over 18
Living in the UK
Willing to provide a valuable asset as collateral for the loan
Clear plan for paying the loan
A decent credit score
In full-time employment (some banks are willing to work with people in part-time employment
A property in good condition
A loan-to-value ratio below 80% (some banks will compromise on the loan-to-value ratio).

You can prepare documents before you submit your application to ensure you meet these criteria.

A clear pathway for repayment is especially important. Working in a stable job and taking out a loan where the repayments are manageable with your salary.

Advantages of taking out a bridge loan

Short-term money

Bridging loans can be a great solution if you need funding in the immediate short term.

This could be to prevent a house sale falling apart. Or perhaps you’ve got a time-sensitive investment opportunity.

Getting the full funds in your account rarely takes longer than one month from starting your application.

Buy an unusual house

Sometimes, you can even use a bridging loan to buy a house you can’t get a mortgage on.

This may be because it’s uninhabitable. If you can almost make the full payment to buy it in cash but are slightly short, a bridge loan can make up the difference.

Early repayment charges are rare

You rarely face early repayment charges with a bridge loan. And you can also use it for both residential and commercial properties.

Disadvantages of taking out a bridge loan

High interest rates

Interest rates on a bridge loan tend to be much higher than other methods of borrowing.

This is because it’s a short-term loan, so the bank charges higher to compensate for this. You usually make repayments every month.

Extra costs

Costs involved with the bridge loan stretch further than interest. You’ll also need to pay a solicitor and a broker.

This can push your costs up by several hundreds of pounds.

Could lose a valuable asset

Securing a loan against an existing asset is stressful. You stand to lose it if you fail to make your repayments.

That’s why it’s crucial that you only take out a bridging loan that you can afford.

Things to consider when taking out a bridge loan

You should prepare for a worst-case scenario when planning your repayments for a bridge loan.

It may be affordable in a best-case scenario. But if a car breaks down, or you get made redundant, you could face repossession of your secured asset.

It’s thus crucial that you give yourself plenty of breathing space.

Consider other types of loans

Not all types of loans force you to secure it against another asset.

And if you can delay your financial transaction, persuading the other parties achieves the same result without taking out a loan.

You should do thorough research into any professionals that support you with the application process.

The lender should be reputable, and your broker should have excellent reviews.

Ensure your solicitor has plenty of positive reviews from past customers, too.