What is a bridging loan?As we mentioned in our introduction, a bridging loan essentially bridges the financial gap in a property purchase. It is a short term finance solution, giving the buyer more time to sort out a long term funding solution, either as a result of the sale of another property, funding release or investment. In most cases, the monthly interest is incorporated into the loan, and no repayments are due until the loan is settled. Bridging loans are secured loans that need to be secured against high-value assets such as property. The amount you can borrow is flexible. At Novellus, we offer bridging loans of any size over 500,000 euros. There’s no upper cap on the amount you can borrow, which means they are suitable for a wide range of products, from residential purchases to poverty development projects. Typically bridging loans have fewer and less stringent lending requirements than high street banks. This makes them ideal for anyone looking to purchase a property that doesn’t meet the standard mortgage lending requirements but will do by the time the developer has refurbished it to make it habitable. Bridging loans are perfect for a wide range of projects which allow the borrower to secure finance on more unusual sites than a standard mortgage would allow.
Bridging loan ExampleSo, for example, if you wanted to purchase an uninhabitable property at auction that required a full refurbishment, it can prove challenging to secure a buy-to-let mortgage or a residential mortgage on a property requiring vast amounts of work. A bridging loan taken out to buy a property in this manner means you can purchase the home at the auction price, renovate it and then either sell it on or secure finance with a mainstream lender.
How do bridging loans work?Here is a basic summary of how a bridging loan would work:
- You find a property, but it is impossible to obtain a standard mortgage in the required timeframe.
- If you want to purchase a property worth 500,000 euros and have a 250,000 euros deposit, you will need an additional 250,000 euros to buy the property.
- So you take out a bridging loan of 250,000 euros, allowing you to buy the property outright and bridge the financial gap.
- Once you have brought the property up to the standard required by a mainstream mortgage company, you can refinance with them or pay off the loan plus interest from the sale of the property once renovated.
Open bridge loans
Closed bridge loans
First ChargeFor any home with a mortgage on it, the chances are the mortgage provider has the first charge on a property. This is because when a provider lends money to you for a mortgage, they will secure the loan against your home, known as a charge. Charges are legally binding and are registered with the land registry. Bridging loans are also secured against properties as charges. So if a bridging lender secures the first charge on your property purchase, they’ll have first priority of repayment if you defaulted on your loan. If you’re in the process of selling your home and haven’t yet sold but took a bridging loan to secure a new property, the loan would be secured on your new property as a first charge because there are no other charges against the property.
Second ChargeA second charge means that the property already has a lender who is the first priority when it comes to repayment on a loan. If a bridging lender is the second charge on a property, they have access to any remaining funds after the first charge lender has been repaid. The lender who holds the first charge will usually need to provide consent for any other lending wanting to secure finance against the property. Most bridging loans issued by Novellus are first charge loans. However, it is possible to secure a bridging loan as the second charge depending on your circumstances.
What are bridging loans used forBridging loans are ideal for several situations for both residential and commercial property purchases. Our clients range from those wanting to build a property development business to residential clients who simply want to buy and sell a property to live in. Here are some examples of what bridging loans can be used for:
- Purchases at auction. Auction houses usually require deals to be completed quickly. A bridging loan means you can secure a property whilst securing alternative finance.
- Buy to let investors use bridging loans to bridge the gap when they need to fund a new deal or bridge a gap in existing deals.
- Where a vendor is looking for a quick sale and is willing to offer the property at a reduced rate. Or where you have seen your dream home but haven’t sold your current property yet.
- Broken property chains. Buying and selling properties can result in long chains, and if the chain breaks, bridging loans can provide a quick solution.
- Downsizing to become mortgage-free. If you want to sell your home and purchase a smaller property to become mortgage-free, you can use a bridging loan to secure a new property while your other home sells.
- To purchase an uninhabitable home to renovate and refinance.
- For property developers to fund new build projects and purchase land.