The amount borrowed is limited by the value of the security or collateral that the loan would be secured against. There is usually a 'haircut' or Loan to Value (LTV) that the lender is willing to accept. For example, a 75% LTV against a property worth £100,000 means the lender would lend £75,000 against an asset worth £100,000.

Bridging loans offer short-term finance until a longer-term solution is available. Depending on the use and criteria, interest is usually paid monthly for a term of up to 12 months. Interest rates are typically higher on bridging finance. Longer periods can be negotiated either at the beginning or throughout the initially agreed term of the bridging loan.

They are used primarily for property-related reasons and can be secured on most residential property or land in mainland UK (subject to valuation), whether habitable or not. Funds raised from bridging finance can be used for any legal purposes as long as it has been pre-agreed with the lender from the outset.

A closed bridging loan is used mainly in residential or commercial bridging loans when a buyer is looking to purchase a new property before having sold the current property. Importantly, there has been an exchange of contacts to sell the first property. This is important because once contracts are exchanged, the likelihood of the sale not going through is extremely low. For this reason, closed bridging loans are considered a lot less risky for lenders.

An open bridging loan is used mainly in residential and commercial bridging loans when a buyer is looking to purchase a new property before having sold the current property. Importantly, there has been no exchange of contacts to sell the first property. This is important because once contracts are exchanged, the likelihood of the sale not going through is extremely low. For this reason, open bridging loans are considered a lot more risky for lenders.

An exit is when the original loan amount plus all the interest owed is repaid to the lender.

Rolled Up interest payments is when the borrower does not make regular interest payments, but instead repays the lender, plus all the accrued interest at the agreed maturity of the bridging loan.

Interest rates vary greatly depending on what the loan funds are used for, but typically they are 1-2% a month.

Bridging can be used to finance buying property at auction, as long as this has been pre-agreed with the lender. Bridging loans can usually be arranged more quickly and are more flexible than mortgages, allowing the bidder at an auction to complete the purchase within the allotted time frame specified by the auction house. The bridging loan will have to be secured against the property once it has been purchased.

Lenders are obliged to be open and transparent regarding any arrangement fees or any other costs (for example, valuation fees). However, the borrower should always seek proper professional and legal advice before taking a bridging loan.

Bridging finance can usually be arranged quicker than alternative financing arrangements and offers more flexibility allowing, for example, the borrower either time to renovate and sell a property, pay back or refinance the loan.

In the case of default or not repaying the loan, the borrower risks losing the entire property or asset against which the loan was secured.

An example of costs, using 1% interest/month for six months:

Amount: £250,000
Arrangement fee: £1,500
Valuation fee: £1,000
Legal Fees: £1,000
Monthly Interest Rate: 1%/month (equating to £2,500/month)
Total Repayment: £268,500 (£250,000 + £3,500 fees + £15,000 interest)

With thanks to Shadow Foundr for contributing to this feature. To find out more about Bridging Loans, contact Heath Lansbury at heath@shadowfoundr.com or call 03442 646 040.

Disclaimer: Always seek proper professional advice from a qualified or regulated advisor along with relevant legal advice.