Flipping houses can be an incredibly lucrative venture, but it often requires quick access to significant capital to secure a property, cover renovation costs, and get it ready for resale. Due to the fast-paced nature of house flipping and the types of property involved, traditional mortgages are often unsuitable or unavailable. This is where bridging loans come in. Designed to provide short-term finance quickly, these powerful financial tools are perfectly suited for the buy-refurbish-sell model. However, it’s important to understand how bridging loans work before going down this route. In this guide, we’ll explain everything you need to know about bridging loans and how they can be used to flip houses.
What is a Bridging Loan?
A bridging loan is a type of short-term, secured loan that allows you to purchase or develop a property whilst you’re waiting for a longer-term financial solution, such as a property sale or a traditional mortgage. They are called bridging loans because they ‘bridge the gap’ between a current financial need and an expected future source of funds.
What are Bridging Loans Used For?
A bridging loan is typically used to purchase or develop a property when a regular mortgage isn’t an option. Let’s look at this a bit closer and talk through some of the most common uses for bridging loans in the UK.
- Buying at Auction – Properties bought at auction often require full payment within a very short timeframe, often just 28 days. This is too fast for a standard mortgage. However, a bridging loan can be completed within a week or two, providing the quick funds needed to complete an auction purchase.
- Renovation or Refurbishment – Project properties or ‘fixer-upper’ properties are not typically eligible for a traditional mortgage due to the state of disrepair they are in. Regular mortgages are also generally designed to cover the purchase of a property but not any work that needs doing. A bridging loan can be used instead, and this will usually cover both the purchase of the property and the renovation costs.
- Breaking a Property Chain – If you’ve found a new home you want to buy but are still waiting for your current one to sell, a bridging loan can provide the funds to complete the purchase, allowing you to effectively become a ‘cash buyer’ from the seller’s point of view.
- Business Purposes – Bridging loans are also used by businesses for short-term financing needs, such as buying new premises, paying tax bills, or managing cash flow.
How Do Bridging Loans Work?
Bridging loans work quite differently from a traditional mortgage, as they are designed to be a temporary financial solution. Here is a breakdown of how bridging loans work in the UK.
Applying for a Bridging Loan
It’s recommended you speak with a bridging loan broker to ensure you find the right lender and a suitable deal. Your broker can also apply on your behalf to increase the chances of success.
The main things your lender will want to know at this point are:
- Property Value – The lender will conduct a valuation of the property you intend to use as security to determine its worth.
- Loan Amount – The lender will need to know how much you are looking to borrow and compare that to the value of the property. Typically, the maximum Loan-to-Value you’ll be able to borrow is 75% to 80%, so you’ll need to be able to fund the remaining amount in other ways.
- Exit Strategy – This is the most crucial part of a bridging loan application. You must provide a clear and credible plan for how you will repay the loan. For example, perhaps you plan to renovate and then sell the property or apply for a traditional mortgage.
Security for Bridging Loans
Bridging loans are always secured against a property. This means that if you default on the loan, the lender has the right to repossess and sell the property to recover their money. Ideally, the property being used as security won’t have any other loans secured against it. This is known as a ‘first charge’. However, you may be able to use a property that already has a mortgage, known as a ‘second charge’, but these can be more expensive due to the higher risk.
Paying Interest on Bridging Loans
Unlike traditional mortgages, the interest rates you see for bridging loans are charged on a monthly basis. Therefore, although interest rates of 0.5% to 2% may seem low, it’s important to understand that this is to be paid every month, making the effective annual percentage rate (APR) much higher. However, bridging loans are designed to be paid off quickly, limiting the amount of interest you pay overall.
There are two options when it comes to paying the interest on bridging loans. You can choose a ‘serviced’ deal, where you pay off the interest as you go and then the capital at the end of the term. Or you can choose a ‘rolled up’ deal, where the interest is added to the total loan amount and both are paid back together at the end of the term.
Exit Strategy Options for Bridging Loans
When talking about bridging loans, the exit strategy refers to the way in which you plan to repay the loan. This will happen as a lump sum at the end of your term, but lenders will want to know where the funds will come from.
Typically, your exit strategy will involve one of the following:
- Sale of a Property – The most common exit strategy is to use the proceeds from the sale of a property to pay off the bridging loan in full. This could be your own home if you’re breaking a chain or a renovated property if you’re using bridging loans to flip houses.
- Refinancing –Another common exit strategy is to pay off the loan using a traditional mortgage. You may want to use this strategy if you’re buying a new home that is not mortgageable in its original state but will be after a refurbishment or renovation.
- Other Sources – Although less common, bridging loans can be repaid from an inheritance, a business sale, or other sources of capital. Just be aware that your lender will need to be confident that you’re exit strategy is reliable.
What Are Bridging Loan Rates in the UK?
Bridging loan rates in the UK vary based on the lender and the borrower’s circumstances, but they tend to sit between 0.5% and 2% per month. As mentioned, unlike traditional mortgages, these rates are calculated and charged on a monthly basis rather than yearly. However, you can choose to let the interest roll up into the loan and repay both at the end of the term.
An interest rate of 1% per month is equivalent to a 12% annual rate, so bridging loan rates can be much higher than traditional mortgage rates. That being said, the idea is to pay them off within a much shorter timeframe than a regular mortgage.
Bridging loan rates are decided on a case-by-case basis, as lenders will take into account various factors before making you an offer, such as:
- Loan-to-Value (LTV) Ratio
- Property Type and Mortgage Status (First or Second Charge)
- Loan Term
- Your Exit Strategy
- Your Credit History
Our experts can help you make the right decisions during the application process and then find out what rates are available to you from a wide range of different lenders.
Can I Use a Bridging Loan to Flip a House?
Yes, a bridging loan is often the ideal financial tool for flipping a house in the UK, and it’s a very common use case for this type of short-term finance. In fact, many lenders offer specific ‘refurbishment bridging loans’ designed specifically for this purpose.
What Are the Benefits of Using a Bridging Loan to Flip a House?
Bridging loans are often an ideal financing option for flipping houses for the following reasons.
- Speed – House flipping is all about moving quickly to secure a potentially profitable project. Bridging loans can be approved much quicker than regular mortgages, and you can receive the funds in a matter of weeks or even days.
- Un-mortgageable Properties – Many properties that are perfect for flipping are those in poor condition, often without a working kitchen or bathroom. Typically, these kinds of properties cannot be financed with a traditional mortgage. A bridging loan, however, is secured against the property’s current value and your exit strategy, making it suitable for these types of projects.
- Funding Renovations – Unlike regular mortgages, bridging loans can be used to cover not only the purchase price but also the refurbishment and renovation costs. This is often done via a ‘drawdown facility’, where you receive funds for the renovation in stages as the work progresses. This means you don’t have to use your own cash for the building work, and you only pay interest on the money you’ve drawn down.
- Short-Term Focus – The entire business model of house flipping is to buy, refurbish, and sell for a profit as quickly as possible. A bridging loan, with its short term (typically 1 to 18 months), aligns perfectly with this strategy.
What Are the Risks of Using a Bridging Loan to Flip a House?
Although bridging loans are often an ideal financing option for flipping houses, there are still some risks to be aware of.
- High Costs – The monthly interest rates and associated fees are typically higher than with a traditional mortgage. The aim is to repay the loan quickly to limit the costs, but if the project runs over schedule, the amount you owe could increase quickly.
- Secured Loan – The loan is secured against the property. Therefore, if you cannot repay it for any reason, for example, if you can’t sell the property or the renovation runs too far over budget, the lender may repossess your asset.
How Do I Get a Bridging Loan to Flip a House
Our bridging loan experts can walk you through every step and make sure you are suitable for a bridging loan before application. As an overview, here are the four main elements that will need to be in place for you to apply for a bridging loan to flip a house.
- A Clear Exit Strategy – The lender will want to see a realistic valuation of the property’s potential value after the work is complete (Gross Development Value, or GDV) to ensure the sale will cover the loan and all associated costs.
- Deposit – As with a regular mortgage, you will need to provide a deposit when applying for a bridging loan. Typically, you’ll need around 25% to 40% of the property’s purchase price.
- Experience – While not always a deal-breaker for a first-time house flipper, lenders are more comfortable with borrowers who have a track record of successful property projects and may offer better rates.
- Business Plan – You should be prepared to present a detailed plan that outlines the refurbishment works, a timeline for completion, and a clear budget.
The Bottom Line
If you’re looking to get into house flipping and you need access to funds quickly, a bridging loan could be the perfect option. Bridging loans can provide the necessary financing within weeks or even days, allowing you to act quickly and secure a property that has good profit potential. You can also cover the renovation costs and only pay interest on the money you used. Although experience can give you access to better rates, even first-time property flippers can take advantage of bridging loans as long as the lender is happy with your application. Get in touch with one of our friendly bridging loan advisors today and talk through your goals and help you get started.
At Michael Usher Mortgage Services, we’ve been helping people throughout Surrey, Hampshire and Berkshire for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages and bridging loans from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help protect your loan with our FREE Insurance Service.
Talk to one of our bridging loan brokers for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
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Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The precise amount will depend on your circumstances but will be agreed with you before proceeding.
