To take out a bridging loan, you normally do not need a salary. This is because bridging loans focus more on the collateral being put down and the exit strategy for repayment.
In this guide, we will explore the requirements for a bridging loan, how much you are able to borrow and why a bridging loan could be a good option if you don’t have a salary.
What Is A Bridging Loan?
A bridging loan is a short-term loan designed to help ‘bridge the gap’ between two transactions. For example, these loans are commonly used for properties between the buying of a property and the sale of another.
They differ from typical mortgages in a few ways.
Bridging loans do not usually have monthly payments – Unlike typical loans, there is no need to pay off your bridging loan in monthly payments. This means that credit check, proof of income and salary are not as important when you take out this kind of loan.
Bridging loans are secure – As bridging loans are a type of secured loan, you need to secure an asset against them, usually an existing property. This means that they come with a higher level of risk as, if you default payments, you could lose your asset.
Bridging loans are short-term – Because bridging loans are to ‘bridge the gap’, they are a form of short-term loan, typically lasting up to 15 months.
Bridging loans have faster approval times – If time is of the essence, bridging loans are a good option as they can be arranged much quicker than a long-term mortgage due to the fact they are unregulated.
Bridging loans are high interest – Bridging loans typically come with higher interest rates than long-term loans. The interest is paid off with the loan amount in one lump sum, rather than monthly.
How Are Bridging Loans Repaid?
Bridging loans usually work on a 15 month basis at the end of which you’ll pay a lump sum. The monthly interest charge could be paid monthly or added to the repayment sum at the end.
If you have a preference, make sure you speak to your lender to find out your options.
Bridging Loan Requirements
The lending requirements for a bridging loan are different from a typical loan in that you only need to provide an exit strategy and collateral. You will also need to put down a deposit, depending on the Loan-to-Value of the loan.
Exit Strategy
Before lending you any money, lenders will want to know what your exit route is i.e. how are you planning to pay the loan back?
Your exit strategy will need to be assessed by lenders before they approve your loan. Lenders will want to know that borrowers have a clear long-term financial solution to know how risky lending you money will be.
Common exit strategies include:
Refinancing: One way to exit your short-term bridging loan is to move over to a traditional, long-term loan arrangement like a mortgage. This can take a long time to set up so must be planned in advance. Opting for this strategy means that you will need to require proof of salary or income as you will need to make monthly payments.
See our guide around remortgaging after a bridging loan.
Resale: A common way to exit a bridging loan is to use the sale of an asset to pay off the loan. Once you sell the property that you borrowed the money for, you can pay off the loan and interest in one lump sum payment.
Other exit strategies could include selling other assets such as a business, business shares or a physical asset, money from inheritance or pension lump sums.
Collateral
As a bridging loan is a secured loan, you will need to secure it with something. Collateral acts as reassurance for lenders, as they can take possession of it if you default on the loan. For bridging loans, collateral can be property, vehicles or valuable possessions. The value of the collateral will usually need to be a percentage of the loan amount.
Deposit
Like any other loan, you will need to be able to put down a certain amount of deposit. In most cases, bridging loans will require a minimum deposit of 30%; however, this will depend on the lender and loan to value agreed. Lenders will usually agree to cover 70% of the property cost, with the borrower providing the remaining capital.
Why Don’t You Need A Salary For A Bridging Loan?
For most loans, you would need to provide a proof of income and lenders would run a credit history check. However, for most bridging loans there are no monthly payments involved so there is no need for these prerequisites.
As long as the lender finds the proposed collateral and exit strategy acceptable, they do not need details of regular salary or even good credit.
How Much Can I Borrow with a Bridging Loan?
Depending on the lender, bridging loans can be anywhere between £5,000 to over £25 million. The amount you are able to borrow will depend on the type of lender, the amount of deposit, the strength of your collateral and your exit strategy.
At Blue Square Capital, we offer bridging loans between £250,000 – £2,000,000 with an LTV of 70%.
How Much Does A Bridging Loan Cost?
The short-term and high-risk nature of bridging loans makes them a more expensive form of borrowing money.
Interest rates tend to be between 0.5% and 2% per month; however, this will vary depending on the type of property you are buying, the condition of the property, your loan-to-value ratio and the exit strategy.
While there are usually no up-front fees associated with bridging loans, there are some additional fees you might need to pay including:
Arrangement fee: A fee paid to the lender for setting up the loan typically around 2% of the loan value.
Administration fee: Lenders could charge an administrative fee when you take out a loan.
Valuation fee: Before lending you the money, the lender will usually want to value the property you want to use as collateral.
Legal fees: Lenders will work with a solicitor to manage the legal side of the bridging loan arrangement and you will be charged a fee to cover this.
Exit fees: You may need to pay a fee if you leave your loan arrangement early.
How Do You Pay Interest On A Bridging Loan?
Unlike traditional mortgages, interest on a bridging loan can be charged in different ways:
Monthly: Like an interest-only mortgage, you have the option to pay monthly interest payments which are not added to the loan. However, for this option you will need a salary as you would need to provide proof of income.
Rolled up: This is where instead of monthly payments, interest is charged monthly on the outstanding account balance and added to the balance. Your balance will increase each month and be paid back at the end of the loan term.
Retained: In this case, you’ll borrow the interest upfront for an agreed period and, once the loan is paid back, you will receive any unused interest.
Paying Back A Bridging Loan Without A Salary
Bridging loans can be a way of borrowing money between projects without the need for a regular, monthly salary.
As you pay everything in one lump sum payment at the end, it is not important if you have proof of income on a monthly basis. However, you must be able to pay off the loan in full at the end, in addition to the interest.
