A bridging loan is a type of short-term finance often used by property investors and developers to purchase property.
In an ideal world, when buying and selling property in Ireland, the transactions would be perfectly aligned. Unfortunately, this often isn’t the case, and you might need to buy a new property before selling an existing one. This is where bridging loans come in.
Here, we explain how Irish bridging loans work and what to watch out for.
What is a bridging loan?
A bridging loan is a short-term lending product that you secure against a property. You can usually borrow over a term of between a few weeks and one year (although some deals might stretch to three years).
Bridging loans can be quick to arrange and are designed to ‘bridge the gap’ between buying one property and selling another.
Bridging loans can be used for both residential and commercial property purchases. But keep in mind that as they are secured loans, your property could be at risk if you fail to keep up with your repayments.
How do bridging loans work in Ireland?
You can usually borrow up to 75% of a property’s value in Ireland. That means you’d need to put down a 25% deposit. However, some lenders might ask for a 35% to 40% deposit.
The example below gives you an idea of how bridging loans work:
- You want to buy a property for €600,000.
- You need a €150,000 deposit and will borrow the remaining €450,000.
- You’re still waiting to sell an existing property and only have €50,000 in savings.
- You bridge the gap by taking out a bridging loan of €100,000 to cover the rest of the deposit.
- When you sell your existing property, you use the money raised by the sale to repay your bridging loan.
What can you use a bridging loan for in Ireland?
You can use a bridging loan to finance a property transaction without applying for a traditional mortgage. You can also use an Irish bridging loan to raise the capital you need to buy a new property before selling an existing one.
Other common reasons to use a bridging loan in Ireland include:
- Releasing equity from an existing property
- Buying a property at auction when you need fast access to cash
- Investing in a buy-to-let property
- Providing finance if a property chain breaks down
- Buying a property that needs light refurbishment
What are the different types of bridging loans?
There are two main types of bridging loans – open bridging loans and closed bridging loans.
Open bridging loans
Open bridging loans have more flexibility as they have no fixed repayment date. Instead, you can repay the loan whenever your funds become available. That said, lenders will usually expect you to pay off the debt within a year, although some might extend this.
Closed bridging loans
Closed bridging loans have a predetermined repayment date. This means you’ll need to repay your loan within a set time. This might be based on a specific event, such as when the sale of your property has been finalised. You’ll usually find that closed bridging loans are cheaper than open bridging loans.
Whichever type of bridging loan you apply for, you’ll need a robust exit plan. This means you’ll need to show lenders how you plan to repay the loan.
First charge vs second charge loans
When you take out a bridging loan in Ireland, a ‘charge’ will be placed against the property or asset you’re using as security. This will be either a first charge or a second charge.
First charge loans
If there are no other loans secured on the property (i.e. you own it outright), your bridging loan will be a first charge loan. This means the lender providing your loan will be the first to be repaid when you sell the property.
Second charge loans
If you already have a loan or mortgage on the property, this will be the first charge loan. The bridging loan will be a second charge loan which means this lender takes second priority when the property is sold.
If you want to take out a second charge bridging loan, you will need permission from the first charge lender. Second charge loans are also more expensive due to the increased risk for the lender.
Fixed vs variable rate bridging loans
When comparing bridging loans, you can also choose from fixed or variable-rate deals.
Fixed-rate loans
With a fixed-rate bridging loan, the interest rate remains the same throughout the loan term. This offers more stability as you’ll know exactly how much you need to repay.
Variable-rate loans
With a variable-rate loan, the interest rate can go up or down in line with current market conditions. This means you’ll benefit if interest rates drop, but there’s also the risk that rates could rise, increasing the amount due.
How much do bridging loans cost?
The cost will depend on factors such as the loan-to-value (LTV) ratio and your financial circumstances. Interest rates can start from around 0.5% per month.
The LTV ratio is the size of the loan in relation to the value of the property you’re buying. So, if a property was valued at €500,000 and you were looking to borrow €300,000, your LTV ratio would be 60% (300,000 / 500,000 x 100).
On the other hand, if you were borrowing €400,000, the LTV ratio would be 80%. Lenders generally favour lower LTV ratios as they are lower risk, so you’ll likely benefit from competitive interest rates and more favourable terms overall.
You’re also likely to secure a more competitive interest rate if you have a good credit history and can show that you’re in a strong financial position.
On top of the interest rate, you might have to pay a range of fees, including:
- Arrangement fee: This can be around 2% of the loan amount.
- Exit fee: This is payable if you repay your loan early.
- Administration fee: This is usually an upfront payment to the lender.
- Legal fee: You’ll need to pay this fee to the conveyancing solicitor.
- Valuation fee: Your lender will want to have the property valued before accepting your application.
Make sure you factor in these additional costs when comparing bridging loans.
Who is eligible for a bridging loan in Ireland?
To be eligible for a bridging loan in Ireland, lenders will usually consider:
- Your security: The higher the value of the assets you’re using as security, the better.
- Your exit strategy: You’ll need to show exactly how you plan to repay your loan. This will usually be done through selling an existing property. But it could also be through selling the new property or refinancing with a mortgage.
- Your LTV: The lower the LTV, the more likely you are to get accepted. You’ll usually need at least a 25% deposit.
- Your credit history: You’re more likely to be accepted for a bridging loan if you have a good credit history. Although it’s possible to get a bridging loan with poor credit, the cost of your loan will be much higher. You’ll also have fewer lenders to choose from.
How much can I borrow through a bridging loan?
The amount you can borrow through a bridging loan in Ireland will depend on the property’s value, your plans, financial background, and credit history.
The better your financial circumstances, the more you’ll be able to borrow. It’s not uncommon for companies to secure loans of up to €250 million.
You’re also likely to be able to borrow more if the loan can be secured against multiple assets, whether these are in Ireland or overseas. This can be useful if you own property portfolios across the globe.
Keep in mind that lenders will also consider other high-value assets – not just property – as security. For example, you might be able to secure your loan against jewellery, investment portfolios, cars or fine art. The greater the value of these assets, the more you can borrow.
How long does it take to get a bridging loan in Ireland?
This will depend on your situation and the lender. But in the best cases, and where the situation is urgent, the process can take as little as 48 to 72 hours. Otherwise, you can expect the application process to take one to two weeks.
Pros and cons of bridging loans
Pros
- They offer flexibility: A bridging loan could help you buy a new property before the sale of an existing one has gone through.
- Quick to process: Bridging loans are typically much quicker to arrange than traditional mortgages.
- You can borrow a large sum: A bridging loan enables you to borrow up to several million euros.
- Additional options: A bridging loan can provide an alternative if you’re struggling to get a mortgage on certain property types.
Cons
- Secured loan: Your loan will be secured against an asset, usually property. This means your asset is at risk if you don’t keep up with your repayments.
- Higher interest rates: These tend to be higher due to the flexibility and speed offered by a bridging loan.
- Fees: You’ll usually need to pay an array of fees when taking out a bridging loan.
What are the alternatives to bridging loans?
Bridging loans won’t be the right choice for everyone, so it’s worth looking at the following alternatives before deciding:
- Secured loan: A secured loan can enable you to borrow a large lump sum of cash that’s secured against a property. Interest rates can be lower compared to bridging loans, and you can borrow the funds over a much longer term.
- Unsecured loan: Unsecured loans don’t require you to use an asset as collateral. But this also means interest rates are usually higher. However, they can be a good option if you only need to borrow up to around €65,000.
- Commercial mortgage: If you’re investing in commercial property, a commercial mortgage might be more suitable for your needs.
Our verdict
Bridging loans in Ireland can be a good option if you’re looking to buy a property before selling an existing one. They can also enable you to buy a property that might be deemed unsuitable by a high street lender and therefore difficult to mortgage.
However, Irish bridging loans should be considered with care. As they are secured loans, you risk losing your assets if you’re unable to keep up with repayments.
What’s more, bridging loans can be expensive, so it’s worth speaking to an independent financial adviser before deciding if they are right for you.
Frequently asked questions
Do you need a valuation for a bridging loan?
Yes, you will need a valuation before you can take out a bridging loan in Ireland. Lenders will want to assess the value of the property you’re using as security to work out how much they are prepared to let you borrow.
Are bridging loans in Ireland safe?
Bridging loans are safe, but you need to ensure you have a solid exit plan in place. You will usually need to repay your loan within a year, so it’s crucial to make sure you can do this. Failure to repay your loan means potentially losing the property you’ve used as security.
It can be worth speaking to a financial adviser before taking out a bridging loan to be sure it’s the right choice for you.
Is an Irish bridging loan more expensive than a mortgage?
Yes, bridging loans are typically more expensive than a mortgage as they are taken out over a shorter term. Interest rates for bridging loans are usually shown as monthly rates. Mortgages, however, are usually advertised with an annual percentage rate (APR).
Many bridging loans also come with high fees, so it’s important to factor these into the total cost.
How do I repay my bridging loan?
You usually repay a bridging loan in one go at the end of the term. You might repay the loan by selling an existing property or by refinancing to a mortgage.
Although you don’t typically need to make monthly payments with a bridging loan, in some cases, you might be asked to pay off the interest each month. You then pay off the amount borrowed at the end of the term. Usually, though, the interest will be rolled up and added to the loan balance to be repaid at the end of the term.
Can I turn a bridging loan into a mortgage?
Yes, you can turn your bridging loan into a mortgage by refinancing, as long as your lender permits it. It will also depend on your financial circumstances and the value of the property. It’s a more common process for residential properties.
