Do Bridging Loans Affect Mortgage Applications and Credit Scores?

Bridging loans are short-term financing solutions designed to help individuals and businesses cover gaps in finance or fund property purchases and development projects. As these loans are becoming more popular, many people are asking, "Do bridging loans affect mortgage applications?" and "Do bridging loans affect credit scores?"

In this insight, we will address these concerns and provide relevant information about bridging loans and their impact on mortgage applications and credit scores.

Key Takeaways

• Bridging loans are short-term financing options used to cover financial gaps or fund property transactions and development projects.
• Bridging loans can affect mortgage applications based on whether they have been fully repaid at the time of application.
• Outstanding bridging loans can complicate mortgage applications due to factors like debt-to-income ratio, credit history, and borrowing capacity.
• Bridging loans can impact credit scores based on timely repayments or defaults, and lenders may run credit checks during the application process.

What is a Bridging Loan?

Bridging loans are a type of short-term financing that is typically used to cover gaps in finance or fund property transactions. These loans are designed to be repaid quickly, usually within 12 months. However, the repayment term can be extended depending on the circumstances and the lender.

Common Uses of Bridging Loans

Buying a new property before selling the current one: This is one of the most common reasons people take out bridging loans. It helps them secure a new property without waiting for the sale proceeds of their existing property. What can a bridging loan be used for:

Property development

Developers often use bridging loans to finance the construction or refurbishment of a property.

Auction purchases

Bridging loans can be used to fund the purchase of a property at auction, where the buyer needs to complete the transaction within a short period.

Business cash flow

Businesses may use bridging loans to cover temporary cash flow shortfalls or to fund expansion plans.

Do Bridging Loans Affect Mortgage Applications?

Yes, bridging loans can affect mortgage applications in some cases. The impact of a bridging loan on a mortgage application primarily depends on whether the loan has been fully repaid by the time the mortgage application is submitted. When affordability assessments are carried out, unless the borrower is able to demonstrate that the bridging loan will be repaid upon completion then it will need to be included as a commitment. That can potentially mean a declined mortgage application. To avoid this, discuss your bridging loan application with your mortgage adviser first. They will be able to assess the impact of the bridging loan on your ability to apply for a mortgage.

Outstanding Bridging Loans and Mortgage Applications

If a borrower has an outstanding bridging loan, it may complicate their mortgage application. The reasons for this include:

Debt-to-Income Ratio

The presence of an outstanding bridging loan can negatively affect the borrower's debt-to-income ratio, making it more challenging to secure a mortgage. Lenders may view the borrower as a higher risk and offer less favorable interest rates or loan terms.

Credit History

If a borrower has had difficulty repaying their bridging loan, it may adversely impact their credit score, making it more challenging to secure a mortgage in the future.

Borrowing Capacity

An outstanding bridging loan may reduce the borrower's capacity to borrow additional funds. This is because lenders will consider the borrower's existing debt when determining how much they can lend.

However, if the bridging loan has been fully repaid, it is less likely to have a significant impact on the mortgage application.

Do Bridging Loans Affect Credit Scores?

Bridging loans can affect credit scores, but the impact depends on how the borrower manages the loan. If the loan is repaid on time and in full, it can actually have a positive impact on the borrower's credit score. On the other hand, if the borrower defaults on the loan or struggles to make repayments, it can negatively impact their credit score.

Lenders typically run credit scoring checks on applicants for bridging loans, and unsuccessful applications may show on the borrower's credit file. However, many lenders offer "in principle" agreements, which do not show on the credit file, allowing borrowers to shop around without negatively impacting their credit score.

Tips for Minimising the Impact of a Bridging Loan on Mortgage Applications and Credit Scores

To minimise the impact of a bridging loan on mortgage applications and credit scores, consider the following tips:

Choose a reputable lender

Selecting a reputable lender with competitive rates and terms can help reduce the overall cost of the loan and ensure a smoother repayment process.

Plan for repayment

Develop a clear exit strategy for repaying the bridging loan, such as selling a property or securing long-term financing.

Monitor your credit score

Regularly review your credit report to ensure that all information is accurate and up-to-date.

Communicate with your lender

Keep in touch with your lender throughout the loan term, and notify them immediately if you anticipate any issues with repayment.

Seek professional advice

Consult a mortgage broker or financial adviser to help you navigate the process of applying for a mortgage while managing a bridging loan.

Alternatives to Bridging Loans

If you're concerned about how a bridging loan may affect your mortgage application or credit score, consider exploring alternative financing options, such as:

Buy-to-Let Mortgage

Buy to Let Mortgages can be more cost-effective than a bridging loan, especially if the property is intended for rental purposes.

Secured Loans

These loans allow homeowners to borrow large amounts against their property or another asset, often at lower interest rates than bridging loans.

Release Equity

If you remortgage to release equity from your existing property it can provide funds to finance a new property purchase or cover temporary cash flow shortfalls.

Bridge to Let Mortgage

A Bridge to Let Mortgage is a special type of loan that allows landlords to purchase a property that is intended to be used as a rental property. Bridging to Let is unique because it offers the flexibility to purchase a property quickly and then move onto a more long-term financing option, such as a buy-to-let mortgage. 

Land Mortgage

If you are using a bridging loan to buy land, you could instead consider to apply for a land mortgage. However, If the type of land isn't as easily mortgageable, for example, amenity land, you would need to proceed with your bridging loan plans. For more information on buying land, consider reading our insight: Is It Worth Buying Land?

Proceeding with your Mortgage Application

So, do bridging loans can affect mortgage applications? Yes, they can depending on the borrower's circumstances and how they manage the loan. Do bridging loans affect credit scores? Yes, they can depending on the borrower's circumstances and how they manage the loan. By choosing a reputable lender, planning for repayment, monitoring your credit score, and seeking professional advice, you can minimise the impact of a bridging loan on your mortgage application and credit score. Additionally, exploring alternative financing options can help you find the best solution for your unique needs.