Bridging loans can be useful for lots of reasons such as helping you buy a house if your chain breaks down, if you're downsizing but want to buy before you sell, or if you've bought at auction but can’t get the funds ready on time. We explain what bridging loans are, when they are used, pros & cons, costs and how to apply.
What is a bridging loan?
Bridging loans are a way to borrow money in the short term. They can be used to ‘bridge the gap’ if you need to buy one property before selling another. Unlike mortgages, bridging loans can be arranged quickly if speed is important.
However, bridging loans are a secured loan, meaning that you have to secure an asset against them, usually a property or properties. As there is a risk of losing your asset, bridging loans are sometimes known as the loan of last resort.
What can I use a bridging loan for?
Here are some examples of when you may consider using a bridging loan:
You are in a property chain that has collapsed and you don’t want to lose out on buying your dream home.
If you want to downsize. By taking out a bridging loan to fund your new purchase, you’ll have longer to sell your current home so you may be able to achieve a higher sale price. It also removes the stress of having to buy and sell at the same time.
When buying a property that is unmortgageable. Your plan is to make it habitable or lettable so a traditional mortgage can eventually be arranged.
If you’re buying land, it could help cover the cost of the land and building work of the property while you apply for a mortgage.
So, how do bridging loans work? You can typically borrow between £50,000 and £10 million with a bridging loan. The amount depends on how much equity you have available. The maximum loan, including interest, is normally limited to 75% loan to value. The loan is then secured on the property or it can be across multiple properties to raise the required funds. Bridging loans, unlike a mortgage, are not directly linked to your income.
Here’s an example of how bridging loans work:
You want to buy a house for £300,000 and you need to put down a £100,000 deposit and borrow the rest on a mortgage.
But your current house hasn’t sold yet and you only have £25,000 in savings.
You ‘bridge the gap’ by taking out a £75,000 bridging loan for the rest of the deposit.
When your current house sells, you use money raised by the sale to pay back your £75,000 bridging loan.
What are the pros and cons of bridging loans?
Make sure you balance up the pros and cons before you apply for a bridging loan.
Pros of bridging loans
Speed: You can quickly borrow money, which could keep your property transaction on track.
Bigger loans: It is possible to borrow very large sums of money.
Flexibility: The repayment terms can be flexible to fit in with your plans.
Provide extra options: It may possible to secure lending on properties where high street lenders may not.
Cons of bridging loans
Secured against property: Bridging loans are a secured form of borrowing, so you’ll need to put up an asset against the loan. This means you risk losing that asset, for example a property, if you can’t repay the bridging loan.
Higher rates: You pay for the convenience of fast, flexible finance with a higher interest rate.
Fees: Bridging loans can come with a range of fees that add to their expense.
Because it is a secured loan, when you take out a bridging loan a charge will be placed against your property. If you own the property outright this will be a first charge loan – meaning the lender will be the first to be repaid when the property is sold.
If you have a mortgage or existing loan on the property, that will be the first charge loan and the bridging loan will be a second charge loan. With a second charge bridging loan you will need permission from the first charge lender before you can take out the bridging loan. These are typically more expensive than first charge bridging loans.
Fixed or variable interest
Just like with a mortgage, you can choose to pay fixed or variable rate interest with bridging loans. As you’d expect, with a fixed rate bridging loan you’ll pay a set interest rate for the duration of the term. While with a variable rate bridging loan, the rate you’ll pay may go up or down if the Bank of England raises or cuts interest rates.
Open bridging loans vs closed bridging loans
With open bridging loans, there is no fixed repayment date and as such it can be repaid whenever your funds become available. But bear in mind, lenders usually expect you to clear the debt within one year. However in some cases they may offer longer repayment terms.
Conversely, with closed bridging loans, there is a fixed repayment date. Closed bridging loans are usually cheaper than open bridging loans.
Bridging loan interest rates
Interest rates tend to be higher on bridging loans as you are paying for the privilege of borrowing a lot of money quickly. Because bridging loans tend to be short term, interest is charged daily rather than annually.
There are three ways that the interest on a bridging loan is charged;
Monthly: Similar to an interest-only mortgage, you’ll pay the interest payments each month and they are not added to the loan.
Rolled up: Interest payments are added to the loan and paid when the bridging loan is cleared.
Retained: You borrow the interest upfront for an agreed period and then when the loan is paid back, any unused interest is returned to you.
To get the best bridging loan interest rate, make sure you shop around. And the easiest way to do this is by using a specialist bridging loan broker. We’ve partnered with the experienced team of brokers at Chartwell Funding to bring you free advice when securing your bridging loan.
However, there’s another important benefit of using a bridging loan broker; that’s because unlike standard mortgages, bridging loans interest rates can be negotiated. So by using a good bridging loan broker, you may get a better rate.
Alongside the interest rate, there are other bridging loan fees you may have to pay. These include:
Arrangement fee paid to the lender – typically 2% of the loan and added to the loan.
Administration fee – can be payable upfront.
Legal fees – part payable upfront to your conveyancing solicitor and the rest on completion.
Valuation fees – range from £900 – £2000 depending on the lender and how fast you need the funds.
How to get a bridging loan
If you’re asking how to get a bridging loan in the UK, while you can go straight to a lender, we advise you to speak to a specialist broker. They will research the market for you, plus bridging loan rates can be negotiated so you may get a better rate by going via a broker.
The lender will usually require at least one property to be used as security against the loan. And the lender will also want your exit plan. That is how you will repay the loan and by when.
If you need to take out a traditional residential or Buy to Let mortgage, for instance on the property that has been renovated or the property you are buying, you will need to show the lender proof that the mortgage will be forthcoming. They will undertake affordability checks as standard with normal mortgage lending or look at the rental income you will be generating. This is to satisfy the lender that you will be able to secure a mortgage and you can afford any repayments required on the new loan.
As there are unregulated products on offer, we advise that you go via a specialised broker, such as Chartwell Funding who can scour the market for you and advise you on all bridging loan options.
Here is an example of how a bridging loan works in the UK. So, say you currently own a £600,000 property outright and want to take out a bridging loan for 12 months so that you can downsize to a £400,000 property before selling your current home, how does that work?
Net Loan Amount:
£400,000
Monthly Interest Rate:
0.7%
Interest Amount:
£35,623 (Assumes full term of 12-months, calculated daily)
Arrangement fee:
£8,000 (Added to loan)
Gross Loan Amount:
£443,623
Costs
Valuation Fee (Inc. VAT):
£522
Telegraphic Transfer Fee:
£35 (Added to loan)
Administration Fee:
£145 (Added to loan)
Estimated legal costs:
£900
Redemption Administration Fee:
£40
Bridging loan calculator
Use our bridging loan calculator to get a detailed estimate of interest, charges and other costs of your bridging finance and get a quote instantly. How much you can borrow with a bridging loan will depend on the value of your properties and your personal finances. The maximum loan, including any retained or rolled up interest is normally limited to 75% loan to value (this can be over multiple properties).
The bridging loan may also be limited depending on the condition of the property, your credit history, any essential works required at the property or the level of finance available to refinance.
How long does it take to get a bridging loan?
Bridging loans are usually approved quickly. They usually take around 5-21 days to be approved, although in some cases it can happen faster than this.
Who offers bridging loans?
Prior to the 2008 financial crisis, bridging loans were a more common lending product offered by the high street banks such as Nationwide, Halifax and Santander. At this time, bridging loans were used by people not wanting to lose out on their dream home.
However, many stopped offering them after the credit crunch. Currently, only Lloyds Bank offers bridging loans to its private banking customers. Nowadays professional or experienced investors take advantage of this facility.
These days bridging loans tend to be offered by alternative lenders rather than the high street banks such as United Trust Bank, Precise mortgages, MT Finance or some regional building societies.
A bridging loan is specialist finance, and you should seek independent advice as they are considered a loan of last resort. You need to establish if more suitable alternatives are available and specialist brokers (such as Chartwell Funding) are experienced in helping to arrange these loans if and when required.
What information do I need to get the best bridging loan?
When you apply for a bridging loan you’ll be asked questions like how much your property is worth, if you have a mortgage and if so, what the outstanding amount is, how much equity you have in the property and what your monthly income and expenditure are. So save time in the process by pulling this information together.
Your broker will be able to explain to you what additional information you’ll need to provide to complete the process.
What are the alternatives to a bridging loan?
There are a number of other options you may consider instead of taking out a bridging loan:
Remortgage: Depending on why you need the money, consider whether remortgaging your house could free up some extra cash. Although, make sure you think this through carefully and consider taking independent financial advice first. Or you may consider taking out a second mortgage on your home.
Let to Buy: Let to Buy mortgages can help you buy your next house when you haven’t got a buyer for your existing home. It essentially means you’ll have two mortgages. You’ll need a Let to Buy mortgage for your current property and a standard residential mortgage for the property you want to buy. Find out more in our guide Let to buy mortgages explained.
Secured loan: You could take out a secured homeowner loan. However, as with bridging loans, your home is at risk if you don’t keep up the repayments.
Personal loan: If the amount you want to borrow on a bridging loan is relatively small, this may be a cheaper option than a bridging loan.
Bridging loans have big advantages: for example, you can quickly borrow the money to keep your property transaction on track, you can borrow large amounts and repayment terms can be flexible. You can discuss whether it’s right for you with one of the specialist lending experts at our partners at Chartwell Funding. Bridging loans can be expensive so it’s a good idea to see if any alternatives, like remortgaging or Let to Buy mortgages might be a better option for you.
Is a bridging loan more expensive than a mortgage?
Yes. Bridging loans are typically more expensive than a traditional mortgage. However, they offer flexibility and may mean you can keep a property purchase on track. Find out more about costs with our Bridging loan calculator.
Do you pay a bridging loan monthly?
This depends on how interest is charged. If it’s charged monthly, it’s similar to an interest-only mortgage where you pay the interest payments each month and it is not added to the loan. But if the interest is rolled up, it will be added to the loan and repaid when you repay the loan. Alternatively the interest may be ‘retained’, this means you borrow the interest upfront for an agreed period of time. When the loan is repaid, any unused interest is returned to you.
Can I use a bridging loan for a Buy to Let property?
Yes. It is possible to use a bridging loan if you’re buying a Buy to Let property.
Are bridging loans expensive?
Yes, bridging loans can be expensive because you pay for the convenience of fast, flexible finance. However, bridging loan interest rates can be negotiated so you may get a cheaper rate by using a good bridging loan broker.
Are bridge loans a good idea?
Bridging can be a good idea if you need to borrow money quickly and flexibly to keep your property transaction on track. But bridging loans are secured against property and you’ll typically pay higher rates and fees. Find out more about costs with our Bridging loan calculator.
If you found this website useful, could you spare a minute to leave us a review?
wpDiscuz
#19899d
Contact us
#ec008c
×
Privacy Overview
This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Strictly Necessary Cookies
Strictly Necessary Cookies are required for the website to function correctly.
Show details
Name
Provider
Description
Expiration
PHPSESSID
hoa.org.uk
Essential for website to function properly
When the browsing session ends
hoa_newsletter_pop
hoa.org.uk
Ensures that the newsletter signup popup is only displayed once to a visitor, and isn't displayed on every page load
7 days
newsletterpage2
hoa.org.uk
Delays the display of the newsletter signup popup until the user is on their second page view
1 hour
reviewPop
hoa.org.uk
Ensures that the reviews pop is only displayed once to a visitor
24 hours
Local Storage (not a cookie)
youtube-nocookie.com
YouTube tracking cookie that is only set when a video is played on our site
n/a
moove_gdpr_popup
hoa.org.uk
Saves your preferences for cookie settings
365 days
ai_session
www.landc.co.uk
Preserves users states across page requests
30 minutes
ai_user
www.landc.co.uk
Used by Microsoft Application Insights software to collect statistical usage and telemetry information. The cookie stores a unique identifier to recognize users on returning visits over time
24 hours
Local Storage (not a cookie)
https://www.landc.co.uk
Enables the L&C comparison tools to function correctly
n/a
ARRAffinitySameSite
white.reallymoving.com
Used to distribute traffic to the website on several servers in order to optimise response times
When the browsing session ends
ASP.NET_SessionId
white.reallymoving.com
Preserves the visitor’s session state across page requests
When the browsing session ends
__cf_bm
checkatrade.com
To allow users to search the Checkatrade search widget
30 minutes
Analytics Cookies
This website uses Google Analytics to collect anonymous information such as the number of visitors to the site, and the most popular pages.
Keeping these cookies enabled helps us to improve our website.
Please enable Strictly Necessary Cookies first so that we can save your preferences!
Show details
Name
Provider
Description
Expiration
_ga
hoa.org.uk
This is a unique ID that is used to generate statistical data on how the visitor uses their website
48 hours
_ga_X2LEWPWZEG
hoa.org.uk
Required for Google Analytics to be able to collect anonymous data
48 hours
_gid
hoa.org.uk
This is a unique ID that is used to generate statistical data on how the visitor uses their website
24 hours
_gat_UA-32915409-1
hoa.org.uk
Required for Google Analytics to be able to collect anonymous data