Bridging loans explained

What is a bridging loan?

A bridging loan (or 'bridge loan') can be useful if you need to borrow money for a short period. It can help to 'bridge the gap' if you want to buy a new home before selling your old one. 

Bridging loans can also be used if you buy a property at auction, where you'll need the money immediately but may not have sold your current property yet.

Rather than taking months to secure, like traditional bank loans, they can be obtained within days - giving borrowers access to cash fast. It is possible to borrow varying sums of money, ranging from £25,000 to £30m. 

But they have a reputation for being high-risk. A bridging loan is a secured loan, meaning there must be an asset to set it against. That asset will usually be a property, or multiple properties. Note that if you find you cannot repay the loan, you risk losing the asset secured against it.

In this guide, we explain how bridging loans work and who they could be right for.

How does a bridging loan work?

There are two types of bridging loan: 'closed' and 'open'.

Closed bridging loans

With a closed loan, there is a fixed repayment date - you will normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.

Open bridging loans

With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one or two years.

Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage.

They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it, as well as proof of what you are doing to sell your current property if relevant.

You should also have a back-up plan in place in case your repayment strategy fails -  - otherwise you could lose the property. 

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What are first and second-charge bridging loans?

When you take out a bridging loan, a 'charge' will be placed on your property. This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans.

Both a first and second charge bridging loan take your property as security in case you default on repayments.

Typically, if you still have a mortgage on your property, the bridging loan will be a second charge loan, meaning that if you failed to meet repayments and your home was sold to pay off your debts, your mortgage would be paid off first.

But if you owned your property outright, or you were taking out a bridging loan to repay your mortgage in full, you would take out a first charge bridging loan. This means that the bridging loan would be repaid first if you fell behind with repayments.

• Find out more: bridging loans on the rise

How much does a bridging loan cost?

Bridging loans are priced monthly, rather than annually, because people tend to take them out for a short period.

One of the major downsides of a bridging loan is the expense: you could face fees of between 0.45% and 1.6% per month.

That makes them much pricier than a normal residential mortgage. The equivalent annual percentage rate (APR) on a bridging loan can reach around 20% - far higher than many mortgages.

There are also set-up fees to consider, usually around 2% of the loan you want to take out, so it is advisable to only take a bridging loan out if you are confident that you won't need it for a long period of time.

Interest is charged monthly, but 'rolled up' and repaid in a lump sum at the end, along with the initial loan price and any fees and charges.

• Find out more: mortgage interest rates explained 

How much can you borrow with a bridging loan?

In cash terms, bridging loan providers might lend anything between £25,000 and over £30m.

But you'll usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property. So if your house purchase costs £200,000, you'll need £50,000 to begin with. 

If you are taking out a first-charge loan, you'll typically be able to borrow more than if you were taking out a second charge loan.

What are the pros and cons of a bridging loan?

The high-risk loans are often considered the last resort for people buying a home. Anyone considering using one needs to weigh up the potential positives and negatives.

Pros

• Access to money is rapid. Brokers can release the loan within days - giving the borrower an almost-immediate short-term fix.
• Repayments can be flexible to suit your desired terms. Depending on the agreed deal, borrowers can take up to a year or 24 months to pay back the loan. However,  you could stand to save a lot of money if you repay the loan as quickly as possible.
• Very large sums of money can be granted. Loans reaching into tens of millions can be agreed, allowing people to cover the purchase of multiple properties. If you can't cover the cost of a house move but don't want to miss out on a dream move, bridging loans are an option.

Cons

• Bridging is specialist finance and the loans are high-risk. You could end up losing assets, such as your home, if you cannot repay the loan, and interest rates and fees tend to be high as you're paying for the convenience.
• They can be very expensive. Due to being a short-term solution, bridging loans come with high interest rates. Current rates equate to an annual interest of about 20% which has to be paid on top of the loan repayment.
• Fees also add to the high cost. The borrower is required to pay a set-up fee, which is usually around 2% of the loan being taken out. Property valuation fees will also be required.

Which banks offer bridging loans?

Prior to the 2008 financial crash, many high street banks used to offer bridging finance, but now the loans are mainly offered by alternative lenders.

Precise Mortgages, MT Finance, United Trust Bank and LendInvest are now among those to offer the loans.

How to apply for a bridging loan

Bridging loans aren’t available from high street banks, so you might want to consider a specialist broker who can set out your options. 

The lender will want to know your exit plan and the timeframe for paying back the bridging loan - so you'll need to provide evidence of a clear repayment and exit strategy. This could be using equity from a property sale, or taking out a mortgage.

If you are aiming to eventually take out a traditional mortgage on the property, you will need to show the lender proof that the mortgage will be accepted. Affordability checks will be carried out and the property will be valued by the broker before a loan is either approved or rejected.

If approved, solicitors will handle the conveyancing and the loan will be released.

What are the alternatives to a bridging loan?

If you want to move but can't sell, you could also consider a let-to-buy mortgage arrangement.

You can do this by remortgaging your current home onto a buy-to-let mortgage and using the equity released to buy a new property.