What Is a Bridging Loan?
A bridge or bridging loan is a short term secured loan. Property buyers typically use bridging finance to “bridge” the gap between the purchase of a new property and the approval of a traditional mortgage, the sale of the new property or the release of capital from an existing property.
What Can I Use a Bridge Loan For?
Bridging loans can be used in various scenarios to bridge a finance gap when funds aren’t immediately or readily available. We’ve outlined a few common situations where bridging loans can be used.
Buying Property at Auction
A mortgage might take longer than needed to come through, so a bridging loan can be ideal if you need to borrow money quickly to secure a property you want to buy at auction. Most bridging loans are relatively easy and quick to arrange once an offer has been accepted on a property purchased at auction. You can even get all the paperwork and indicative terms confirmed before you’ve found a specific property - speeding the process up once you’ve made an offer.
A bridge loan can be used to access funds needed to complete renovations. This can range from small bridging loans for light renovations, like plastering or replacing fixtures, to larger bridging loans for major structural refurbishments.
If you’re purchasing a property that is unmortgageable because, for example, there’s no kitchen or bathroom, bridge loans can help you to cover the cost of making the necessary repairs to get the property into a mortgageable state.
It’s possible you may need to find funds quickly to purchase land at auction or secure short term finance to buy land for building residential or commercial property. A bridge loan can be a good interim option to help you purchase the land and finance building work until you’re able to sell or arrange a mortgage.
Fixing a Broken Property Chain
If you’re in a property chain that falls through, a bridging loan can be an alternative way to secure finance and make sure you don’t lose your new home. Typically, with bridging finance, you’ll have up to 12 or 24 months to sell your old property and pay off the bridging loan in full.
Types of Bridging Loans
There are various types of bridging loans available to suit different needs. We’ve outlined some of the most common types below.
First Charge and Second Charge
The legal term "charge" is used to define the order in which your debts will be paid off if you default on your loans. If you can’t make your repayments and the property is repossessed and sold, the money from the sale is used to repay the debts secured against it.
With a bridging loan, a "charge" is put on your property. Usually, if you have an existing mortgage this will be the first charge – or first debt to be paid off – and your bridging loan will be the second charge. Keep in mind that you'll need permission from the lender of your first charge debt, normally your mortgage lender, before taking out your second charge bridge loan.
Fixed or Variable Interest
As with other standard mortgages, bridging loan interest rates can be fixed or variable - however fixed rates are much more common. Fixed interest rates mean you’ll be charged a fixed rate of interest each month for the duration of the loan. Variable interest rates can go up or down and usually change in relation to a reference benchmark, such as the Bank of England Base Rate.
Open Bridge Loan
Open bridging loans have no fixed date for repaying the loan, although typically you'll be expected to pay it off in a timeframe of 12 - 24 months. Open bridge loans can be a good option if your repayment strategy isn’t set in stone yet, or you want to purchase a new home before you’ve sold your old one. As open bridge loans are riskier for lenders, less lenders offer them than closed bridge loans, which means they often come with higher rates.
Closed Bridge Loan
Closed bridging loans will have a fixed date for paying off the loan. This means you won’t have as much flexibility as an open bridge loan but they’re typically offered at lower rates and can be suitable if you have a well-defined repayment strategy or know you'll receive funds to pay off the loan when selling a property.
Could Bridging Finance Help You?
Bridging finance may be able to help you if:
- You want to move but are struggling to sell your property and need to buy your new home quickly
- You’ve lost your buyer but don’t want to let your purchase fall through
- You want to purchase a property that isn’t currently mortgageable or habitable
- You want to convert/refurbish/develop a property
- You want to purchase an auction property
- You want to purchase land so you can self-build a property
- You require short term funding without making monthly interest payments
Talk to Our Experts Today
How Does a Bridge Loan Work?
Bridging loans are ideal for “bridging the gap” between the purchase of a property and the securement of other funds – such as via a mortgage or from the sale of a property – because they’re quick, flexible interest-only products that are available on a wide range of properties. They’re perfect for people who would otherwise be unable to find suitable financing within a restricted time frame.
Wondering how to get a bridging loan and what you’ll need? We’ve set out the key essentials below.
You Need a Deposit
The minimum deposit you would typically put down for a bridging loan is about 25% - 40%. The amount you have to provide in deposit will come down to the type of security, condition of the property/land and the amount of work you’ll be carrying out.
Interest Rates Are High
Because bridging loans are short term and sometimes secured against riskier properties, lenders charge higher interest rates than on mortgages – about 0.5% to 1.5% a month.
They’re Short Term
You could typically have a regulated bridging loan for up to 12 months and a non-regulated bridging loan for up to 24 months. Regulated bridging loans are suitable for residential house purchases and non-regulated bridging loans are suitable for buy-to-let and commercial property purchases.
You Must Provide Evidence of a Repayment Vehicle
The majority of lenders will require that you give evidence of your repayment vehicle/exit strategy – i.e. how you’re going to repay the loan at the end of the term. If your exit strategy will be the sale of the property then the lender will want to make sure that the expected sale price is in line with the market.
Alternatively, if your exit strategy will be to remortgage onto a new product - such as a normal residential mortgage, buy-to-let mortgage or a LTD company BTL mortgage - then it's likely the lender will likely want to see the terms of the exit, whether this will be the Illustration or DIP (Decision in Principle).
There Are No Monthly Payments
Many bridging lenders allow for the monthly payments to be rolled on top of the loan itself. This means that you don’t have to make any monthly payments as the loan plus payments is paid off via your exit strategy. It’s important to note that the interest payments that roll up will have interest charged on them as well as the main amount borrowed. You can also opt to make monthly interest payments if you wish to keep the balance from increasing. This is called servicing the loan.
There Are a Few Extra Costs like with a Normal Mortgage
You’ll probably need to pay a valuation fee, product fee, and solicitor's fee like with a standard mortgage.
Expert Tip - Nick Mendes, John Charcol. May 2023
Bridging can be a really useful tool for many clients, especially where you’re looking at a property that’s deemed uninhabitable, or you're buying at auction and you need to complete within a short period of time. You can even use it to raise money on an existing property if you’re thinking of downsizing or in a complex chain. You can raise finance over a short term period to do the work and then either re-sell it or refinance it to a new lender with great flexibility.
How Much Do Bridge Loans Cost?
The cost of a bridge loan will vary depending on your own personal circumstance and various factors and fees, including the following.
- Interest rates - typically, these will be between 0.5% and 1.5% per month
- Term length - bridging loan terms can be anything from 1 to 36 months, but 12 - 24 months tends to be the standard. Generally, the longer the loan term, the more expensive it will be overall. Longer terms are also only available on unregulated bridges
- Product fees - most lenders charge a product or arrangement fee of between 1.5% and 3% of the loan amount
- Deposit - most bridging loans require a deposit of at least 25%. As with a standard mortgage, typically the bigger your deposit, the lower the interest rate you’ll be charged
- Valuation fees - lenders will usually want to survey or inspect the property and any other secured assets that are included as part of the cross charge to value them. An individual valuation fee can be around £500
- Drawdown fees - it’s also common for lenders to charge drawdown or admin fees, normally around £500
When looking for the right finance, it’s always wise to compare bridging loans by consulting an expert. Using a specialist broker like John Charcol can help you access the best products to suit your needs, saving you time and money.
Pros and Cons of Bridging Loans
Before you apply for a bridging loan, you should consider the pros and cons to help weigh up if bridging finance is the right option for you. Here are some of the key advantages and disadvantages.
- A bridge loan gives you relatively quick and easy access to a cash lump sum
- Bridging finance can mean you're able to invest in land or property you might not otherwise be able to. This might be to buy land at auction, finance building work, or undertake renovations on unmortgageable properties
- Bridge loans can help you plug the gap if your property chain falls apart and you want to go ahead with buying your new home before you’ve sold your old one
- Bridging loans can be for large sums of money, depending on your own personal circumstances. Keep in mind, the LTV (loan-to-value) of your loan will usually need to be 75% or less
- You typically won’t be charged for early repayment, although some bridging loans can carry a minimum term
- If you opt for an open bridging loan, you’ll have the benefit of greater flexibility. With no set repayment date, you won’t be under pressure to sell by a particular point
- Like any mortgage or secured loan, you’ll need to be sure you can afford it. If you miss repayments, there’s a risk you’ll lose the property
- Most bridge loans require a personal guarantee, meaning you have personal liability. If you default on the loan and there is a shortfall after selling your property, you could be required to sell other assets to make up the shortfall
- Bridging loans tend to have higher interest rates compared to standard mortgages. Typically you’ll see an interest rate of 0.5% - 1.5% a month, meaning you could pay around 6% to 18% interest per year, depending on your specific bridging finance agreement
- Some bridging loans are unregulated. While this can mean securing a quick and flexible loan, an unregulated loan can mean less borrower protection. A bridging loan that is regulated by the Financial Conduct Authority offers greater protection
- There are different fees for a bridge loan that can start to add up. Depending on your arrangement, this can include fees for set up, valuation, drawdown and exit fees, as well as solicitor costs
Why John Charcol?
We’ll Manage All the Details
If you require a bridging loan quickly and easily, we’ll handle the whole process for you – from application to completion.
We've Helped Thousands of People
With 1,800 5* reviews and multiple awards, you know you’re in excellent hands with us when you need bridging funds.
We Listen to Your Needs
Whether you’ve got a complex income structure or need a specialist lender, we can find a bridging loan that works for you.
1. First Conversation with Adviser
When you phone us, you can either arrange a phone appointment with your adviser or a face-to-face meeting. Your adviser will ask you some questions then go away and find the best bridging finance option for your circumstances and future needs. They’ll organise a follow up during which they’ll present you with what they’ve found. If you're looking to buy a property at auction you would typically contact us before making an offer.
2. Decision in Principle
Once you’re happy with your adviser's recommendation, they’ll go about securing your DIP (Decision in Principle), which is basically a promise from the bridging loan lender that they’ll loan you money on the condition that the information you’ve provided is correct.
3. Offer on Property/Refinancing
After you’ve secured a DIP (Decision in Principle), you’ll be in a great position to make an offer on a property or move forward with the refinancing. If you’re purchasing an auction property, you may want to put down a deposit of 10% or so. You’ll typically have 28 days to complete the purchase after putting a deposit on an auction property.
4. Pre-Application and Submission
We’ll send you some information which explains all the documents we need to submit to the lender. You’ll be assigned a client relationship manager who’ll check and submit certified copies of your documents; they’ll liaise with both you and the lender. Your adviser will then submit the fully packaged mortgage application.
5. Lender Underwriting and Valuation
The lender will underwrite your application. This basically means they’ll verify that the information you’ve provided is correct and review all your documents for themselves. They’ll also want a valuation for their purposes on the property in question.
6. Loan Offer
If the lender is happy with everything they’ve found, they’ll send you an offer. They’ll also send us a copy.
Here you’ll go through the legal part of the process, known as conveyancing. This is where the solicitors/conveyancers draw up contracts and organise the actual, legal purchase or refinancing of the property. You may need to arrange buildings insurance at this stage, making sure it’s in place from exchange.
8. Exchange and Completion
If you’re buying a property, your conveyancer/solicitor will exchange contracts with the seller’s conveyancer/solicitor; it’s at this point that you would put down your deposit and be legally bound to the property. The purchase will complete when the money is transferred on an agreed-upon date. If you’re refinancing, then your conveyancer/solicitor will set a date to draw down the funds and pay off any existing lender(s) once the bridging loan offer is released.
Funding Home Improvements
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Our guide explains everything you need to know about the different types of mortgages, including: interest rates, features, repayment methods and more.
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Are you looking to buy a second home and need advice on a second property mortgage? Perhaps you’re planning to buy a holiday home? Read our guide to find out more.
Bridging Loan FAQs
What Are Some Bridge Loan Rates and How Do They Work?
Interest rates for bridging loans tend to be between 0.5% to 1.5% a month, which means you could pay between 6% and 18% per year depending on how the deal is structured.
Can You Use Bridging for a Residential House Purchase?
It is possible to purchase a residential property with bridging finance. However, it's a short term finance option which means you’ll need to replace your loan with a normal mortgage, usually within 12 months of purchase.
Compare the best fixed rate mortgage deals for residential properties now.
How Fast Is Bridging?
You can have a bridging loan put in place within a month - or even a few days - of starting the application process.
Can I “Bridge the Gap” Until My Mortgage Is in Place?
Bridging loans can be much quicker to arrange than normal mortgages. You can also secure them on properties that would otherwise be unmortgageable, therefore they’re a suitable option if you need a loan to purchase a property quickly or you plan on remortgaging it after carrying out some improvements.
See our page to compare and find out more about the best mortgage deals currently on the market.
Can You Take Out Bridging Finance on a Property that’s Unmortgageable?
One of the main benefits of bridging finance is that it can be secured against a property that’s unmortgageable, perhaps because it’s uninhabitable with no working kitchen/bathroom, or it’s a property that was divided into flats and is being converted back into a single dwelling. Often, buyers will use bridging to purchase and renovate an unmortgageable property so that it can be sold for a profit or remortgaged onto a longer term.