What is a bridging loan?

Bridging loans explained

A bridging loan, sometimes called a bridge loan, is a short-term borrowing option designed to bridge a temporary financial gap when buying a property.

For example, a bridging loan could help you to buy a new property while you wait for your existing property to sell. It means you can access the funds necessary to make the purchase without needing to wait for a sale to go through.

When applying for a bridging loan, you’ll need to show the lender that you have a strong strategy in place to repay the loan (such as a property sale or refinancing to a mortgage). Instead of repaying a bridging loan via monthly payments, you typically repay it in full at the end of the term (or when you’re in a position to pay), after selling your property, for example. However, depending on the terms of the loan, you may be able to pay the interest charges each month instead of adding them to your loan.

While bridging loans are useful in certain situations, they can charge high interest rates and, because they are secured, failure to repay the loan could result in the property being repossessed.

Most major banks don’t offer bridging loans. Instead, you can usually find bridging loans via brokers and more specialist lenders.

How much can I borrow with a bridging loan?

You may be able to borrow tens or hundreds of thousands of pounds with a bridging loan, or potentially even more.

However, the exact amount you can borrow will depend on the value of your property, how much equity you own and the purpose of the loan, among other factors.

For example, bridging lenders will often cap the amount you can borrow at around 70% to 80% of your property’s value, although some lenders may be able to finance a higher loan-to-value (LTV).

What are the interest rates for bridging loans?

Because bridging loans are designed for borrowing over the short-term, interest rates are usually charged monthly. A typical monthly interest rate could range from around 0.5% to 2%, although the exact rate you receive will depend on your individual circumstances.

Bridging loan interest rates can be fixed or variable and may be paid in a number of ways:

• Monthly: You pay the interest charge every month, which means it isn’t added to the loan.
• Rolled up or deferred: The interest is added to your balance, and you pay it off when you pay the rest of your loan.
• Retained: The maximum amount of interest payable is calculated and added to your loan at the start of the agreement. You’ll get a refund for any interest you didn’t use if you repay it earlier than the end date.

Are bridging loans regulated?

Bridging loans on residential properties that you or your close family live in (or are going to live in) must be regulated by the Financial Conduct Authority (FCA). Regulated bridging loans have a maximum term of 12 months.

Regulated bridging loans offer a greater level of consumer protection as lenders need to follow certain rules and standards set by the FCA, and this also means that borrowers have certain rights.

By contrast, bridging loans on commercial properties, including properties bought as an investment such as renovation projects or buy-to-lets, can be unregulated as the FCA doesn’t need to regulate loans used for business purposes (with some exceptions).

Because they’re unregulated, these bridging loans can carry more risk for the borrower and offer less protection than regulated loans. However, this doesn’t mean that unregulated bridging loans are unsafe. Unregulated bridging loans may offer longer repayment terms and could finance a higher loan-to-value than regulated loans.

Make sure you check a lender or broker is reputable and trusted before applying for a bridging loan. Speak to our preferred bridging loans broker for businesses.

Bridging loan types

There are bridging loans available for residential purposes, as well as for investment and business purposes if you want to purchase a buy-to-let property or refurbish a property and sell it for a profit, for example.

Whether you’re looking for a residential or business bridging loan, there are two main types to choose from:

• Open bridging loans. These loans don’t set a fixed repayment date, which may be useful if you don’t know exactly when you’ll be able to repay the loan and want some flexibility. The lender will still need to see your strategy to repay the loan and will usually expect you to pay off the balance within a year, or possibly longer.
• Closed bridging loans. Unlike open bridging loans, closed bridging loans have a fixed repayment date by which you need to pay off the loan. They may be suitable if you know when you’ll be able to repay the loan, if you’ve exchanged contracts to sell your house, for example. Because they offer less flexibility, closed bridging loans may be cheaper than open bridging loans.

First charge vs second charge bridging loans

Bridging loans can also be first charge or second charge loans, depending on whether you already have finance secured against your property.

For example, if you own your property outright and don’t have any loan secured against it, the bridging loan will be a first charge loan. This means the bridging lender will be first in line to get paid if your property is repossessed.

However, if you have a mortgage, this will be the first charge loan and the bridging loan will be a second charge. This means the mortgage lender has priority over the bridging lender if you fail to repay your loans.

Because the bridging lender only gets paid after the mortgage lender in the event of default, second charge bridging loans can be more expensive. You may also need the consent of the first charge lender before taking out a second charge loan.

What can a bridging loan be used for?

You can use a bridging loan in a variety of situations, including to:

• buy a new property before the sale on your existing property is completed
• ensure you don’t miss out on your new property purchase, even if the chain collapses and the sale of your existing home falls through
• raise money relatively quickly to buy a property at auction
• fund a renovation project or a non-traditional property that you may not be able to get a mortgage for
• invest in a buy-to-let property or property development
• pay for a property while you wait for longer-term finance (such as a mortgage) to be arranged.

Bridging loan requirements

To qualify for a bridging loan, you’ll need to be at least 18 or 21 years old.

You’ll also need to meet several key lending criteria.

Firstly, you’ll need to be able to put forward some form of property as security. Lenders will typically require you to own a minimum amount of equity to be eligible for a bridging loan, such as 25% of your property’s value. You may be able to borrow more if your bridging loan is a first-charge loan (if you don’t have any other debts secured on your home) or if it’s an unregulated bridging loan.

Regulated bridging loans are likely to have stricter eligibility criteria than unregulated loans and may require you to own a larger percentage of equity in the property.

The bridging lender will usually value your property to assess whether it can provide adequate security for the loan. If the property forms part of your repayment strategy (such as its sale), the lender may also look at factors that could influence the speed and likelihood of the sale.

Your repayment strategy for the bridging loan, such as the sale of a property or refinancing to a mortgage, will be crucial in determining your eligibility, as lenders will want to see a clear plan of how you will pay it off.

While bridging lenders will look at your income and run a credit check during the application process, the property acting as security and your repayment strategy are likely to be more important to the lender’s decision on your application.

However, if your repayment strategy is refinancing to a mortgage, for example, the bridging lender may pay more attention to your income to check that you are likely to be approved for a mortgage.

Individual lenders will also have their own requirements. For example, they may have certain criteria regarding loan size, loan term and the type and condition of the property acting as security.

Related Guide: How to get a bridging loan

Additional fees

When taking out a bridging loan, you can expect to pay a number of fees on top of the interest charged. You may be able to add some of these to the loan but others you may need to pay upfront.

These extra charges could include:

• arrangement fees
• broker fees
• legal fees
• valuation fees
• exit fees
• redemption fees
• administration fees

If you don’t repay a bridging loan before the end of the term, you could also face penalty fees and late payment charges.

Is a bridging loan right for me?

Bridging loans won’t be right for everyone, but they can be useful in certain situations.

If you’re confident that you’ll be able to repay the bridging loan and will only need to borrow over a short period, a bridging loan could be worth considering as it can allow you to purchase a property, for example.

However, it’s important you understand the implications if you don’t repay the loan.

The interest charges and fees on bridging loans can make them an expensive way to borrow, especially over a longer repayment term. Furthermore, because they are secured, you risk losing your home if things don’t go as planned and you can’t repay the loan.

As a result, if you think there’s a chance you won’t repay the loan, if you’re not confident about selling your property on time, for example, the risk of taking out a bridging loan could outweigh the benefits.

It’s always worth seeking advice and considering alternative options to help you decide if a bridging loan is suitable for you.

Alternatives to bridging loans

A bridging loan may not be the most suitable source of finance for everyone. It may be worth considering some alternative options such as:

• Remortgaging: If you want to release some equity from your property, you could consider remortgaging. This is likely to be cheaper than a bridging loan but, depending on what you need the money for, it may not be suitable.
• Secured loan: This is another type of loan that’s secured against your property, but they can offer a longer term than a bridging loan.
• Personal loan: If you only need to borrow a relatively small sum, a personal loan could be a less risky alternative to a bridging loan as it isn’t secured against your property.
• Peer-to-peer loan: A peer-to-peer loan could offer a quicker route to funding than a bridging loan. However, they may not be available to every borrower, and they carry their own risks, so do your research and seek advice before applying.
• Home equity line of credit (HELOC): A relatively new product in the UK, a HELOC could offer a flexible alternative to a bridging loan as you can borrow as much as you need (within a certain limit). They are secured against your property and are regulated by the FCA. HELOCs can be helpful, but it’s worth getting advice first to discuss your options.
• Family: Although it won’t be an option for everyone, you could consider asking a family member for a short-term loan to enable you to buy a property. If you do this, make sure you agree the repayment terms to avoid any disputes later on.
• Waiting: If you want a bridging loan to buy a property before your existing property sells, you could consider waiting until the sale goes through. Although this could delay your plans, it means that, if you don’t manage to sell the property, you won’t be left with an expensive bridging loan to pay off.