A bridging loan is a short term, secured loan used to fund a large private or business purchase while you arrange longer-term finance.
It is a short term measure in every sense: easy to arrange, often able to release funds within 24 hours, and lasting anywhere from days up to two years.
Their scope and quick set-up mean these loans can be used to resolve funding problems for both business and private borrowers; however, that flexibility doesn't mean they are always the right answer.
You need to compare the cost of the bridging loan finance options available to you and consider your financial circumstances from a number of angles before applying.
What can bridging finance be used for?
Bridging loans are only an option worth considering in specific financial circumstances whether you're a commercial or private borrower.
However, as they're generally provided by specialist companies all manner of situations can be considered and catered for.
Common uses for bridging loans include funding:
Securing a house purchase until your existing property is sold
Covering a break in a property chain so you can buy a new home while waiting for a mortgage
Completing a building project if the next tranche of your self-build mortgage isn't released until stage-completion
Renovation and redevelopment; altering an existing property structurally or cosmetically with a view to resale or refinance
Buying a property at auction
Paying a tax bill
Funding a new business venture e.g. buying time to raise money internally and/or generate investment
Business invoice finance to help with cash flow while you're waiting for money to come through
Paying for work to be completed so a mortgage can be agreed; for instance if your mortgage offer is contingent on some basic work being carried out to make it habitable
Refinancing an existing bridging loan
First charge bridging loans are available as standard from bridging loan lenders as are second charge bridging loans. Third charge bridging loans tend to be even more of a specialist and costly area because of the increased risk they pose to the lender's finance.
Whatever your reason for considering a bridging loan it's essential that you have a clear 'exit strategy' for paying the loan back so you aren't left picking up two tabs if anything falls through. The more concrete your way out, the lower the risk.
Bridging loans from UK lenders are generally only available on properties, land or businesses based in the UK although you don't necessarily need to be a permanent UK resident yourself to get this type of finance approved.
Open and closed bridging loans
There are two classes of bridging loans, known as open and closed.
An open bridging loan means you haven't yet got an agreement for your main source of finance and a concrete time frame for the loan being repaid; for instance a mortgage agreed in principle or the sale agreed on your house. Open loans are riskier to both you and the lender, so they're more expensive.
A closed bridge loan is available to homeowners who have already exchanged contracts for the sale of their current property, have a concrete mortgage offer or some other pre-agreed means of paying back the loan at a certain point in the future. These are slightly less risky so tend to be more readily available, more flexible and more affordable.
What do bridging loans cost?
Bridging loans are only intended to cover temporary cash shortfalls, so they charge monthly interest at rates up to 1.5%. This equates to substantially higher annual rates than a standard mortgage which is why they're not viable as a long term borrowing solution.
Both the loan size and its duration will impact on the bridging loan interest rates you're actually charged, as will the property, land or business you're securing the loan upon, your credit rating and, in the case of property purchases, loan-to-value (LTV) required
Finally, you need to be aware that bridging finance charges one-off arrangement fees including valuation fees, admin and legal fees plus (occasionally) exit fees.
Are bridging loans safe?
The risk of a residential bridge loan actually lies in your circumstances, rather than in the product itself. If you don't have the long-term finance agreed then a single sale in a property chain falling through can pull the financial rug out from under you. Which is why you have to be completely happy that you are going to be in a good enough financial position to pay off the loan without being in a difficult situation.
Bear in mind that all bridging loans are secured. Although you'll often be able choose the asset on which to secure (usually property due to the size of the loan), you stand to lose that asset if you default on repayments.
Who regulates the bridging loan industry?
Like the mortgage industry, all "first charge" residential bridging loans are regulated by the Financial Conduct Authority (FCA), first charge loans is where no other borrowing is in place, for example if your current home was mortgage free and you took out a bridging loan secured against it that would be considered a first charge loan.
However, second charge bridging loans are currently an unregulated industry, meaning lenders do not have to be regulated by the FCA to offer them.
The benefit of choosing a regulated lender is that any firm you use wil have had to be granted relevant permissions by the FCA and commit to maintaining necessary standards.
While this doesn't necessarily mean that lenders offering second charge bridging loans are unreliable, you should bear in mind that they will not have been through the same set of stringent checks as the regulated lenders offering first charge loans.
How to get the best deal on bridge finance
With substantial set-up fees and monthly rates cumulatively topping 10% per year, it's vital to keep those costs as low as possible.
Remember, the short term nature of bridging loans means that set up fees - potentially running into £1,000s - can have an impact on the cost of the loan comparable to the actual interest rate. This means that when you are looking at the overall cost of the loan you should consider the cost of the set up fees as these may determine what the cheapest bridging loan actually is.
Consider what you can afford to repay per month on the amount you need to borrow and check the best bridging loan rates to see which lenders fit your budget - and over what period. This will give you the security to know that you aren't going to be faced with massive repayments that are unrealistic for you to be able to afford.
Bridging loans are cheapest if you can repay them in full once your project's main financing kicks in, this means trying to confirm (as far as possible) your longer term cashflow prior to taking one out so as to minimise the length of time you need to borrow.
You can use our bridging loan comparison to shop around and compare your bridging loan options to get the best possible deal.
What are your alternatives?
If you are likely to need the funds over a longer period and have the time to arrange a secured loan or a second mortgage, these could potentially be used instead; often with better interest rates.
Of course, you'll need to prove you can cover the repayments on both debts, plus choose a no-fee mortgage without early repayment fees.
Ultimately, you need to judge how concrete your main finance offer is, and compare the expense of a bridging loan against that risk and the cost of the deal falling through.