What is it?
It is a loan to bridge the gap between making a purchase and other funds becoming available. They are often used to buy one property while you wait to sell another.
Bridging loans are a type of secured loan, which means you will need to own property, land or another similar high value asset to use them.
They are often used by landlords and property developers to fund projects, but they are becoming more popular with homeowners moving home as well.
Bridging loans pros and cons
Fast application process
Borrow large amounts
High interest rates
Secured against your property
Yes, the bridging loan industry is regulated by the Financial Conduct Authority (FCA).
Some business bridging loans are exempt from regulation, but all personal loans are regulated by the FCA either under mortgage or loans and consumer credit rules.
What can you use a bridging loan for?
You can use a bridging loan for the following reasons:
Buying a property
Buy to let investment
Paying a tax bill
Bridging loans are also often used by property developers at auction who need to pay a deposit to secure their purchase at short notice.
How do they work?
There are two types of bridging loan:
Open bridging loans have no set end date. They can be repaid when your funds become available and tend to last for up to one year, sometimes longer.
Closed bridging loans have a fixed end date, usually when you know when funds will be available to pay off what you owe. They tend to last just a few weeks or months.
Open bridging loans are usually more expensive than closed bridging loans because they offer more flexibility.
You must have a way to repay the bridging loan no matter which type you choose - this is called an exit route.
What are charges?
When you apply for a bridging loan a charge is added to the property you are using as security by the lender.
Charges determine the priority of debts if you are unable to repay your loan:
First charge loans are where the loan is the first or only borrowing secured against your property. Mortgages are normally first charge loans.
Second charge loans are where there is already a loan or mortgage listed against the property.
If a property was seized and sold to pay off outstanding loans, a first charge loan would have to be paid first before a second charge loan could be paid back.
Second charge lenders usually need the permission of the first charge lender before they are added. There is no limit to the number of charges that can be listed on a property.
How much can you borrow?
The amount you can borrow depends on the value of the property or land you are using for security. Lenders currently offer loans from just £5,000 up to over £250 million.
Bridging lenders will quote a maximum loan to value (LTV), usually between 65-80%.
First charge loans tend to offer higher LTVs than second charge loans because there is no other claim on your property.
Second charge loans base their LTV on the amount of equity you have after other loans and mortgages are deducted - so the LTVs on offer tend to be lower.
It is a ratio lenders use to set how much money you may be able to borrow using a mortgage or secured loan, including bridging loan.
For example, if you owned a property worth £100,000 and wanted to borrow £75,000 the loan would have a 75% LTV.
How much do they cost?
Bridging loans can be very expensive because they charge both interest and a range of fees.
Bridging lenders charge interest on your loan, but because they usually only last a few weeks or months they charge monthly interest, rather than quoting an annual percentage rate (APR).
Interest is normally charged in one of three ways:
Monthly interest: You pay the interest each month and it is not added to the balance of your loan.
Rolled up or deferred interest: You to pay all of the interest at the end of the term when the original loan is also repaid. No monthly payments are made and the interest is added to the loan each month.
Retained interest: You borrow the interest from the bridging lender when you apply for the loan to cover the monthly interest payments, usually for a set period. You then pay everything back at the end of your term.
Some lenders let you combine these options, for example they may retain the interest for the first six months after which you pay monthly interest.
On top of the interest you will have to pay a set of different fees when you take out a bridging loan, including some or all of the following:
Arrangement or facility fee: The cost of setting up the loan, around 1-2% of the loan.
Exit fees: Around 1% of the loan if you pay it back early; not all lenders charge this fee.
Administration or repayment fees: The cost of the paperwork at the end of your loan.
Legal fees: This pays the lender's legal and solicitor fees, it is usually charged at a set rate.
Valuation fees: This covers the surveyors costs for carrying out a property valuation.
Introducer or broker fees: If you use a broker, this pays for their work finding you a loan.
This is not an exhaustive list and you may be asked to pay other fees.
Bridging loan example
Here is how much it could cost you to borrow £100,000 over one month, six months and twelve months with a monthly interest rate of 0.65%:
|Loan term||1 month||6 months||12 months|
|Total to repay||£102,687||£105,972||£109,914|
Here is how much the same loan would cost if the monthly interest rate was 1.3%:
|Loan term||1 month||6 months||12 months|
|Total to repay||£103,343||£109,908||£117,786|
Where can you get one?
Bridging loans are offered by companies ranging from major international banks to small specialist lenders.
To make things easier you could use a broker to help you find the right bridging loan for your circumstances, but they may charge a fee.
How long does it take?
You will find out if your loan has been approved quite quickly, often within 24 hours.
Once approved, you usually have to wait around two weeks for:
Your property to be valued
Your lender to complete their checks
The money to be transferred
Paying back your loan
Bridging loans are repaid in a single instalment when your funds are available - if you have chosen to defer your interest charges these will also be due at the end of the term.
Closed bridging loans will have a set repayment date in place when you apply. If you choose an open bridging loan you need to arrange the repayment when your funds are ready.
Can you pay it back early?
Yes, but there may be an extra fee to pay if you do. Check with your lender before you decide.
What if you cannot repay the loan?
Speak to your lender straightaway, some may let you extend your term or convert your bridging loan into a second charge mortgage if your exit strategy falls through.
However, you may still be charged an arrears fee and more interest if you are late paying back your loan.
What are your other options?
Bridging loans are a specialised type of lending but some possible alternatives include;
A secured loan: You would need to show that you could afford to repay both your mortgage and the loan, you would also need enough equity in your property to borrow, our guide explains how they work.
Let to buy: If you want to buy a property and the sale of your first property falls through a let to buy mortgage could be worth investigating. They work by letting out your existing home and using the income to pay for a mortgage on a new property.