Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Bridge loans are an extremely expensive form of credit so you should think carefully before taking one out. You need to have a cast iron plan to pay the money back quickly, or you’ll pay huge amounts of interest.
There are several different types of bridging finance available, depending on your circumstances – so it’s important to know what’s what before you decide.
Read on to learn how bridging loans work, what you might be able to borrow, the differences between the types and a step-by-step guide to getting the finance you need.
Bridging loans are a short-term financial product with high interest rates. Most commonly they are used bridge the gap between buying a new property and selling another asset (usually an existing house) or getting longer term finance like a mortgage.
While they’re expensive, they give you the time sort out your finances without the risk that you’ll miss out on the house you want. They’re also useful for people who are buying at auction, anyone who needs to renovate before moving in and property developers.
The main advantage of a bridging loan is that money is available quickly. They can also help you to break a chain, allowing you to be a cash buyer.
Bridging loans are secured loans, which means you will have to put up another asset as a guarantee. This is most often a property you own but could be something else with value. If you fail to pay back the loan, you could lose your home.
There are several reasons you might want to consider using bridging finance. These include:
Breaking a property chain
Buying an unmortgageable property or land
Paying a tax bill
The amount that lenders are prepared to offer varies wildly, from as little as £5,000 to over £10,000. However, in some cases, bridging loans of over £100 million can be possible.
How much any individual can borrow depends on their personal circumstances.
Lenders will look at several factors including the value of your existing assets, how much equity you have in your current home, your spending, any debts or financial commitments you have and your credit rating.
The most important factor is the value of the property or assets you’re using for security compared to the bridge loan. As a general rule of thumb, lenders will usually allow you borrow up to 75% of the value of your property for a first charge loan.
Bridging loans work like any other secured loan. Typically, you work out how much you need to borrow, compare providers to find the best deal, and then apply. At that stage, you will need to pass eligibility and affordability checks. If you secure a loan, you will pay it back at an agreed rate of interest. Failure to make payments could lead to the assets you used as security being repossessed or sold.
Step one: Working out how much to borrow
Bridging loans are most commonly available between £50,000 and £10 million, but they can be as low as £5,000 or as much as £100 million.
Most lenders will only offer you 75% of the asset that you secure the loan against. This could be your existing home, the house you’re buying, or something else.
For example, you might want to buy a property valued at £400,000, with a deposit of £150,00 and a mortgage on the rest. However, your current property is not yet sold, and you only have £50,000 in savings.
You might use a bridge loan to make up the £100,000 shortfall in deposit. You could secure this on your existing home. When your property is sold you use the money to repay the bridge loan.
To secure this size of loan, you’d need to have at least £134,000 of equity in your current house. That’s because lenders will usually only offer a 75% loan to value.
Step two: Find a loan provider
Next, you need to compare loan providers to find the best deal. Look at our bridging loans comparison, but also consider a broker.
Typically, you’re looking for the best interest rate you can get, but you’ll also want to consider other fees and charges, such as set up fees, exit fees, admin fees, legal fees and valuation fees.
You’ll need to pass eligibility checks and credit checks, however, unlike mortgages, bridging loans are not usually dependent on your income, just the value of the assets you use as collateral. If you’re planning to refinance with a mortgage or are buying a property for buy to let, lenders may consider your income.
Typical eligibility criteria include:
Being over 18 – but some providers will only lend if you’re over 21
Being a UK resident
Credit history – particularly if you’re planning to refinance with a mortgage#
Typical assets you can use as security include:
Existing property – including multiple properties
The property being purchased
High value vehicles
Jewellery and watches
Step three: Pay back the loan
You’ll need an exit plan with a bridging loan. At the end of the term, you’ll need to pay back the money you borrowed plus interest. For instance, when you sell your existing property. Most bridging loans are paid back within a year.
You’ve found your dream house, but it is unmortgageable because it needs renovation.
The property is valued at £250,000 and you have a £100,000 deposit
You apply for a bridge loan of £150,000 so you can buy the property outright at 0.65%.
Once the renovations are completed, you get a mortgage to cover off the bridge loan amount plus interest as well as any fees.
If you had the loan for six months and a 1% arrangement fee, you’d pay £6,005 in interest.
When you get a bridging loan, the lender adds a ‘charge’ to the property that you’re using as security. This charge sets out the priority in which debts are paid if you can’t make payments.
If you own the property you’re putting up as collateral outright, you can get a first charge bridging loan. This means that the bridging loan will be paid first when the property is seized and sold.
If you have a mortgage, you’ll need to get a second charge bridging loan. That means that if the property is sold to pay your debts then the mortgage will be paid off first, followed by the bridging loan.
There’s no limit on how many charges can be listed on a property.
First charge bridging loans can typically be for higher amounts, and will have lower interest rates. Second charge loans are more risky for the lender, so you won’t be able to borrow as much and may be charged more.
Whether a bridging loan is open or closed refers to how it is paid off.
Open bridging loans have no set end date. You can repay them whenever your funds become available. However, there is usually a time limit, for instance a year. Some lenders offer more than a year, so shop around if you think you’ll need more time.
Closed bridging loans have a fixed end date based on when you know you’ll have funds available to pay back what you owe. These are usually for people who need to borrow money on a very short-term basis, such as a few weeks or months.
Open bridging loans are usually more expensive than closed bridging loans. Either way, you’ll need an exit route to pay back what you owe before you apply for the loan.
As with most loans, the interest rates on bridging loans can be fixed or variable.
With a fixed rate, the interest is fixed across the term of the bridge loan. This means all the monthly payments will be the same.
With a variable rate, the interest rate can change. The lender sets the variable rate, usually pegged to another indicator, such as the Bank of England base rate. This means your payments can go up and down.
The most important factors in determining the cost of your bridging loan are how much you borrow and the interest you pay.
Rates typically fall between 0.4% and 2%, but how much you’re offered will depend on your personal circumstance and whether you take out a first or second charge loan.
Aside from interest, other costs you may have to pay include:
Arrangement or facility fee: What you pay for setting up the bridge loan. It’s usually around one to two per cent of the total loan.
Exit fees: This is usually around one per cent of the bridge loan if you pay it back early. Not all lenders charge an exit fee.
Administration or repayment fees: This is what you pay for the paperwork to be completed at the end of your bridging finance.
Legal fees: This pays the lender's legal fees. It’s usually charged at a set rate.
Valuation fees: This pays for the surveyor to value your property.
Introducer or broker fees: If you use a broker, this pays for their work in looking at bridging loans for you and choosing the best product for your circumstances.
There might be other fees too, so bear this in mind before you decide if bridging finance is right for you.
Interest rates on bridging loans tend to be pretty high. They usually range from around 0.4% to 2%. But these can differ depending on the lender you choose and your own credit history.
Use our comparison table to see what’s available. Currently, the best rates are sitting at around 0.5%.
As they are short term, bridging loans most commonly charge monthly interest rates rather than an annual percentage rate (APR).
This means that just a small difference in rates can have a big impact on the overall cost of your bridge loan. For example, a 0.65% monthly interest rate is equivalent to 8.08% APR (taking compound interest into account). A 2% monthly interest rate is equivalent to 26.82% APR.
That’s why it’s important to shop around. A broker may be able to negotiate bridging loan interest rates to get you a better deal.
There are two other main ways that interest can be charged. These are:
Deferred or rolled up – You pay all the interest at the end of your bridge loan. There are no monthly interest payments.
Retained – You borrow the interest for an agreed period, and pay it all back at the end of the bridge loan.
Some lenders let you combine these options. For example, you could choose retained interest for the first six months, and then switch to monthly interest.
Here’s a step-by-step guide on finding the best bridging loans and best bridging finance rates, and then filling out your application.
Decide what you need from your bridge loan. How much do you need to borrow? How long do you need to borrow it for?
Gather the important details about your current situation. How much is your property worth? Do you have a mortgage? How much is your mortgage and how much equity is in your home? Are you using a different asset as collateral? What is that worth? You’ll need all this information to find cheap bridging loans that fit your needs.
Work out your exit plan in detail. If the money is dependent on the sale of a house, work out what you will do if it sells for less than expected, or if it takes a long time to sell.
Use the comparison table at the top of this page to compare bridging loans and find the best bridge loan rates for you.
Decide whether you want to speak to a broker or apply online. A broker may be able to help find the best rates, but you will need to pay their fee. They can negotiate on interest rates, so may still work out as cheaper.
Pick which bridge loan to apply for. Read the small print to find out about all the costs and fees, to ensure that you’re comparing all the costs.
Once you’ve applied, wait to hear whether your application’s approved. This could take 24 hours. Lenders will be checking that your application meets the eligibility criteria. This varies from provider to provider.
If you’re approved, and you accept the loan, the bridge loan money will be transferred to your bank account. This could take up to two weeks.
Once you realise your exit plan, you’ll need to pay back everything you owe.
This is how much it could cost you to borrow £100,000 over 1 month, 6 months and 12 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|
* Fees are based on: 1% arrangement fee, £250 valuation fee, £35 bank transfer fee, £295 Admin fee and £450 legal fee.
Bridging loans are specialist loans in that you use to borrow money for a short time. There are some alternatives to bridging finance, though. These include:
Remortgaging or taking out a second mortgage: Both of these options allow you to release money from your existing home, which could help you access cash quickly. However, think carefully before you do this, and consider specialist advice, as you could end up paying significantly higher interest rates over the long term.
Secured loan: There are other secured loans available that are available over a longer term. You’ll typically pay less interest than with a bridging loan, but you’ll still need an asset as security. If this is your existing home, you could lose it if you don’t keep up with repayments.
Personal loan: Personal loans are unsecured, which means that you don’t have to put your house at risk. However, they’re usually limited to £50,000, which means they’re only suitable if you only needed a very small bridging loan. Interest is charged annually, so this might also work out cheaper.
Credit cards: Again, if you only have a small shortfall, a credit card might be a good alternative. If you can get a 0% percent card, you can bridge the shortfall without paying any interest, as long as you make repayments on time.
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. However, there are risks. For instance, what if you have big gaps between tenants, and can you afford both mortgages if rates rise?
There’s no ‘best bridging loan’ because the right product will depend on your personal circumstances. However, there are some important things to consider before choosing a product.
Start by considering how much you want to borrow. Lenders offer bridging finance from £5,000 up to £10 million and beyond. Once you have a figure in mind, you can see which providers offer loans of that amount and start comparing fees and charges.
Make sure you fully understand how much your property is worth: This affects how much you can borrow and the bridge loan rates you’ll get so you will need an accurate valuation. Check how much is left on your mortgage (if you have one). This affects how much you can borrow through a bridge loan.
Stress test your exit plan. What happens if your existing property doesn’t sell quickly or for the price you’d hoped. While you may be able to borrow up to 75% LTV, borrowing less means you should be able to afford repayments even if house prices fall and you get less than expected. Work out whether you need an open or closed bridging loan depending on your exit plan.
Also think about how long you need to borrow for: bridging loans can be as short as one month, to as long as two years. The length will determine how much you pay in interest, and ideally you want to pay back the money as quickly as possible.
Do lots of research and shop around. You want to get the best interest rate you can, as even small changes can make a huge difference to the price you pay overall. Consider a specialist broker who can help you access the best deals. Don’t forget to compare fees and charges as well as the interest rate.
Only apply for loans you're likely to be eligible for. Getting rejected can impact your credit rating, particularly if you apply for lots of loans in quick succession.
Many lenders will still consider your application for bridging finance even if you have bad credit. But, as you’re seen as a riskier customer, your loan might have a higher interest rate. This will make it more expensive. You’re unlikely to be able to get the very best bridging loan rates if you have bad credit. Check your credit rating before you apply, and think about steps you can take to improve it, if it is low. Some of these are quick, such as putting yourself on the electoral roll.
Usually, it takes about 24 hours to find out if a bridging loan application is successful. After that, money typically takes about two weeks to land in your account.
It depends on your financial situation. They can be a great way to secure a property you love, but they are expensive and there are risks. Use a calculator to find out how much interest you’ll pay, and decide whether it’s worth it to you. Consider alternative options to see if there’s a better way of borrowing.
All loans affect your credit score, but not always negatively. If you pay your bridging loan in full and on time, this will show you’re a reliable borrower and it could improve your rating. If you apply and get rejected for several loans in quick succession, your score may fall. The loan will also impact your affordability assessments for other forms of credit as they usually take other debts into account.