Think carefully before securing other debts against your home. You home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

What is a bridging loan?

A bridging loan is a secured loan that fills the gap between making a purchase and other funds becoming available.

Because they are secured, you will need to own property, land or another high value asset to be eligible.

They're often used to buy one property while you're waiting wait to sell another.

Bridging loans are often used by landlords and property developers to fund projects. But they're becoming more popular with regular homeowners because the timings of house chains do not always match up.

All personal bridging loans are regulated by the Financial Conduct Authority (FCA). They usually fall under mortgage or loans and consumer credit rules. Some business bridging loans are exempt from regulation.

The pros and cons of bridging loans

  • Fast application process

  • Can borrow large amounts

  • Flexible borrowing

  • High interest rates

  • High fees

  • Secured against your property

What can you use a bridging loan for?

You can use a bridging loan for the following reasons:

  • Buying a property before the sale of yours goes through

  • Property development

  • Buy to let investment, often at auctions where you need a high deposit to secure a property at short notice

  • Business ventures

  • Paying a tax bill

  • Divorce settlement

How do bridging loans work?

There are two types of bridging loan:

  1. Open bridging loans

  2. Closed bridging loans

An open bridge loan has no set end date. You can repay them when your funds become available. They tend to last for up to 1 year, though they can be longer.

A closed bridging loan has a fixed end date. The end date is when you know you'll have the funds 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 the charges for bridging loans?

When you apply for a bridging loan, the lender adds a charge to the property you're using as security.

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.

How much do they cost?

Bridging loans can be very expensive because they charge both interest and a range of fees.

Interest

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:

  1. 1.

    Monthly interest: You pay the interest each month and it is not added to the balance of your loan.

  2. 2.

    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.

  3. 3.

    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.

Fees

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 term1 month6 months12 months
Interest6573,9427,884
Fees*2,0302,0302,030
Total to repay102,687105,972109,914

Here is how much the same loan would cost if the monthly interest rate was 1.3%:

Loan term1 month6 months12 months
Interest1,3137,87815,756
Fees*2,0302,0302,030
Total to repay103,343109,908117,786
* Fees are based on: 1% facility fee, 250 valuation fee, 35 bank transfer fee, 295 Admin fee and 450 legal fee.

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.