Bridging Loans

Find out what bridging loans are, how they work, how much they cost – and if they’re the right type of loan for you.

What is a bridging loan?

A bridging loan is a short term loan used to help you ‘bridge the gap’ when you want to buy something, but you’re waiting for funds to become available from the sale of something else.

Bridging loans are often used by people who want to buy a new home before selling their current one.

Landlords, homeowners and property investors use them to help with things like:

  • Buying property
  • Property development
  • Investing in buy-to-let opportunities
  • Tax payments

There are two types of bridging loan:

Open bridging loans
This type of loan has no fixed repayment date, and so can be paid whenever your funds become available. However, lenders will normally expect you to clear the debt within one year. Some may offer longer repayment terms, but this isn’t common.

Closed bridging loans
A closed bridging loan has a fixed repayment date. The date will usually be based on when you know you’ll have your funds available (for example when the sale of your house has gone through). This type of loan is usually cheaper than an open bridging loan because there is less flexibility available around repayment.

Whichever type of bridging loan you go for, lenders will want to see details of how you plan to repay it (such as money from a property sale). This is sometimes called an ‘exit plan’.

When you take out a bridging loan, the lender will place a ‘charge’ on your property. This means that if you fail to repay the loan, they’ll take their repayment from the sale of the property.

If you don’t have any other loans already secured on the property (for example you own it outright) then this will be a ‘first charge’ bridging loan. This means that if you failed to repay the loan and your home was sold to pay off the debt, the bridging loan lender would receive their repayment first.

If you already have one or more other loans secured on the property (for example a mortgage) then it will be a ‘second charge’ bridging loan. This means that if you failed to repay the bridging loan and your home was sold to pay off the debt, the bridging loan lender would take their repayment after your mortgage provider had taken theirs.

Second charge loans are usually more expensive than first charge loans (as there’s more chance the second charge lender won’t recover their money if you can’t keep up repayments). A second charge loan will also require the consent of the first charge lender (normally your mortgage provider).

Lenders offer bridging loans from anything between £27,500 to £10m, so the amount you can borrow will depend on your current financial circumstances and your credit history.

Most lenders will allow you to borrow up to 75% of the value of your property. It’s also worth knowing that lenders will generally allow you to borrow more for a first charge bridging loan than a second charge loan.

Due to the short-term nature of bridging loans, they tend to be very expensive compared to other types of loan. Companies will usually charge monthly rather than annual percentage rates (APR) – and these can range from around 0.4% to 2%.

This type of monthly charging means that just a small difference in interest rates can have a big impact on the overall cost of your loan. To put it into perspective: a 1% monthly interest rate is equivalent to 12.7% APR (taking compound interest into account). A 2% monthly interest rate is equivalent to 26.8% APR.

Not all companies charge interest monthly, however. You might also find that your loan payments are deferred or rolled up. This means you don’t pay the interest on your loan until the end of the agreement.

Lastly, don’t forget the set-up fees. When you take a bridging loan, you can expect to pay the following fees:

  • Arrangement fee: Usually around 1-2% of the total loan amount
  • Exit fee: The cost of paying your loan early. Not all companies charge an exit fee, but those who do charge around 1% of the total loan amount
  • Administration/Repayment fees: This is the cost of the paperwork at the end of your loan period. The amount will differ from company to company
  • Legal fees: Companies tend to charge a set amount to cover their legal costs
  • Valuation fees: The cost of sending a surveyor to value your property.

Some lenders may have other fees too, so don’t forget to take these into account when you’re choosing a loan.

There are companies who will still consider lending to you if you have ‘bad credit’, but you will be seen as ‘higher risk’ and so the cost of your loan will probably be higher too.

It’s worth checking your credit report before you apply so you can get an idea of what your current credit history looks like.

A bridging loan is designed specifically for when you need a short-term loan, but it isn’t the only option available. Here are a few others to consider:

  • Remortgage — you could consider remortgaging your current home to free up money. It’s important to think carefully before remortgaging, though. It’s a long-term decision (consider what happens if interest rates change, or your income were to fall). If in any doubt, it’s best to get expert advice from a professional
  • Let-to-buy — this is where you switch your existing mortgage to a buy-to-let mortgage, and use any equity released to purchase a new home. Rather than selling your old home, you rent it out (this is why it’s called ‘let-to-buy’). There are quite a few risks to consider, though. What if you struggle to find tenants? Can you afford two mortgages, especially if interest rates change? Again, it’s best to seek professional advice if in any doubt
  • Secured loan — secured loans let you borrow larger amounts than personal loans (and tend to charge lower interest rates than bridging loans). But as with bridging loans, your home is at risk if you don’t keep up the repayments
  • Personal loan — some lenders offer personal loans of up to £50,000 (though £25,000 is a more common limit). A personal loan could be an alternative if you only need a relatively small bridging loan. Personal loan interest is charged annually, not monthly, so the repayments are likely to be cheaper. These loans aren’t secured against your property either, so your house isn’t at risk of being repossessed

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