Bridging Loan

What is a bridging loan?

A bridging loan is used to borrow money for a short period. 

It helps ‘bridge the gap’ if you want to buy a new home before selling your old one.  

Bridging is also used for buying property at auction, where you need the money immediately.

How does a bridging work?

There are two types of bridging loan, ‘closed’ and ‘open’.

Closed bridging loans
With a closed loan, there is a fixed repayment date, you will use this if you have exchanged contracts but are waiting for your property sale to complete.

Open bridging loans
With an open loan, there is no fixed repayment date, you will be expected to pay it off usually within one year.

Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage.

Lenders will want to see evidence of the new property you’re purchasing, the price you are paying for it and proof of what you are doing to sell your current property if relevant. 

You also need a back-up plan in place in case your repayment strategy fails.

What are first and second-charge bridging loans?

When you take out a bridging loan, a ‘charge’ will be placed on your property.

This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans.

Both a first and second charge bridging loan take your property as security in case of default. 

If you still have a mortgage on your property, the bridging loan will be a second charge loan.

Meaning that if you failed to meet repayments, your home would be sold to pay off your debts with your mortgage would be paid off first.

How much does a bridging loan cost?

Bridging is priced monthly, rather than annually, because they are normally used for short term lending.

One of the major downsides of a bridging loan is that they are quite expensive: you could face fees of between 0.5% and 1.5% per month. 

That makes them much pricier than a normal residential mortgage.

The equivalent annual percentage rate (APR) on a bridging loan is between 6.1% and 19.6% – far higher than many mortgages. 

There are also set-up fees to consider, usually around 2% of the loan you want to take out.

It is advisable to only take a bridging loan out if you are confident that you won’t need it for a long period of time.

How much can you borrow with a bridging loan?

In cash terms, bridging providers might lend anything between £25,000 and over £25m. But you’ll usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property.

If you are taking out a first-charge loan, you’ll typically be able to borrow more than if you were taking out a second charge loan.

Advantages and disadvantages of a bridging loan

There are a number of advantages when opting for a bridging loan for high-cost transactions:

You’ll receive your money quickly
You can borrow a large amount of money
Flexible borrowing might apply

The drawbacks to bridging loans include:

The loan is secured against your property, so you risk losing ownership if you can’t repay

The high interest rates that come with the loan – this is because you pay for the flexibility and swift payment

You’ll be charged a number of fees so it’s a costly option

What are the alternatives to a bridging loan?

If you want to move but can’t sell, you could also consider a let-to-buy mortgage.  

Remortgage your current home onto a buy-to-let mortgage and use the equity released to buy a new property.

A development loan is also a short-term loan for property developments including refurbishment and construction.  The loan will be based on gross development value which you’ll pay back in stages.

Remortgaging works very similarly to a bridging loan with the key difference that this is a long-term loan, usually between 25 to 35 years and requires a lengthy application process.

A personal loan is always an option if you can borrow sufficient funds for your transaction but you’re likely to pay higher interest rates than you would with a mortgage.

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