What Is A Bridging Loan?
A bridging loan can act as a bridge between the sale of one property and the purchasing of another. It is a short-term option that helps bridge a gap, for example, when buying a new house before selling your old one.
Bridging loans are a type of finance that can help you ‘bridge the gap’ between buying a property before selling another.
There are two main types of bridging loan, residential bridging loans, which are regulated by the Financial Conduct Authority (FCA) and commercial bridging loans which are unregulated. Generally it’s more common for bridging loans to be used by businesses or investment professionals.
Read on to find out how each type of bridging loan works and whether they’re right for you.
What is a bridging loan?
A bridging loan is a type of property loan that is taken out over a short period. It can range from just a couple of months to a year. This type of flexible financing is popular with landlords, property developers and sometimes individuals who are moving house.
As the name suggests, the loan is there to act as a bridge before you move on to a more long-term solution. It might be that you want to buy an investment property at auction, do it up, and then sell it for a profit.
Or, it might be that you have found your dream home and agreed on a completion date, but haven’t yet completed the sale of your current property. A bridging loan can help you bridge that gap.
You can get a bridging loan for a wide range of values too, from tens of thousands of pounds for residential property purchases to millions for larger infrastructure developments.
Some lenders will also offer bridging loans to those with bad credit in certain circumstances.
How does a bridging loan work?
Bridging loans work differently depending on which type you choose: open or closed.
Closed bridging loan
A closed bridging loan has an actual date set in stone for when it needs to be paid off, although it’s also possible to pay off this type of bridging loan early, though fees may apply if you do.
Closed bridging loans are often used by those who have a clear plan of how and when they will be able to repay the loan as they have more certainty over when funds will become available. For this reason, interest rates are often lower, as there is deemed to be a lower risk compared to other types of bridging loan.
So, if you are just looking to bridge between buying a new property and the sale of your current one – and have completion dates already set for both – then a closed bridging loan may be worth considering.
Open bridging loan
An open bridging loan will still have a maximum term, of, say, six to 12 months, but you can pay the loan back at any point, or even piecemeal, during that period. An open bridging loan is often used by people who don’t have a clear strategy with a concrete timeline of how they will repay the loan, hence it is more flexible and ‘open’, usually with higher interest rates as well.
If you’re buying an investment property and plan to remortgage after carrying out some refurbishments, then you might prefer the flexibility that comes with an open bridging loan since you don’t know exactly when that work will be finished.
How much does a bridging loan cost?
Bridging loans are a type of interest-only loan. This means that you only repay the interest on the loan each month. You don’t have to pay back the amount you borrowed until the end of the loan term.
They often come with relatively high interest rates compared to other forms of borrowing which means that they can be an expensive long term solution for financing a property purchase.
There are three different ways you can be charged interest on your bridging loan, which will impact how much it costs overall. These include:
- Monthly interest: Where you make monthly payments towards the interest charged on your loan. It’s quite similar to an interest-only mortgage.
- Deferred or ‘rolled up’ interest: This is where payments are deferred ‒ or put off ‒ until the end of the loan. This means that you won’t have to pay monthly interest payments. Instead, the interest is ‘rolled up’ or compounded and paid as a lump sum at the end of the loan term.
- Retained interest: Here, the lender works out what the interest charges will be for the whole life of the loan from the very beginning, and then adds that to what you actually need to borrow. For example, you might need £100,000 and the lender calculates that over a six-month term you’ll build up interest charges of £10,000 so you’ll have to borrow £110,000 in order to get the £100,000 you need, and pay the lot off in full at the end of the loan.
On top of interest, lenders also charge a range of fees, such as arrangement fees, valuation fees and even exit fees if you pay the loan off early.
How to get a bridging loan
There are dozens of different lenders active in the UK who offer bridging loans, whether you’re looking to use one for your home, for business premises, or for an investment property.
Importantly some of these lenders – particularly those who focus most of their efforts on short-term property loans like bridging loans – only offer their products through independent mortgage advisers.
Mortgage advisers can help you work out the product best suited to your needs and which lender is most likely to approve your application, though you will likely have to pay for that advice.
» COMPARE: Bridging loans from UK lenders
Is a bridging loan secured?
Yes, a bridging loan is a type of secured loan. That means that you’ll need to use a physical asset, such as a house, as collateral to borrow money in case you can’t repay your loan.
If you aren’t able to pay off your bridging loan, the lender keeps the asset to recover any money you owe.
Pros and cons of bridging loans
There are several advantages to using a bridging loan including:
- Flexibility: Typically, lenders have more flexible lending criteria for bridging loans compared to traditional loans, which could improve your chances of being accepted for one.
- Quick to arrange: Bridging loans tend to be arranged more quickly than other forms of borrowing, and some lenders pay out within 48 hours of approving your application.
- Borrow large sums: You can often borrow a large amount of money using a bridging loan.
- Non-standard properties: Some lenders offer bridging loans for non-standard properties, such as thatched properties or homes with flat roofs, which aren’t always accepted by high street providers.
Some of the disadvantages of using bridging loans to look out for include:
- Fees: Lenders often charge a range of administrative fees, which can make borrowing money through a bridging loan more expensive.
- Secured loan: You may lose an asset if you’re not able to repay your bridging loan.
- High interest: Bridging loans are designed for short-term borrowing, which means that the interest rates tend to be more expensive.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more