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Published 21 March 2023
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11 minutes

Bridging Loans Explained: How do Bridge Loans Work?

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 financial gap whether you’re a landlord or property developer, or simply moving house.

A bridging loan, or bridge loan, could offer a solution if you’re finding it difficult to align funding when buying and selling property.

Read on to find out more about what a bridging loan is, how bridging loans work and whether bridging finance might be right for you. 

What is a bridging loan?

Bridging loans are a type of short-term finance that can help bridge funding gaps, which might occur when buying and selling property. How long a bridging loan can be taken out for depends on the type of bridging finance you need.   

Residential bridging loans, which are taken out against a borrower’s main residence and regulated by the Financial Conduct Authority (FCA), tend to be restricted to a maximum term of one year. However, commercial bridging loans or bridging finance secured against a buy-to-let or investment property you won’t live in are unregulated loans that you might find available for as long as two years. 

What are bridge loans used for?

Bridging loans tend to be popular with landlords, property developers and sometimes individuals who are moving houses. Businesses also use bridging finance to purchase property, or to help improve cash flow or fund expansion in their operations.

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, make some renovations, 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 might also find getting a bridging loan with bad credit easier than getting a mortgage or credit card if your credit is poor.

How does a bridging loan work?

A bridging loan is a type of secured loan. That means 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 are unable to pay off your bridging loan, the lender keeps the asset to recover any money you owe. 

Bridging loans are also interest-only loans, meaning the loan amount borrowed – or the capital – doesn’t need to be repaid until the end of the agreed loan term. You might want to pay the interest you accrue on the loan each month, or alternatively you may be able to either ‘roll up’ or retain the interest to pay off as a lump sum when your loan ends.

Types of bridging loan

Bridging loans work differently depending on whether the loan is 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, fees may apply if you do. 

Closed bridging loans are often used by those who have a clear plan – or exit strategy – 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 compared to other types of bridging loans, as there is deemed to be a lower risk. 

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 exit 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.

What are first and second charge bridging loans?

Since bridging loans are secured loans, a ‘charge’ is placed against your property when taking bridging finance out. The charge is a legal agreement that sets out the order different lenders must be repaid if you don’t pay back your loans. 

If you own the property outright with no mortgage, you’ll take out a first charge bridging loan because the bridging lender is first in line to receive repayments. But if you have an existing mortgage on the property and then take out a bridging loan against it, this will be a second charge bridging loan because the mortgage lender would need to be repaid first and the bridging lender second.  

Are bridging loans regulated?

A bridging loan can be either regulated or unregulated, depending on what it is being used for. 

Any bridging loan taken out on a residential property should be regulated by the FCA. This means the borrower enjoys some protection under the FCA, including if it’s established you’ve received bad advice or been sold an unsuitable product. Lenders must also abide by certain rules, including in relation to how they explain the costs and risks of a bridging loan, and  loans are usually limited to a maximum term of 12 months. 

A bridging loan can be unregulated if it’s taken out in relation to buy-to-let, commercial property or an investment property you intend to refurbish and sell. Unregulated bridging loans aren’t overseen by the FCA and don’t come with as many formal protections as regulated loans. At the same time, an unregulated loan might involve fewer checks and restrictions, including coming with terms of up to two years.    

» MORE: How are bridging loans regulated? 

How much can you borrow with a bridging loan?

The amount available to borrow through a bridging loan might start from as low as £10,000, but for larger infrastructure developments, can potentially go up to hundreds of millions of pounds. 

In terms of how much you might be able to borrow, regulated bridging loans tend to have a maximum loan-to-value (LTV) of 75%. This means if the property the loan is secured against is worth £100,000, the most you could borrow is 75% of that value, so £75,000. 

With an unregulated bridging loan, higher loan-to-values can often be available, including up to 100% LTV in certain circumstances.   

How do you repay a bridging loan?

How you intend to repay a bridging loan is known as your exit strategy. The strength of your exit strategy can also be important in deciding whether you’ll be offered a bridging loan and on what terms. 

There are various exit strategies you might consider, including:

What do bridging loans cost?

Bridging loans often come with relatively high interest rates compared to other forms of borrowing, which means that they can be an expensive way to finance a property purchase. 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. 

However, as bridging loans are a type of interest-only loan, you only repay the interest on the loan each month. This means you don’t have to pay back the amount you borrowed until the end of the loan term, although lenders will want to know you have an exit strategy in place when taking out the loan to make sure this happens.

Interest rates on bridging loans

There are three different ways you can be charged interest on your bridging loan which will impact how much it costs overall. These include:

» MORE: How much do bridging loans cost?

What are the pros and cons of bridging loans?

As with any form of lending, there are benefits to bridging finance but some important drawbacks to consider too.

Advantages 

There are several advantages to using a bridging loan including: 

Disadvantages

Some of the disadvantages of using bridging loans include:

Am I eligible for a bridging loan?

Different lenders usually have different criteria for how they assess the applications they receive for bridging finance.

Broadly, however, most will look at similar overarching criteria, including:

» MORE: What bridging loan criteria do you need to meet?

Who offers bridging loans? 

Bridging loans tend to be available through alternative lenders rather than the more familiar high street banking names. That said, there are still plenty of lender options available if you want a bridging loan. 

How do I get a bridging loan?

You might be able to apply to a bridging lender directly or you may need to approach them through a specialised broker. 

The potential advantages of applying through a broker include the support they can provide in helping you work out the product best suited to your needs, and during the application process. Through their experience, they might also know which lenders are most likely to approve your application. 

What are the alternatives to a bridging loan? 

Before committing to a bridging loan, it’s sensible to explore the other options that might be available as well. 

Typically, these might include an unsecured loan or a different type of secured loan, such as a second charge mortgage. Other alternatives might include remortgaging, or a commercial mortgage or more specific business funding options, depending on whether your need for a loan is for residential or commercial reasons.

» MORE: Alternatives to bridging loans 

Image source: Getty Images

WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.Always check whether a bridging loan is regulated or not. To protect consumers, bridging loans on residential properties must be regulated by the Financial Conduct Authority. Bridging loans on buy-to-let, commercial and investment properties can be unregulated.

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