Bridging loans explained

Bridging loans can be useful for lots of reasons such as helping you buy a house if your chain breaks down, if you're downsizing but want to buy before you sell, or if you've bought at auction but can’t get the funds ready on time. We explain what bridging loans are, when they are used, pros & cons, costs and how to apply.

Paula Higgins CEO & Founder

What is a bridging loan?

Bridging loans are a way to borrow money in the short term. They can be used to ‘bridge the gap’ if you need to buy one property before selling another. Unlike mortgages, bridging loans can be arranged quickly if speed is important.

However, bridging loans are a secured loan, meaning that you have to secure an asset against them, usually a property or properties. As there is a risk of losing your asset, bridging loans are sometimes known as the loan of last resort.

What can I use a bridging loan for?

Here are some examples of when you may consider using a bridging loan:

• You are in a property chain that has collapsed and you don’t want to lose out on buying your dream home.
• You are buying an auction property and need to raise funds quickly.
• If you want to downsize. By taking out a bridging loan to fund your new purchase, you’ll have longer to sell your current home so you may be able to achieve a higher sale price. It also removes the stress of having to buy and sell at the same time.
• When buying a property that is unmortgageable. Your plan is to make it habitable or lettable so a traditional mortgage can eventually be arranged.
• If you’re buying land, it could help cover the cost of the land and building work of the property while you apply for a mortgage.

Get in touch with specialist brokers Chartwell Funding – 01454 809 300.  Get FREE independent advice, a no obligation quote and instant decision. 

How do bridging loans work?

So, how do bridging loans work? You can typically borrow between £50,000 and £10 million with a bridging loan. The amount depends on how much equity you have available. The maximum loan, including interest, is normally limited to 75% loan to value. The loan is then secured on the property or it can be across multiple properties to raise the required funds. Bridging loans, unlike a mortgage, are not directly linked to your income.

Here’s an example of how bridging loans work:

1. You want to buy a house for £300,000 and you need to put down a £100,000 deposit and borrow the rest on a mortgage.
2. But your current house hasn’t sold yet and you only have £25,000 in savings.
3. You ‘bridge the gap’ by taking out a £75,000 bridging loan for the rest of the deposit.
4. When your current house sells, you use money raised by the sale to pay back your £75,000 bridging loan.

What are the pros and cons of bridging loans? 

Make sure you balance up the pros and cons before you apply for a bridging loan.

Pros of bridging loans

• Speed: You can quickly borrow money, which could keep your property transaction on track.
• Bigger loans: It is possible to borrow very large sums of money.
• Flexibility: The repayment terms can be flexible to fit in with your plans.
• Provide extra options: It may possible to secure lending on properties where high street lenders may not.

Cons of bridging loans

• Secured against property: Bridging loans are a secured form of borrowing, so you’ll need to put up an asset against the loan. This means you risk losing that asset, for example a property, if you can’t repay the bridging loan.
• Higher rates: You pay for the convenience of fast, flexible finance with a higher interest rate.
• Fees: Bridging loans can come with a range of fees that add to their expense.

For FREE advice on bridging loans from our specialist finance partners at Chartwell Funding. Submit an enquiry form now or call them on 01454 809 300. 

Types of bridging loan

There are different types of bridging loans:

First and second charge bridging loans

Because it is a secured loan, when you take out a bridging loan a charge will be placed against your property. If you own the property outright this will be a first charge loan – meaning the lender will be the first to be repaid when the property is sold.

If you have a mortgage or existing loan on the property, that will be the first charge loan and the bridging loan will be a second charge loan. With a second charge bridging loan you will need permission from the first charge lender before you can take out the bridging loan. These are typically more expensive than first charge bridging loans.

Fixed or variable interest

Just like with a mortgage, you can choose to pay fixed or variable rate interest with bridging loans. As you’d expect, with a fixed rate bridging loan you’ll pay a set interest rate for the duration of the term. While with a variable rate bridging loan, the rate you’ll pay may go up or down if the Bank of England raises or cuts interest rates.

Open bridging loans vs closed bridging loans

With open bridging loans, there is no fixed repayment date and as such it can be repaid whenever your funds become available. But bear in mind, lenders usually expect you to clear the debt within one year. However in some cases they may offer longer repayment terms.

Conversely, with closed bridging loans, there is a fixed repayment date. Closed bridging loans are usually cheaper than open bridging loans.

Bridging loan interest rates

Interest rates tend to be higher on bridging loans as you are paying for the privilege of borrowing a lot of money quickly. Because bridging loans tend to be short term, interest is charged daily rather than annually.

There are three ways that the interest on a bridging loan is charged;

• Monthly: Similar to an interest-only mortgage, you’ll pay the interest payments each month and they are not added to the loan.
• Rolled up: Interest payments are added to the loan and paid when the bridging loan is cleared.
• Retained: You borrow the interest upfront for an agreed period and then when the loan is paid back, any unused interest is returned to you.

To get the best bridging loan interest rate, make sure you shop around. And the easiest way to do this is by using a specialist bridging loan broker. We’ve partnered with the experienced team of brokers at Chartwell Funding to bring you free advice when securing your bridging loan.

However, there’s another important benefit of using a bridging loan broker; that’s because unlike standard mortgages, bridging loans interest rates can be negotiated. So by using a good bridging loan broker, you may get a better rate.

For FREE advice on bridging loans from our specialist finance partners at Chartwell Funding. Click here or call them on 01454 809 300. 

How much does a bridging loan cost?  

Alongside the interest rate, there are other bridging loan fees you may have to pay. These include:

• Arrangement fee paid to the lender – typically 2% of the loan and added to the loan.
• Administration fee – can be payable upfront.
• Legal fees – part payable upfront to your conveyancing solicitor and the rest on completion.
• Valuation fees – range from £900 – £2000 depending on the lender and how fast you need the funds.

How to get a bridging loan

If you’re asking how to get a bridging loan in the UK, while you can go straight to a lender, we advise you to speak to a specialist broker. They will research the market for you, plus bridging loan rates can be negotiated so you may get a better rate by going via a broker.

The lender will usually require at least one property to be used as security against the loan. And the lender will also want your exit plan. That is how you will repay the loan and by when.

If you need to take out a traditional residential or Buy to Let mortgage, for instance on the property that has been renovated or the property you are buying, you will need to show the lender proof that the mortgage will be forthcoming. They will undertake affordability checks as standard with normal mortgage lending or look at the rental income you will be generating. This is to satisfy the lender that you will be able to secure a mortgage and you can afford any repayments required on the new loan.

As there are unregulated products on offer, we advise that you go via a specialised broker, such as Chartwell Funding who can scour the market for you and advise you on all bridging loan options.

Get a no obligation quote and instant decision from our partners at Chartwell Funding. Click here or call them on 01454 809 300

Bridging loan example

Here is an example of how a bridging loan works in the UK. So, say you currently own a £600,000 property outright and want to take out a bridging loan for 12 months so that you can downsize to a £400,000 property before selling your current home, how does that work?

Costs

Bridging loan calculator

Use our bridging loan calculator to get a detailed estimate of interest, charges and other costs of your bridging finance and get a quote instantly. How much you can borrow with a bridging loan will depend on the value of your properties and your personal finances. The maximum loan, including any retained or rolled up interest is normally limited to 75% loan to value (this can be over multiple properties).

The bridging loan may also be limited depending on the condition of the property, your credit history, any essential works required at the property or the level of finance available to refinance.

How long does it take to get a bridging loan?

Bridging loans are usually approved quickly. They usually take around 5-21 days to be approved, although in some cases it can happen faster than this.

Who offers bridging loans?

Prior to the 2008 financial crisis, bridging loans were a more common lending product offered by the high street banks such as Nationwide, Halifax and Santander. At this time, bridging loans were used by people not wanting to lose out on their dream home.

However, many stopped offering them after the credit crunch. Currently, only Lloyds Bank offers bridging loans to its private banking customers. Nowadays professional or experienced investors take advantage of this facility.

These days bridging loans tend to be offered by alternative lenders rather than the high street banks such as United Trust Bank, Precise mortgages, MT Finance or some regional building societies.

A bridging loan is specialist finance, and you should seek independent advice as they are considered a loan of last resort. You need to establish if more suitable alternatives are available and specialist brokers (such as Chartwell Funding) are experienced in helping to arrange these loans if and when required.

Get in touch with specialist brokers Chartwell Finding – 01454 809 300.  Get FREE independent advice, a no obligation quote and instant decision.

What information do I need to get the best bridging loan?

When you apply for a bridging loan you’ll be asked questions like how much your property is worth, if you have a mortgage and if so, what the outstanding amount is, how much equity you have in the property and what your monthly income and expenditure are. So save time in the process by pulling this information together.

Your broker will be able to explain to you what additional information you’ll need to provide to complete the process.

What are the alternatives to a bridging loan? 

There are a number of other options you may consider instead of taking out a bridging loan:

• Remortgage: Depending on why you need the money, consider whether remortgaging your house could free up some extra cash. Although, make sure you think this through carefully and consider taking independent financial advice first. Or you may consider taking out a second mortgage on your home.
• Let to Buy: Let to Buy mortgages can help you buy your next house when you haven’t got a buyer for your existing home. It essentially means you’ll have two mortgages. You’ll need a Let to Buy mortgage for your current property and a standard residential mortgage for the property you want to buy. Find out more in our guide Let to buy mortgages explained.
• Secured loan: You could take out a secured homeowner loan. However, as with bridging loans, your home is at risk if you don’t keep up the repayments.  
• Personal loan: If the amount you want to borrow on a bridging loan is relatively small, this may be a cheaper option than a bridging loan.

Frequently Asked Questions