Bridging Loans Explained: When and How to Use Them

Bridging loans are short-term financing solutions that 'bridge' the gap between purchasing a property and securing long-term finance or selling another asset. In the fast-moving property market, bridging finance can be the difference between securing a deal or missing out entirely.

What is a Bridging Loan?

A bridging loan is a short-term secured loan, typically lasting from 1-18 months (though some lenders offer up to 24 months). It's secured against property and designed to provide fast finance when traditional mortgages are too slow or when the property doesn't yet meet standard mortgage criteria.

When to Use Bridging Finance

Bridging loans are particularly useful in several scenarios:

Property Auction Purchases

Auction properties require completion within 28 days - far too quick for traditional mortgages. Bridging finance can be arranged in days, allowing you to bid with confidence.

Chain Breaks

When you've found your perfect property but your sale hasn't completed, a bridging loan lets you proceed without losing the purchase.

Quick Purchases

For properties requiring immediate purchase - perhaps below market value opportunities where speed is essential.

Property Requiring Refurbishment

Properties in poor condition often won't qualify for standard mortgages. Bridge to buy, refurbish, then refinance to a traditional mortgage.

Development or Conversion Projects

Short-term finance while planning permission is secured or light refurbishment completed before refinancing.

Commercial Opportunities

Quick finance for commercial property purchases when arranging a commercial mortgage would take too long.

Types of Bridging Loans

Closed Bridging Loans

You have a fixed repayment date with a confirmed exit strategy - such as an exchange property sale. These typically offer better rates due to lower risk.

Open Bridging Loans

No fixed repayment date, though there's still a maximum term. More flexible but usually more expensive.

First Charge Bridging

The bridging loan is the primary charge on the property - no existing mortgage.

Second Charge Bridging

Taken out behind an existing first charge mortgage. More expensive due to increased lender risk.

How Much Can You Borrow?

Bridging loans typically offer:

• Loan-to-Value (LTV): Up to 75% of property value (some specialist lenders go higher)
• Loan amounts: From £25,000 to £25 million+
• Higher LTV options: Some lenders offer up to 80-85% LTV with additional security

Calculating Your Borrowing

If the property is worth £500,000:

• At 70% LTV: £350,000 available
• At 75% LTV: £375,000 available

Some lenders calculate based on purchase price rather than value - important if buying below market value.

Bridging Loan Costs

Understanding the full cost structure is essential:

Interest Rates

Typically 0.45% - 1.5% per month (roughly 5.4% - 18% annually). Rates depend on:

• LTV ratio
• Loan size
• Property type
• Exit strategy clarity
• Borrower experience
• Market conditions

Arrangement Fees

Usually 1.5% - 2% of the loan amount, though some lenders offer fee-free products (with slightly higher rates).

Exit Fees

Some lenders charge 1% when you repay the loan early.

Additional Costs

• Valuation fees: £500 - £2,000+ depending on property value
• Legal fees: Both your solicitor and the lender's (£1,000 - £3,000)
• Broker fees: If using a broker (often paid by lender commission)
• Administration fees: Varies by lender

Retained Interest

Many lenders retain 6-12 months' interest upfront, even if you repay earlier. This provides the lender security that minimum interest will be paid.

Eligibility Criteria

To secure a bridging loan, you'll need:

Clear Exit Strategy

Lenders must be convinced you can repay. Common exit strategies:

• Sale of the bridged property
• Sale of another property
• Remortgage to long-term finance
• Business sale or liquidation
• Investment funds or inheritance

Adequate Security

Property offered as security must have sufficient value and be acceptable to the lender.

Proof of Funds

Evidence you can cover:

• Deposit required
• Interest payments (if paying monthly)
• Associated costs

Credit History

While more flexible than traditional mortgages, serious credit issues may prevent approval or result in higher rates.

Regulated vs Unregulated

Regulated Bridging Loans

If the property is (or will be) your main residence, the loan is regulated by the Financial Conduct Authority (FCA). This provides additional consumer protection.

Unregulated Bridging Loans

For investment properties, buy-to-let, or commercial property. More flexible lending criteria but fewer regulatory protections.

The Application Process

1. Initial Consultation

Discuss your needs with a bridging finance specialist. Explain your situation, exit strategy, and timeline.

2. Decision in Principle

Good brokers can secure initial approval within hours, subject to valuation and legal work.

3. Valuation

The lender arranges a property valuation, usually completed within 24-48 hours.

4. Legal Process

Solicitors handle legal documentation. With experienced solicitors, this takes 3-7 days.

5. Completion

Funds released - the fastest deals complete in 24-48 hours, though 1-2 weeks is more typical.

Interest Payment Options

Retained Interest

Interest for the expected term is added to the loan and paid on exit. No monthly payments required.

Monthly Payment

Pay interest monthly, like a traditional mortgage. This keeps the loan balance lower.

Rolled-Up Interest

Interest is added to the loan monthly and paid on exit. Useful if you have no rental income or other funds.

Bridging Loan Example

**Scenario**: You're buying a £400,000 auction property requiring £50,000 refurbishment. You plan to refinance to a buy-to-let mortgage after 6 months.

• Property value: £400,000
• Loan required: £280,000 (70% LTV)
• Your deposit: £120,000 + £50,000 refurb costs = £170,000
• Interest rate: 0.75% per month
• Term: 6 months
• Arrangement fee: 2% = £5,600

**Interest**: £280,000 x 0.75% x 6 = £12,600

**Total to repay**: £280,000 + £12,600 = £292,600

**After refurbishment**, property value increases to £550,000. You refinance to a buy-to-let mortgage at 75% LTV = £412,500, easily covering the bridging loan repayment.

Tips for Success

**Have a Realistic Exit**: Your exit strategy must be achievable within the loan term. Build in contingency time.

**Shop Around**: Bridging rates and terms vary significantly. Use an experienced broker who knows the market.

**Understand All Costs**: Factor in all fees, not just interest rates, when comparing offers.

**Plan for Delays**: Things take longer than expected. Ensure you can extend if needed (usually for a fee).

**Professional Advice**: Use experienced solicitors familiar with bridging finance to speed up the process.

Common Pitfalls to Avoid

• Underestimating costs: Include ALL fees in your calculations
• Unrealistic timescales: Property sales and refurbishments take longer than planned
• Inadequate reserves: Ensure you can cover all costs plus contingency
• Wrong lender choice: Different lenders suit different scenarios
• Ignoring exit strategy: Without a clear exit, you risk default and repossession

Alternatives to Consider

Before committing to bridging finance, consider:

• Short-term personal loans: For smaller amounts
• Refurbishment mortgages: Some lenders offer these for light refurbishment
• Development finance: For major works
• Joint ventures: Partner with investors
• Delayed completion: Negotiate longer completion periods with sellers

Conclusion

Bridging loans are powerful financial tools when used correctly. They enable quick property transactions, resolve cash flow problems, and facilitate property investments that would otherwise be impossible.

The key to success is having a realistic exit strategy, understanding all costs, and working with experienced professionals who can guide you through the process efficiently.

Whether you're buying at auction, breaking a property chain, or funding a quick refurbishment, bridging finance can help you move fast and secure opportunities in the competitive property market.