What is a bridging loan?

A bridging loan is a short-term financing option designed to ‘bridge’ the gap between a pressing financial need and a more permanent funding solution. Essentially, it provides quick access to capital when time is of the essence, allowing borrowers to secure funds rapidly, typically within a matter of days or weeks.

Key characteristics and features of bridging loans include:

How does a bridging loan work?

Bridging loans are designed to be short-term solutions, with most lenders offering terms between 1 to 18 months. However, the exact duration can be flexible depending on the borrower’s needs and the lender’s policies. The key is to have a clear ‘exit strategy’ — a plan for repaying the loan at the end of the term.

The process of obtaining and using a bridging loan typically follows these steps:

The choice of repayment structure often depends on the borrower’s cash flow situation and the purpose of the loan. For instance, a property developer renovating a house might prefer to roll up the interest, paying everything back when the property is sold.

Repayment terms can vary, but often include options such as:

Understanding these basics of bridging loans sets the foundation for exploring their various uses and types, which we’ll cover in the following sections. 

What can I use a bridging loan for?

Bridging loans are incredibly versatile financial tools that can help you in various situations. Let’s explore some common uses for these short-term loans:

Property purchases & refurbishments

When you spot a fixer-upper with loads of potential, a bridging loan can help you snap it up quickly. This type of finance allows you to buy the property and fund necessary renovations before selling it on or refinancing with a traditional mortgage.

Auction purchases

Fancy nabbing a bargain at a property auction? Bridging finance is perfect for this. You’ll typically need to pay for your auction purchase within 28 days, which is often too quick for a standard mortgage. A bridge loan can help you secure the property fast.

Fixing a property chain break

If you’re stuck in a property chain and your buyer pulls out, a bridging loan could save the day. It lets you buy your new home before selling your current one, preventing the whole chain from collapsing.

Buying a property to flip

Property developers often use bridging loans to buy, renovate, and sell properties quickly. This short-term loan covers the purchase and refurbishment costs, and you repay it when you sell the property.

Buying a property to convert

Planning to turn a commercial building into flats? A bridging loan can fund the purchase and conversion costs. Once the work’s done, you can refinance with a buy-to-let mortgage or sell the property to repay the loan.

Buying a property to rent out

Bridging finance can help landlords expand their portfolio quickly. Use it to buy a property that needs work before it can be rented out. Once it’s ready for tenants, switch to a buy-to-let mortgage.

Buying an unmortgageable property

Some properties don’t qualify for standard mortgages due to their condition. A bridging loan allows you to buy and renovate these properties, making them mortgageable in the future.

Buying a property with a short lease

Properties with short leases can be tricky to mortgage. A bridging loan gives you time to extend the lease, after which you can refinance with a standard mortgage.

Buying land

Fancy building your dream home? Use a bridging loan to buy the land and fund the initial construction costs. Once the property is habitable, you can switch to a regular mortgage.

Downsizing your property

If you’re moving to a smaller, cheaper home but haven’t sold your current property, a bridging loan can help. It allows you to buy your new home while you wait for your old one to sell.

Paying care fees

When a loved one needs to move into a care home quickly, a bridging loan secured against their property can cover the initial fees while you arrange the sale of their home.

Non-property purposes

While bridging loans are often secured against property, they’re not just for property transactions. Businesses might use them for short-term cash flow issues, to fund a time-sensitive opportunity, or to cover unexpected costs.

Remember, bridging loans are secured loans, often against property. This means your home or other assets could be at risk if you can’t repay the loan. Always consult a qualified bridging loan broker to ensure this type of finance is right for your situation.

Whether you’re looking to buy a new home, start a property development project, or need quick funds for your business, a bridging loan could be the financial bridge you need to reach your goals.

What are the types of bridging loans?

Bridging loans come in various forms to suit different needs. Let’s explore the main types you might encounter:

Residential bridging loans

These are perfect when you’re buying a new home before selling your current one. They’re often regulated by the Financial Conduct Authority, offering extra protection for borrowers. You might use this to break a property chain or snap up your dream home quickly.

Commercial bridging loans

Businesses often turn to these loans for short-term finance. They’re great for buying commercial property, like shops or offices. The loan amount is usually secured against the property you’re buying.

Closed bridging loans

With a closed bridging loan, you have a fixed repayment date in mind. This type is ideal when you know exactly when you’ll receive funds to repay the loan, such as from the sale of another property. Lenders often offer better interest rates for closed bridging loans due to the reduced risk.

Land bridging loans

Fancy buying a plot to build your dream home? Land bridging loans can help. They’re typically used to purchase land before you get planning permission or start construction.

Fast bridging loans

When time is of the essence, fast bridging loans come to the rescue. Some lenders can approve and release funds in as little as 24 hours. They’re perfect for auction purchases or time-sensitive business deals.

Auction finance

Speaking of auctions, this specialised bridging loan helps you buy property at auction. Since you usually need to complete within 28 days, traditional mortgages often won’t cut it.

Property refurbishment loans

These loans are ideal if you’re buying a fixer-upper. They cover both the purchase price and renovation costs. Once you’ve spruced up the property, you can sell it on or refinance with a traditional mortgage.

Second charge bridging loans

If you already have a mortgage, a second charge bridging loan lets you borrow against your property’s equity. It’s a bit like a second mortgage, but with a shorter term.

Rebridging loans

Sometimes, you might need to extend or replace an existing bridging loan. That’s where rebridging comes in. It’s a way to buy more time if your exit strategy hasn’t panned out as planned.

Large bridge loans

Need to borrow a hefty sum? Large bridge loans cater to significant property purchases or development projects. They often come with bespoke terms to suit your specific needs.

Farm finance

Farmers and landowners can use bridging loans too. They’re handy for buying additional land, funding diversification projects, or managing cash flow between harvests.

Business finance

Bridging loans aren’t just for property. Businesses can use them for various short-term needs, like managing cash flow gaps or funding time-sensitive opportunities.

Tax bridging loans

Got a hefty tax bill looming? Tax bridging loans can help you spread the cost. They’re often used by businesses or high-net-worth individuals facing large, unexpected tax demands.

How much can I borrow with a bridging loan?

Wondering how much you can borrow with a bridging loan? Let’s dive into the factors that affect your borrowing power and some savvy tips to boost it.

Factors that influence borrowing limits

Tips to maximise borrowing capacity

How much does a bridging loan cost?

Thinking about getting a bridging loan? It’s crucial to understand the costs involved. Let’s break down the different expenses you might encounter when taking out a bridging loan in the UK.

Bridging loan interest rates

Interest rates for bridging loans are typically higher than traditional mortgages. They’re usually charged monthly and can range from 0.5% to 1.5% per month. Here’s how you might pay this interest:

Bridging loan fees

On top of interest, there are several fees to consider:

How long does it take to arrange a bridging loan?

Typical timelines

Generally, you can expect to have a bridging loan in place within 1 to 4 weeks. Some lenders even boast about completing the process in as little as 3 days! Remember, a bridging loan is a short-term loan, so lenders are often geared up for speed.

Here’s a rough timeline:

Factors affecting speed

Several things can impact how quickly you can arrange your loan:

Tips for quick turnaround

Want to fast-track your bridging loan? Here are some top tips:

What are ‘First Charge’ and ‘Second Charge’ bridging loans?

First charge bridging loans

When you get a bridging loan on a property with no existing mortgage, it becomes a ‘first charge’ bridging loan. This means the bridging loan lender has first dibs on the property if you can’t repay your loan. It’s like being first in line at a buffet – you get the best pickings!

Second charge bridging loans

If you already have a mortgage (the first charge) and take out a bridging loan, it becomes a ‘second charge’ bridging loan. The bridging loan provider is second in line if things go pear-shaped. It’s riskier for them, so these loans often come with higher interest rates.

Differences and implications for borrowers

Property types & their LTVs

When you’re looking to get a bridging loan, one crucial factor to consider is the Loan-to-Value (LTV) ratio. This number tells you how much you can borrow compared to the property’s value. Let’s dive into the LTVs for different property types.

LTVs for residential property bridging loans

Residential properties often enjoy the highest LTVs. Why? Because they’re seen as less risky by bridging loan lenders. You might snag an LTV of up to 75-80% for a standard residential property. Some lenders even offer up to 85% LTV if you’ve got a strong exit strategy to repay your loan.

Remember, a bridging loan is a short-term loan, typically lasting up to 24 months. So, having a solid plan to repay the loan at the end of the loan term is crucial.

LTVs for mixed-use (semi-commercial) property bridging loans

Mixed-use properties, like a shop with a flat above, usually fetch LTVs around 65-75%. These properties are a bit trickier for lenders to value, which explains the slightly lower LTV compared to purely residential properties.

If you’re eyeing this type of bridging loan, it’s worth using a bridging loan calculator to crunch the numbers. Don’t forget, bridging loans are secured against property, so it’s important to understand the risks.

LTVs for commercial property bridging loans

Commercial properties typically come with lower LTVs, usually around 60-70%. Why the dip? Well, commercial properties can be harder to sell quickly if things go pear-shaped.

Bridging loans for commercial properties are often unregulated bridging loans. This means they might come with higher interest rates but could offer more flexibility.

LTVs for land with planning

Got your eye on a plot with planning permission? You might be looking at LTVs of 60-75%. The exact figure will depend on the location and the details of the planning permission.

Remember, bridging loans can be arranged quickly for land purchases, making them a popular choice for developers who need to move fast.

LTVs for land without planning

Land without planning permission is the riskiest bet for lenders. As a result, LTVs here are typically the lowest, often around 50-60%. Some specialist lenders that offer bridging loans might go higher, but expect to pay a premium in interest rates.

How do I apply for a bridging loan?

Thinking about getting a bridging loan? Let’s walk through the process step-by-step. Remember, bridging loans are typically short-term solutions, so it’s crucial to understand how they work before you dive in.

Step 1: Initial consultation call

First up, you’ll chat with a bridging loan broker or lender. They’ll ask about your plans and explain how bridging loans work. This is your chance to compare bridging options and find out if you’re eligible for a bridging loan.

During this call, discuss whether you need a closed bridging loan or an open bridging loan. Don’t forget to mention if you’re after a first charge loan or a second charge bridging loan.

Step 2: Application

Ready to move forward? Time to fill out the application. You’ll need to provide details about the property, how much you want to borrow, and your exit strategy (that’s how you’ll repay the loan).

If you’re using a bridging loan broker, they’ll help you find the best bridging loan for your needs. They might use a bridging loan calculator to show you different scenarios.

Step 3: Decision in principle

If your application looks good, the lender will give you a Decision in Principle (DIP). This isn’t a guarantee, but it’s a good sign! The DIP will outline the loan amount, bridging loan interest rates, and other key terms.

Remember, bridging loans are secured against property, so the loan amount will depend on the property value and the lender’s maximum LTV.

Step 4: Valuation & legal work

Next, the lender will arrange a property valuation. They’ll also start the legal work. This is where things can slow down a bit, but don’t worry – bridging loans can be arranged quickly compared to traditional mortgages.

If you’re getting an unregulated bridging loan, like for a commercial property, the process might be a bit different.

Step 5: Payout

Once everything checks out, it’s time to get your money! The lender will release the funds, usually to your solicitor. This is when you’ll start paying interest on the loan.

Some lenders offer the option to roll up the interest and add it to the loan, which can be helpful if you’re short on cash flow.

Step 6: Exit

Remember, a bridging loan is a short-term loan, often lasting up to 24 months. When the loan term ends, it’s time to repay your bridging loan.

Your exit strategy might involve selling the property, refinancing to a traditional mortgage, or using funds from another source. Whatever your plan, make sure you stick to it to avoid any nasty surprises at the end of the loan term.

Throughout this process, keep in mind that bridging loans are typically more expensive than traditional mortgages. Use our bridging loan calculator to understand the full bridging loan cost, including interest and fees.

Bridging Loan Criteria & Your Eligibility

Wondering if you can get a bridging loan? Let’s dive into the criteria and explore your options.

Non-status & bad credit bridging loans

Good news! Bridging loans are often more flexible than traditional mortgages when it comes to credit scores. Lenders are more interested in your exit strategy – that’s how you’ll repay the loan – than your credit history.

If you’ve got bad credit, don’t despair. Many bridging loan providers offer non-status loans. These focus on the property’s value rather than your financial status. However, keep in mind that interest rates might be higher.

Is proof of income required for a bridging loan?

Here’s a pleasant surprise: many bridging lenders don’t require proof of income. Why? Because they’re more concerned with your exit strategy and the property’s value.

However, if your plan to repay involves refinancing to a mortgage, you might need to show proof of income. It’s always best to chat with a bridging loan broker to understand what you’ll need.

What’s the difference between a regulated bridging loan and an unregulated one?

The main difference lies in who’s taking out the loan and why. Let’s break it down:

What is Unregulated bridging loans

These are typically for business purposes or for properties you won’t live in. They offer more flexibility but less protection. Unregulated loans are often used for:

What is regulated bridging loans

These loans are supervised by the Financial Conduct Authority (FCA). They’re for properties you or your family will live in. Regulated loans offer more consumer protection but might have stricter criteria.

Open and closed bridging loans explained

Bridging loans come in two flavours: open and closed. Let’s explore the differences:

What are open bridging loans

Suitable scenarios:

What are closed bridging loans

Suitable scenarios:

Remember, whether you choose an open or closed bridging loan, it’s crucial to have a solid exit strategy. These loans are short-term solutions, typically lasting up to 24 months.

What alternatives are there to a bridging loan?

While bridging loans are fantastic for many situations, there are many alternatives to bridging loans. Let’s explore some:

Remember, each option has its pros and cons. It’s worth chatting with a financial advisor to find the best fit for your situation.

Final thoughts on bridging loans

Bridging loans can be a real lifesaver when you’re in a pinch, offering quick access to funds for property purchases or renovations. They’re like a financial stepping stone, helping you cross from one opportunity to another.

Here’s the lowdown on what we’ve covered:

If you’re thinking about taking the plunge, here’s some food for thought:

First off, shop around. Each lender has its own quirks and specialties, so don’t settle for the first offer you get. Take a good, hard look at your finances and make sure you can handle the repayments. Remember, these loans are short-term for a reason!

It’s also worth chatting with a financial advisor or mortgage broker. They can help you navigate the choppy waters of bridging finance and might even sniff out deals you’d miss on your own.

Lastly, always read the fine print. Some lenders might hide sneaky fees in the small text, so keep your eyes peeled.

Bridging loans can be a brilliant tool when used wisely. Just make sure you’ve done your homework before diving in. With the right lender and a solid plan, you could be bridging your way to success in no time!