Bridging loans are short-term, secured loans which is used to ‘bridge the gap’, or provide funding while waiting for another event to occur. Bridging loans, also known as bridging finance, are secured against property, with interest charged monthly until the loan is repaid. The interest rate charged is based on the security property, loan to value and your circumstances. The best bridging finance deals are usually offered for loans against residential property at 50% loan to value (LTV) or below.
Bridging loan interest rates define how much interest you will pay on your loan. Interest is by far the biggest cost when taking out a bridging loan, so securing the best possible interest rate is key. Working out how much a bridging loan could cost you is best handled through a bridging loan calculator or our bridging loan comparison tool.
Bridge loans are often used to fund a quick property purchase while waiting for another property to sell or allow an individual to borrow money for an emergency.
Key product features
|Max LTV||Up to 85%|
|Interest rate||From 0.39% per month|
|Charge types||1st, 2nd & 3rd considered|
|Term||1-36 months (maximum 12 months for regulated loans)|
|Interest type||Added to the loan, deducted or serviced|
|Completion timescale||5 days – 3 weeks|
- Residential, commercial property or land acceptable
- Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
- Minimum applicant age 18 years – no maximum age
- Available in England, Scotland, Wales and Northern Ireland
- Adverse credit accepted (on a case by case basis)
What is the definition of a Bridge Loan in Finance?
A bridge loan is a type of short-term loan which is arranged for 1-18 months and is used to provide a fast cash injection while waiting for other funds. These loans were first offered in the 1960s by large banks and building societies to fund property purchases before the borrower’s existing property was sold. They’re now a very popular form of finance and are offered by a wide range of specialist lenders such as Together Money, United Trust Bank and Shawbrook Bank.
The bridging loan market has grown to become a £4.8bn industry as of 2021, and is continuing to grow. While this is a large number, the market is still quite niche compared to the mortgage market which is currently a £1,613bn market.
What is a bridging loan example?
A client has an opportunity to profit from property investment through the purchase of a property in need of refurbishment. They agree to purchase the property for £200,000, will spend £20,000 on a full internal refurbishment and will sell it for £260,000 within 12 months.
In this scenario, the client would like to put down a deposit of £75,000 and would like to borrow £125,000. The lender offers the following terms:
- Interest rate – 0.45% per month (£562.50 per month)
- Arrangement fee – 2% of the loan amount (£2,500)
- There are no exit fees for this product.
The client agrees to these terms, purchases the property and completes the refurbishment. They then sell the property after 9 months for £260,000 and repay the lender.
The total cost to the client is as follows:
- Interest charges – £562.50×9 = £5,062.50
- Arrangement fee – £2,500
- Amount borrowed – £125,000
The total to be repaid is £132,562.50, meaning the total cost of borrowing is £7,562.50, and the client is left with a profit of £32,437.50.
How do bridging loans work?
Bridging loans allow you to borrow funds quickly and are paid to you as a lump sum for a property purchase or refinance. Once your loan has been arranged, your interest charges are usually ‘rolled up’ into the loan, leaving you with no monthly payments to make. At the end of the loan term, the loan is repaid in full, along with any interest and outstanding charges and the legal charge is removed from your property.
Repayment of a bridging loan is usually funded through the sale of your property or by taking out a remortgage. Your plan for repaying the loan is known as your exit strategy.
Loan to value (LTV) and equity are key to securing bridging finance, with lenders focussing on these two points to assess new loans. Most lenders are happy to offer a maximum of 75% of the property value, although some will extend this to 80% for unregulated bridging loans. To calculate your loan to value, simply multiply the property value by the maximum loan to value available for your chosen product, or use our bridging loan comparison tool.
Are Bridging Loans a replacement for a Mortgage?
Yes, bridging loans are a replacement for a mortgage. They are a short-term alternative that is used when a mortgage wouldn’t be available. This can be because the property isn’t mortgageable, you need the funds quickly or you have a short-term financial gap that needs to be filled, for example using a bridging loan for a house purchase before your existing one sells.
Is Property Investment the main reason for Loan Bridging?
Yes, property investment is the main reason for taking out a bridging loan. This is true whether you’re financing an investment property or your own home. This is because bridging loans allow you to secure a property quickly and add value through property refurbishment where it is needed.
What are the Loan Bridging Rates?
Below is a breakdown of the best bridging loan rates from reputable lenders:
|Bridging Loan Rates From||Bridging Loan Terms||Bridging Loan Lender|
|0.39% per month||1-24 months||Aspen Bridging|
|0.4% per month||1-18 months||Shawbrook Bank|
|0.45% per month||1-36 months||Octopus|
|0.47% per month||1-18 months||Precise Bridging|
|0.48% per month||1-18 months||United Trust Bank|
|0.49% per month||1-12 months||LendInvest|
|0.499% per month||1-18 months||Ortus Bridging|
|0.54% per month||1-12 months||Together Money|
|0.55% per month||3-18 months||Glenhawk|
|0.59% per month||3-24 months||MFS Bridging|
What are the terms for bridging loans?
Bridging loan terms are between 1-36 months, with each lender having its own limits. Short-term bridging loans are those that run from 1-12 months. Loans over 12 months are considered to be long-term loans. As the interest rates charged on bridging loans are higher than mortgages, it’s usually advisable to take a bridging loan for short-term needs only, repaying them as soon as your exit strategy is available.
What should I use Bridge Loan for?
Bridging loans can be used for the following reasons:
- To fund a property purchase or refinance quickly.
- Buying property at auction.
- To finance an uninhabitable property.
- To purchase an unmortgageable property.
- Buying a property before selling your existing property.
- To fund a business venture or tax bill.
- To buy a below market value property without putting down a deposit.
- To fund a property refurbishment.
- To buy a property or land while undertaking an application for planning permission.
How can I Use Bridge Loan for Home Renovation?
To use a bridge loan for property refurbishment, the borrower should understand the current property value, the refurbishment work that will be undertaken, its cost and the property value once the work is complete. The bridging loan will allow the borrower to increase the property value before refinancing or selling the property. Compared to using a mortgage, bridging finance is far more flexible and may even allow you to borrow the renovation costs.
To secure a bridging loan for property refurbishment, your exit strategy is crucial to the success of your application. Each lender will want to ensure that the loan can be repaid safely and will ask for proof of your exit strategy. If your loan to value and exit strategy are acceptable, your application has a good chance of success.
How can I Use Bridge Loan for Buying Land
To use a bridging loan to buy land, the borrower would need to be clear on why the land is being purchased and the future plans for the site. Land is a less liquid asset than property, especially if it doesn’t have planning permission, so the exit strategy is the most important element of the application.
Land bridging loans are usually restricted to a maximum of 60% loan to value (LTV). This is lower than bridging finance for residential or commercial property, which can be up to 75-80% LTV.
How can I Use Bridge Loan for Buying a Home?
To use a bridging loan to buy a home, the borrower will need to be clear on why the bridging loan is needed and how it will be repaid. In this situation, a bridging loan is used as an alternative to a mortgage, usually when funds are needed quickly or the property will be refurbished.
When using a bridging loan to buy a home, the lender will want to check your credit history, see proof of your exit strategy and a valuation of the property.
How can I Use Bridge Loan for Founding a Business?
To use a bridging loan when founding a business, the borrower can use the funds to purchase their business premises. While a commercial mortgage would usually be used to do this, it’s often very difficult to secure funds for start-up businesses. Purchasing your business premises rather than renting, can give a strong base for your business and may provide more flexibility around modifying the property to suit your business’s needs. To secure a bridging loan to start a business, the lender will require a large deposit, usually around 45-50% of the property value and detailed financial projections for the business. This is to ensure that the loan will be affordable and can be repaid at the end of the loan term.
What are the Types of Bridging Loans?
The main types of bridging loans are the following:
- Closed bridging loans
- Open bridging loans
- First charge bridging loans
- Second charge bridging loans
We describe each of these in detail below.
1. Closed Bridging Loan
A closed bridging loan is one that has a clear exit strategy defined from the outset, meaning the lender is clear on how you will repay the loan. A closed bridging loan gives the lender added comfort that the loan will be repaid on time and as such, they can offer a lower rate due to the increased security. As closed bridging loans have a set term, the interest can usually be added to the loan, meaning there are no monthly repayments to make.
2. Open Bridging Loan
Open bridging loans have no defined exit strategy and usually have an open-ended, or very long term. As these loans have no defined exit date, they usually don’t allow rolled-up interest. Although open bridging loans are more flexible, they don’t offer the lender as much security around the exit, and as such usually come with a higher interest rate.
3. First Charge Bridging Loan
A first charge bridging loan is a bridging loan that is secured by way of a first legal charge over your property. This means that there is no other debt outstanding on the property, such as a mortgage. When taking out a first charge bridge loan against your own home, your loan will be FCA regulated. FCA regulated bridging loans come with more protection for the borrower, but this comes at a cost of slightly reduced flexibility.
First charge bridging loan rates are usually lower than those offered on second or third charge loans.
4. Second Charge Bridging Loan
A second charge bridging loan is one that is secured against a property that already has a loan or mortgage secured against it. Second charge bridging loans usually require consent from the 1st charge lender, although this can be avoided through use of an equitable charge.
The rates charged on second charge loans are usually higher than first charge loans. That said it may still work out cheaper if it allows you to retain a first charge loan at a very low rate.
How to Compare Bridge Loans to Each Other
To compare bridging loans with each other you should consider the total cost of each product, rather than just the interest rate. This allows you to ensure that you’re getting the best possible deal, rather than being taken in by a low headline rate.
Other key factors to compare are the following:
- Maximum loan to value
- Set-up costs and exit fees
- The lender’s application process
- How quickly the lender can complete your application
- Late payment fees, default interest charges and extension fees
- The type of security that the lender requires
- The reputation of the lender
What are the Advantages of Bridging a Loan?
The advantages of a bridging loan are:
- Speed – They can be arranged very quickly; you can get a bridging loan in 5 days-2 weeks. Some even complete on the day of application, far faster than most alternatives to bridging loans.
- The costs are falling – The bridge loan market is currently in a price war. Rates realistically start from 0.4%, with 0.37% available for select applications. The main drawback has historically been cost, although this is now becoming an advantage.
- Flexibility – bridging finance is far more flexible than mortgages and secured loans.
- No monthly payments – Where interest is rolled up or deducted, there are no monthly payments to make. This can be a major help to cashflow during a property refurbishment or marketing period.
- Bridging loans allow lending against unmortgageable properties – Bridging loans can be used to buy a property that you would otherwise be unable to borrow against.
What are the Disadvantages of Bridging a Loan?
The disadvantages of bridging loans are:
- They add cost to a property transaction – No matter how cheap your loan bridging loan is, it will still cost something. This will add a cost to your property transaction that must be considered.
- Fees and charges – Comparing quotes from lenders or brokers can be difficult. On top of the lender arrangement fee and interest payments, some lenders will charge additional ‘fund management’, ‘application’, ‘inspection’ or other fees. These can add up and mean that the lowest rate isn’t always the best option. You must consider all the costs to calculate the total cost rather than just the headline figures when comparing bridging loans. As a leading bridging loan broker, we’ll happily assess this for you.
- Problems with exit route – If you have problems with your method of repaying, this can cause major issues as the end of the loan approaches. If you are unable to repay the loan at the end of the term, you will have to refinance or pay the interest charges monthly. Although there is no guarantee your lender would allow you to do either, failure to do so can put your property and credit history at serious risk.
How do I Choose a Bridging Loan?
To choose a bridging loan, the borrower should consider the total cost of the loan, rather than just the interest rate. While the best deal can vary depending on your circumstances, you should consider the cost of the loan, loan to value, how quickly the lender can complete your application and any early repayment charges.
What is the average cost for bridging a loan?
The average cost of a bridging loan is between 5.4-12.2% per annum. The difference in cost is decided by the loan to value, applicant’s credit history, property type and your plans for the property. The strongest applications will benefit from the lowest costs. These are applications below 50% LTV with a clear credit history that are secured against residential property. While the cost is higher than a mortgage, which is around 2-3% per annum, they also offer you more opportunities to profit from property. This can be through grabbing a bargain by completing quickly or adding value through refurbishment.
What are the alternatives to Bridging Loans?
The alternatives to bridging loans are:
How can I apply for a bridging loan?
To apply for a bridging loan, you should follow the following steps:
- Talk to lenders or a reputable bridging loan broker to find the best deal. They will look to understand your requirements and will present the options available to you.
- Once you’ve chosen a product, an initial assessment will be undertaken and an agreement in principle is issued, signalling the lender’s intention to lend, subject to full underwriting.
- You will complete the lender’s application form and send them any supporting information required for underwriting.
- Once the underwriting process is complete, the lender will issue a formal offer and the application is passed to solicitors to undertake the legal work.
- Completion can then take place and the funds are released to you.
What are the requirements for a bridging loan?
The requirements for taking out a bridging loan are the following:
- Proof of ID and residence – To satisfy money laundering requirements, every lender requires address and ID proof. Some lenders are able to validate this electronically, although most require copies of appropriate documents.
- A valuation of the property – The lender will require a valuation of the property, either by undertaking a physical inspection of the property or through a desktop report. Where a physical inspection is required, this must usually be paid for by the applicant.
- Proof of your exit strategy – Your lender will request details of your exit strategy to ensure that you can repay the loan. Where your chosen exit strategy is through a remortgage, they may ask for a decision in principle (DIP) from your new lender.
- Proof of income – Where your exit strategy relies on your income, your bridging loan lender may ask for proof of income to validate that your exit strategy is realistic.
- Proof of your property experience – Where experience is required by a lender, for example, property refurbishment experience, proof is usually required.
Is Bridging Loan Consultancy helpful?
Yes, bridging loan consultancy from an experienced bridging loan broker can be massively helpful. This is because these loans can be difficult to understand and assistance from an experienced professional can help you to get the best deal and avoid the common pitfalls. On top of working with an experienced bridging loan broker, you will also need a solicitor to conduct the legal work who understands bridging finance.
Which banks are better for bridging loans?
The best banks for bridging loans include United Trust Bank and Interbay Commercial (who are part of One Savings Bank). Most leading bridging loan lenders are specialist lenders, rather than banks and include Octopus Bridging, Together Money and Glenhawk. We’re often asked the question ‘are bridging loans still given by high street banks such as Barclays, Santander and Lloyds’? The answer is no, the main high street banks and building societies no longer offer bridging loans as it is such a specialist market, meaning your best options are specialist bridging loan lenders.
What is the difference between open and closed bridging loans?
The difference between open and closed bridging loans is explained by how each is repaid. In this section, the difference between each is explained in detail.
What is a closed bridging loan?
A closed bridging loan means that the exit strategy for the loan is clear from the outset. This means the lender knows exactly how you will repay the loan at the end of the term.
An example would be an application where you are planning to refinance with a new lender to repay the loan, and you have a full offer of finance in place.
There are a number of acceptable repayment strategies for a loan to be considered closed, such as:
- Sale of property
- Maturity of an investment
- Funds from an inheritance coming through
The lender will be keen to ensure the funds are definitely going to arrive, with a date already set out.
Due to the reduced risk, lenders are likely to offer lower interest rates for closed bridging finance, and may be more comfortable lending, meaning the application process is more straightforward.
What is an open bridging loan?
An open bridging loan is, as mentioned above, a term of short-term finance secured against property or land. Where it differs from a closed bridging loan is that there generally wouldn’t be a specific exit strategy in place, or the strategy has no set date.
An example of an exit strategy that would lead to an open loan is where the sale of the property will repay the loan, but the property is not yet on the market.
The key distinction is that there is no guarantee of receiving an offer, when an offer is likely to happen, or how much the offer would be. As such, this makes the transaction inherently riskier than it would be if an offer has been made, a completion date set, or even if there were already offers on the table.
While open bridging loans are slightly more flexible, they can be slightly trickier to apply for as the lender will be keen to understand how repayment will happen.
Should I take an open or closed bridging loan?
Lenders are moving more and more towards ensuring that applications are agreed with as solid an exit strategy as possible. This is done to ensure that repossessions remain as low as possible, which is obviously a goal that is shared with borrowers.
It’s one thing to look to take bridging finance where an offer has not been made on a property that is to be sold, but another to go into an application with no planned exit.
We never recommend taking a risky loan and would not offer loans where a clear exit can be put forward. Bridging loans can be costly and using them to delay an inevitable problem just reduces the equity in the property.
If you’re unsure how you can maximise the situation you’re in, you should take expert advice on the options available.
There are always numerous options on the table, some common ones that may be a better option than an open bridging loan are:-
- Request time from your current lender while you sell the property.
- Use the bridging loan to refurbish the property to maximise the sale price.
- Looking at a mortgage or secured loan to raise the funds needed.
Depending on your circumstances, there will likely be other options that could work very well for you.
What are re-bridging loans?
Re-bridging loans are used to refinance an existing bridging loan if you are looking for a better interest rate, or your existing loan is coming to the end of its term. Customers generally approach us for a re-bridging loan to either see if we can save them money by moving the loan to a lender with lower rates. Or, alternatively, if their current bridging loan is nearing the end of its term but the requirement for this type of finance is still there. Rebridging loans work in much the same way as a regular bridging loan, except you are repaying one bridging loan with another. Generally, this is with a different lender however in some instances, your existing lender may re-bridge their own loan.