Bridging loans in the UK, sometimes known as ‘bridge loans’ are a form of short term, secured property finance which is used by property owners when speed is of the essence and funding is needed. Most often, these loans are used where a property sale and purchase are needed in quick succession, for example, as a result of a ‘chain.’
For example, where a homeowner wishes to move and purchase a new property before the sale of their current one, a bridging loan may be needed.
Bridging loans are temporary finance solutions when you're buying a new property. They let you borrow money before you've sold your current home so that you don't miss an opportunity. You repay the loan when your current home is sold.
Bridging finance can also be used as a form of auction finance, where funds are needed very quickly to complete a property purchase.
Bridging loans are typically used as a short-term solution and to literally ‘bridge the gap’ between property purchases.
There are, as with all secured finance, different forms of bridging finance which can be used in a plethora of different ways.
However, it is important to remember that even though bridging finance is secured, interest rates will be significantly higher than those for traditional mortgages and the arrangement and broker fees may be too.
Hence, this should all be factored in when applying for and acquiring a bridging loan for any purpose.
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As a short-term option, secured on your property, a bridging loan works by ensuring the money you need is available a lot faster than a run-of-the-mill mortgage can provide. For example, a homeowner may wish to move to a larger and therefore more expensive property when a desirable and well-priced property enters the property market prior to finding a buyer for their current one. Rather than lose out on the new property which they require and having to wait for the sale of their current property, the homeowner may seek a bridging loan.
It may, for example, be the case that their current property is worth £500,000 and the new property is worth £750,000, with the homeowner owning 50% equity of their current property. Naturally, they will need to sell their current property to fund a portion of the purchase of the new one. In this case, the bridging loan can provide the full amount needed to buy the new property for them whilst they find a seller for their current one. Thus, there will be a period where the homeowner actually owns two properties at the same time.
Once they find a buyer for their first property and the sale goes through, they can use the money from the sale to pay off the relevant portion of the bridging loan and then refinance their new property at a cheaper rate to clear the balance of the bridging loan and work to repay a conventional and more affordable mortgage.
Although there is no specific person or type of person that is eligible for a bridging loan in the UK, there are some criteria which will actually have to be met in order to qualify, although this is by no means exhaustive and different lenders and brokers will differ in their lending and application criteria.
Typically, bridging finance borrowers:
Although there are various different purposes for which you may seek a bridging loan, and although what is ultimately a bridging loan may be marketed as something else for specific purposes, there are two main types of bridging loans to consider: open bridging loans and closed bridging loans.
Sometimes a lender or broker may refer to a secured property loan as a ‘renovation loan’ or perhaps a ‘development loan.’ It is important to read into what the loan actually is and how it will work. If it is the case that the nature of the loan is similar or the same as what a bridging loan is, it will be so, in all but name.
Bridging loans will typically require the borrower to have an exit strategy, which refers to the way in which they will repay the loan and ‘exit’ its terms and timeframe. As a short term secured loan, bridging finance should never be a long-term option and thus, the quicker the exit, the less costly the loan will be to the borrower.
More often than not, the exit for the borrower will be the sale of the first property, which then enables them to refinance their second property to repay the bridging loan and refinance more affordably.
An ‘open’ bridging loan is one in which there is no set date or timeframe in which the borrower will repay the bridging loan. Although there will be an exit strategy, namely the sale of a property to repay the loan, the bridging loan will remain ‘open’ until there is a set date by which time the loan can be repaid.
This will be the preferred nature of a bridging loan for both the borrower who will be able to account for the additional funds, interest and charges for a set period of time as well as the lender who will have a reduced degree of risk, with a timeframe of repayment in place. With a closed bridging loan, there will be a date by which the borrower will be able o pay off the bridging loan.
Most commonly, bridging finance will be used to finance the purchase of a second property before the sale of a primary one or in order to make a property purchase very quickly. By being able to provide finance for a property much quicker than a traditional mortgage, a bridging loan will typically be well-utilised when time is of the essence. There are, however, some more common uses than others when it comes to any type of bridging loan:
When it comes to purchasing a property at auction, the buyer is required to put down 10% of the agreed purchase price on the day, payable to the auction house. They are then required to pay off the entire purchase price within 28 days of the auction.
For some, they will not have a mortgage in place for this and would not be able to get one in time to clear the balance. Thus, a bridging loan can be used to purchase the property immediately. Then, once they have completed on the property, the owner can refinance the property with a normal mortgage to pay off the bridging loan.
It may be the case that there is a particularly desirable property or piece of land which comes onto the market and for which there is stiff competition. In these circumstances, a bridging loan may be used to purchase the land or property. Then, the property or land can be developed by the buyer and sold off. The sale amount will clear the bridging loan as well as providing the new seller with a profit.
There are circumstances in which a business may need a quick and immediate injection of capital, for example, to increase its value for sale. In such cases, a bridging loan may be considered to provide more immediate funds which can then allow the business to be sold and the bridging finance cleared thereafter.
Although they are a form of mortgage and secured finance, the lending criteria and conditions around bridging finance is stricter than a normal mortgage. When it comes to borrowing money through a bridging loan, lenders will usually consider lending between £25,000 and £25,000,000 depending on the properties involved, their values as well as the timeframes and the nature of the arrangement.
Also, unlike an everyday mortgage, lenders will not usually lend more than 75% loan-to-value (LTV), i.e. they will not lend an amount which is more than 75% of the value of the property to be purchased.
Bridging loans, as a short-term solution will always be more expensive and costly than a traditional mortgage. There will be higher interest rates attached to these loans, up to as much as 1.5% per month, equating to potentially as much as 20% annually. This is far more than a traditional, first charge mortgage on a property would cost.
There will also be broker fees and more expensive arrangement fees for bridging finance which will not be the case for a normal mortgage. As a borrower, you should take all of these fees and more expensive charges into account before you take out these loans.
Unlike everyday mortgages, for which you can apply through high street lenders and mortgage providers and even online, bridging loans as a form of specialist property finance will need a broker to arrange the loan for you. The loan will ultimately come from a specialist lender, and thus, most people do not have access to these specialist lenders in the way we do to normal mortgage lenders.
Also, due to the more specific nature of these loans, the broker and lender will need to understand more about the loan and why it is needed as well as what it is to be used for.
Furthermore, with time tending to be of the essence in the case of bridging finance, you will likely require a broker to arrange the loan for you via their panel of dedicated lenders, and there will also be more stringent lending criteria compared to normal mortgages.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Bridging Loans brokers. They have already helped thousands of people get the best Bridging Loan deal and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.
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