What a bridging loan is for
A bridging loan fills a gap in time. It allows a property purchase or refinance to go ahead now, with the loan repaid later from a sale, a mortgage or another source of funds. Terms are short, commonly between 3 and 24 months, and the full balance is repaid at the end rather than through monthly capital repayments.
Property investors and developers use bridging for a wide range of situations:
- Buying at auction, where completion is due within a fixed period
- Buying property that needs work before a mortgage lender will accept it
- Completing a purchase before the sale of another property
- Refinancing a loan that is ending, or raising capital against property already owned
- Funding light or heavy refurbishment, alongside the purchase
Bridging is not designed to be long-term finance. Its value lies in speed and flexibility, and its cost is justified when it allows a deal to happen that would otherwise be lost, or makes a property worth more by the time it is refinanced or sold.
Security and charges
Every bridging loan is secured on property. Most are first charge loans, meaning the bridging lender is the only or senior lender registered against the title. A second charge bridge sits behind an existing mortgage, and is repaid only after the first lender, so it is priced higher and lenders allow lower combined borrowing.
Lenders may also take security over more than one property. This is common in chain breaks, where both the property being bought and the property being sold are charged, and in cases where the loan needed exceeds what a single property supports. Taking additional security can increase the amount available, but every charged property is at risk if the loan is not repaid.
Bridging is available on residential, commercial, mixed-use property and land. Each lender has its own appetite for property types, locations and condition, which is one of the main reasons comparing lenders matters.
How much you can borrow
Bridging lenders size loans by loan to value, the loan as a percentage of the property's value. Most bridging lenders lend up to 70% to 75% of value on a first charge, with lower limits for land, specialist property and second charges.
Two details often surprise borrowers. First, the loan to value is usually measured on the gross loan, which includes any interest retained for the term and any fees added to the loan. The amount you actually receive on completion, the net advance, is lower. Second, on a purchase, lenders use the lower of the price paid and the valuation, unless they specifically allow lending against a higher valuation.
For refurbishment cases, some lenders also consider the expected value after the works, and release funding for the works in stages. The facility can then be larger than a standard bridge on the same property, but the day-one advance is still limited by the current value.
Interest and how it is paid
Bridging rates are quoted per month. Interest can be dealt with in three ways, and the choice affects the net advance and the total cost.
- Retained interest: the lender calculates interest for an agreed period and deducts it from the loan at the start. There are no monthly payments, and any unused interest is usually refunded if you repay early.
- Rolled-up interest: interest is added to the balance each month and repaid at the end. There are no monthly payments, and interest compounds on the growing balance.
- Serviced interest: you pay interest monthly, as with an interest-only mortgage. The net advance is higher, but you need income to cover the payments.
Many loans combine approaches, for example retaining interest for part of the term and servicing the rest. Indicative quotes show the rate, but the true comparison between lenders comes from the net advance, the fees and the total repayable at the end of your expected term.
The exit strategy
The exit is how the loan will be repaid. It is the single most important part of a bridging application, because the lender's whole case rests on being repaid in full at the end of a short term.
The two main exits are a sale and a refinance. A sale exit needs evidence that the property will sell at the expected price within the term. A refinance exit needs evidence that the property and you will meet a mortgage lender's criteria, including value, rental cover or income and any minimum ownership period. Other exits, such as the sale of a different property or the receipt of known funds, are also accepted where they can be evidenced.
Choose a term with headroom. Extending a bridge or refinancing it under time pressure usually costs more than the extra months would have cost at the outset.
From enquiry to completion
Once you have an indicative comparison, the process usually follows the same steps. Lenders review the case and issue terms, a valuation is instructed and paid for by the borrower, and solicitors acting for you and the lender complete the legal work. Lenders can move quickly when the valuation and legal work are ready, so the timescale is often set by how prepared the case is.
Information that helps a case move forward includes:
- Property details, the purchase price and any legal pack or title documents
- Your experience and any portfolio you hold
- Evidence for the exit, such as comparable sales or a mortgage agreement in principle
- Proof of deposit and the source of funds
- Details of any works, with costs and a programme
If the property is, or will be, lived in by you or a close family member, the loan is a regulated mortgage contract and comes with additional protections. We will tell you at the outset if that applies and how your case will be handled.
Working out what a bridging loan will cost
The cost of a bridge comes from the monthly rate, the term, the arrangement fee, any exit fee and the costs of valuation and legal work. The bridging loan calculator estimates the interest, fees, total cost and net advance from the figures you enter, and our guide to how much a bridging loan costs explains each part.
When you are ready to compare real figures, Instant Quotes gives indicative figures from lenders on our panel based on your answers. We then search the market for lenders that suit the property and your plan, and arrange the introduction.
Common questions
How long can a bridging loan last?
Terms commonly run from 3 to 24 months, and some lenders offer longer. The term should allow comfortably for the exit to complete.
Can I repay a bridging loan early?
Most bridging loans can be repaid early, often with a minimum interest period. Some lenders charge an exit fee, so check the terms before you commit.
Why is the net advance lower than the loan amount?
Retained interest and any fees added to the loan are deducted from the gross loan. The net advance is what you actually receive on completion.
What is a bridging loan in simple terms?
It is a short-term loan secured on property that lets a purchase or refinance go ahead now, with the whole balance repaid later in one sum from a sale, a mortgage or other funds.
Do you make monthly payments on a bridging loan?
Usually not. Interest is commonly retained or rolled up and repaid with the loan at the end, although some lenders allow you to pay the interest monthly instead.
How does a bridging loan work when buying before selling?
The lender secures the loan on the property you are buying, and often on the one you are selling too, so you can complete the purchase first. The bridge is repaid when your sale completes. If you or your family will live in the property, the loan is a regulated mortgage contract.
This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.
