Last reviewed on 10th September 2023 by Martin Alexander (Mortgage Advisor)
A bridging loan is perhaps one of the most misunderstood forms of finance there is. A lot of businesses and people we speak to, tend to shy away from using bridging loans simply because they don’t completely understand them. Having said that, the use of bridging finance has increased over the years.
Using a bridge instead of a mortgage can be considered either too risky or too expensive, but that isn’t always the case. When used correctly, bridging can be a powerful form of finance and could be your only option in terms of securing a great deal.
- What is a bridging loan?
- How does bridging work?
- Types of bridging loan
- What are ‘first-charge’ and ‘second-charge’ bridging loans?
- How do mortgages and bridging finance compare?
- Differences between a mortgage and a bridging loan
- What can I use a bridging loan for?
- Will I qualify for a bridging loan?
- How to get a bridging loan
- Bridging loan fees
- Is bridging finance the right option?
What is a bridging loan?
A bridging loan is a short-term loan designed for property buyers and developers. Think of it as either a temporary loan or even a short-term mortgage.
Bridging can be used in a variety of circumstances to provide finance until a more permanent form of finance can be arranged, such as a mortgage. The term ‘bridge’ is often used, as that’s exactly what a bridging loan is designed to do. You may need to ‘bridge the gap’ due to monetary issues or time constraints (or both).
Funds are provided very fast in comparison to mortgages and can therefore make a great alternative. A word of caution, bridging loans usually come with high interest rates and fees and for this reason, are generally used as a last resort. Nonetheless, they can make financial sense when used correctly.
How does bridging work?
Here’s how a bridge loan would work:
- You want to purchase a property, but it isn’t possible to get a mortgage due to its condition
- The property is valued at £200,000 and you have a £50,000 deposit
- You then get a bridge for £150,000 so you can buy the property outright
- You can then sell the property to repay the loan plus the interest or get a mortgage once you’re able
Bridging is often repaid within one year, as interest rates are a lot higher when compared to mortgage rates.
Types of bridging loan
There are two types of bridging available:
Closed-bridge loans are for when there is a dated exit strategy in place. For instance, you may have a buyer for your home that has exchanged contracts but has not yet completed the purchase.
Once completion takes place and you receive funds from the property sale, you can then repay the bridging lender. As the bridging lender has a date for completion and there is a clear exit strategy, this would be classed as a closed-bridge loan.
Open-bridge loans have more risk attached from the viewpoint of a bridging lender. This is because there is no fixed date for when the loan is to be repaid. That being said, bridging lenders will often request the loan to be paid back within 12 months.
Open-bridge loans are often used by home movers who haven’t yet agreed on a sale for their existing property. A property investor may use an open bridge to fund a home they’re buying to then renovate and sell.
Regardless of the type of loan you choose, bridging lenders will request evidence of an exit strategy, such as taking out a mortgage or using funds from a property sale.
Open-bridge and closed-bridge loans can be secured at both first and second charges, depending on the nature of your bridging loan.
What are ‘first-charge’ and ‘second-charge’ bridging loans?
As with almost every form of finance, bridging can be packaged in many different ways.
If you have a mortgage on your home, the chances are that your lender has a ‘first charge’ against your property. When purchasing a property with a mortgage, the lender will secure the loan against your home, in the form of a charge. Charges are then registered with the land registry and are legally binding.
Bridging loans are also secured against properties as charges. If a bridging lender secured the first charge, it would indicate that they’ll have first priority of repayment in the case you defaulted on your loan.
If you’re in the process of selling your home and haven’t yet sold, but took a bridging loan to secure your new property, the loan would be secured on your new property as a first charge. This is because there aren’t any other charges on your new home.
Bridging loans can be used to pay off mortgages when moving house. In this case, your bridging loan would pay your lender the mortgage balance, clearing their charge on the property and the bridging loan would be secured as a first charge.
A ‘second charge’ would indicate that the bridging lender has access to any funds remaining after the lender with the first charge has recouped their loan.
A bridging lender may want to place a charge on your current home, which already has a mortgage. In that case, this would be classed as a second charge, as the first charge is with your mortgage lender.
Lenders that have the first charge will usually need to provide consent for any additional lenders securing charges on the property. A second charge places more risk on a lender when compared to a first charge. Second charges often have higher rates and fees as a result.
It’s worth noting that charges can be placed on multiple properties, but there’s a lot more risk involved in doing this. This enables bridging lenders to access more than one property, should something go wrong. If a bridging lender only has a charge on one property, they can only recoup their funds from that specific asset.
If you need to raise capital fast but want a loan with lower rates over a longer term, a second-charge mortgage may be better suited.
How do mortgages and bridging finance compare?
Bridging loans share similarities with mortgages. For instance, interest is paid on the term of the loan until the loan is repaid in full. Bridging lenders will place charges on assets and the value of the loan is determined by the property value.
Lenders that offer mortgages will do exactly the same. Bridging loans are also offered at variable and fixed rates, much like mortgages. Both are regulated by the FCA but some bridging products are unregulated.
Differences between a mortgage and a bridging loan
Bridging is very short-term in comparison to a mortgage. Mortgages are usually taken out on 25-year terms. Bridging loans are generally offered for one year or less.
Bridging also takes less time to obtain than a mortgage. A mortgage is a lot more intricate and can take weeks if not months for funds to be released. Bridging can take as little as 48 hours once an application has been approved!
Interest rates for bridging are higher than mortgage interest rates. Most mortgages can be obtained with rates between 3-5%, even lower with higher deposits and great credit. Bridging finance tends to start at a whopping 8% with rates on average being between 10-20%! On a positive note, bridging lenders won’t assess income and generally aren’t interested in rental income if it involves buy to let.
Bridging is also available on any type of property, whereas mortgage lenders tend to lend on specific properties such as traditional brick-built and habitable homes. For this reason, bridging is popular with auction buyers to secure rundown properties that won’t qualify for mortgages.
Mortgages are usually repaid monthly. Bridging loans can be ‘rolled up’ and repaid as a lump sum once the term expires. This can be practical for when you’re cash-strapped and are awaiting funds either from a new mortgage or a property sale.
What can I use a bridging loan for?
Bridging loans can be used for several situations and can be utilised for both residential and commercial reasons. You may want to start a property development from the ground up or simply buy and sell a property.
As bridging finance is often more expensive than mortgages, why would anyone want to use them? Let’s find out.
Bridging loans are often used by homeowners between selling their homes and buying a new one. Perhaps you’ve found the perfect home but haven’t yet found a buyer for your existing property. A bridging loan may be your only option to avoid losing your dream home.
Bridging can be used to secure a deposit on your new home and can be repaid once your existing house is sold. A loan could provide a temporary solution if you’re part of a chain and it’s on the verge of collapsing because a buyer has pulled out.
Landlords and investors often use bridging finance when they need to fund a new deal or bridge gaps in their existing deals. Investors sometimes use bridging loans to secure auction properties, where time is of the essence.
Auction houses typically require buyers to complete within 28 days, so sometimes a bridging loan may be the only viable route.
You may have found a great property deal, but the vendor needs a quick sale and is prepared to offer the property at a discount. A bridging loan could be ideal in this instance as funds are released much faster than mortgages.
Property investors may want to buy, renovate and sell a property. As mortgages are generally long-term, bridging finance could be a more viable option.
Landlords may want to buy, renovate and then let the property to tenants. In this case, a bridge could be used to purchase an unmortgageable property and even fund the renovation. Landlords can then remortgage the property once it’s mortgageable and repay the bridging lender while profiting off any surplus funds.
Bridging loans can also be used by property developers and often are. For instance, a developer may have secured planning permission to build multiple dwellings.
With the cost of buying land on which to build and the forthcoming cost of labourers and builders, the developer may look at bridging finance to leverage the cost of the development.
Once the development is complete, the developer could either remortgage, move to a commercial mortgage, or sell/rent the development and repay the bridging lender.
The key things to remember are that bridging finance is fast and short-term. The property can be of any standard and funds can be used to purchase, renovate and build. If you’re looking to develop on a much larger scale, development finance may be better suited.
Read more: What is development finance?
Will I qualify for a bridging loan?
Bridging is largely assessed on the value of a property. The good news is that bridging lenders don’t make assessments on personal income whereas mortgage lenders do.
The bad news is that lenders value properties in varied ways, but this can be a positive as it gives you more options.
As with standard mortgages, your property will be subject to a survey. Bridging lenders will carry out a survey to ensure that their loan is safe and isn’t deemed too high risk. A qualified surveyor will visit the property to inspect the values involved.
We often see homeowners overvaluing their properties and sometimes don’t achieve the top value they’re aiming for. Surveyors will normally provide valuations that can sometimes be considered undervaluing.
It’s not that surveyors are undervaluing, it’s simply because they need to assess worst-case scenarios for the lender. If you strongly disagree with a surveyor’s valuation, then you can sometimes request for the valuation to be revised. Bear in mind that there’s often a cost to getting a revised valuation.
Loan to value (LTV)
A loan to value is simply the size of the loan in comparison with the property value. An 80% LTV on a £100k property would indicate an £80k loan with a £20k deposit. In terms of a mortgage, a lender would only offer you £80k, as the property is worth £100k (on an 80% LTV).
Even if you managed to secure the property cheaper at around £70k, a mortgage lender will only consider the purchase value. An 80% LTV on a £70k property would result in a loan amount of £56k. Some bridge lenders will follow suit and use the exact same principles as mortgage lenders.
Other bridging lenders may disregard the actual price you paid for the property and will consider its true market value. This can be practical for when you need to borrow more than a mortgage lender will allow.
Gross Development Value (GDV)
Bridging lenders can offer loans based on the Gross Development Value (GDV) of your project. The GDV is calculated on what the property or development would be worth once the works are completed. This can be very useful when you need to finance more than just a purchase but also need to finance the renovations or building of a property.
See the example below: (based on an £80k purchase of a £100k property using an 80% LTV)
Traditional mortgage lender = £68k loan
Bridging loan lender considering market value = £80k loan
Bridging loan lender considering GDV (once developed/renovated) = £96k loan (if property value was increased to £120k)
As you can see, the difference is quite staggering. It’s important to note that the more you borrow, the higher the rates tend to be which you’ll also need to consider.
The loan is also secured on a property, so you will have to repay the loan or face repossession. It’s important to have an alternative plan in the event you run into financial difficulty.
An exit strategy is a term used for how you’re aiming to clear the balance of the bridging loan.
If your aim is to remortgage once a property has been renovated, then the exit plan would be to remortgage. If you’re awaiting funds from a property sale, then your exit plan would be selling a property.
Exit strategies are not to be overlooked. An exit strategy is an imperative part of bridging. Without an exit strategy, it’s near enough impossible to secure a loan. A clear and concise exit strategy helps your application but also helps you to plan your projects.
Anyone applying for bridging needs to have a planned exit. Remember, bridging finance is short-term, so the quicker you can exit the better.
Bridging lender discretion
Although a valuation is the main factor in deciding how much you can borrow, a lender may consider other factors. Even though your income isn’t assessed, lenders may consider other areas of your proposition.
For instance, if it’s a development or property venture, lenders may assess your experience in this field. Lenders will also assess the quality of the project, such as whether the property is saleable or if the funds are enough to cover the project.
If your exit strategy is to remortgage, lenders will assess the likelihood and the projected value of the remortgage. Lenders will also assess whether or not the loan period is sufficient for the loan to be repaid.
If you want to repay the loan on a monthly basis, then a lender is likely to check your income. That being said, bridging finance is usually repaid in one lump sum at the end of the term.
Some bridging lenders will just check on whether the loan can be secured against an asset and that’s simply enough security for them. Bridging is a lot faster than a mortgage, but bridging lenders will still carry out their own checks. Lenders each have varied assessment criteria, so this doesn’t apply to every lender available.
Similar to a mortgage, you may undergo credit checks and current financial commitments, such as additional mortgages that you may have. Applying for a bridging loan with bad credit will make it difficult, but it’s still possible.
How to get a bridging loan
Bridging loans aren’t available from high street lenders and will often require an advisor to broker a deal. Again, the process of when and how to get a bridging loan really depends on your own reason for the loan.
- Speak to an advisor who has experience with bridging finance and access to bridging lenders
- Your advisor will make enquiries with bridging lenders based on your circumstances and reasons for a bridge
- An application is made to a bridging lender
- The bridging lender will organise a valuation of any properties involved
- An assessment of the applicant is carried out by the bridging lender (other mortgages, credit check, experience)
- The loan is either approved or declined. If declined, you can either reapply with the same or a different lender
- Solicitors are allocated to handle the conveyancing involved and placing the charge on the property
- Bridging funds are released
- If you’re using a bridge to purchase a new property, then solicitors will carry out legal work and liaise with your lender’s solicitor
- Once the lender’s solicitor is satisfied, they will approve the loan to be released
Although it sounds like a lot, an application can be completed in as fast as a week.
Getting a fast bridging loan
The speed of the process largely depends on:
- The speed of the valuation
- How fast your solicitor responds to any requests for information from the lender’s solicitors
- How much will the bridging lender probe into your application?
- If using a second charge loan, how fast the primary lender takes to approve (if they approve)
- The bridging lender in general (typically, the quicker you need the funds, the higher rates you’ll have to pay)
Bridging loan fees
Bridging lenders and their products do vary quite considerably. Some lenders will charge additional fees, whereas other lenders won’t.
We’ve outlined all fees imaginable, just so you’re prepared!
It’s important to remember that bridging loans do have much higher interest rates when compared to traditional mortgages.
If a bridging loan is advertised at 1.5%, it would equate to a mighty 18% APR. Rates are usually based on a monthly basis, as the type of finance is short-term.
The monthly interest is often referred to as ‘rolled-up’ interest. Rolled-up interest isn’t repaid on a monthly basis and is paid when the term ends. If you wish to repay interest on a monthly basis, some lenders can facilitate this.
If interest is cleared earlier than anticipated, there are usually no early repayment charges. That said, most bridging lenders have 1-month minimum terms. For instance, if the loan was repaid within 10 days, you’d probably still be charged for the entire month.
If the term was for 12 months, but you paid the loan back after 3 months, then you should only be charged 3 months’ interest. Bridging finance can be offered at either fixed or variable rates.
Admin fees for bridging finance can also pack a hefty punch. There may be arrangement fees which usually start at 1% of the loan amount. There can also be exit fees which again, start from 1% of the loan amount.
Fees are often higher than mortgage fees and it doesn’t factor in the interest rate on which the loan is charged. In addition, there can also be broker and valuation fees.
Lenders that charge fees at the lower end of the spectrum, tend to have stricter criteria. Lenders that charge higher fees, tend to lend on riskier proposals. For instance, you may be charged higher rates and fees if you need finance urgently.
Is bridging finance the right option?
Before you decide to use a bridging loan, consider all your options. We’ve outlined important things to consider before applying.
Risk with bridging
Using bridging finance can be very risky. You’re able to calculate the risk depending on the quality of your proposal. That’s why bridging lenders may assess your experience and will carry out surveys, to ensure the proposal is of quality.
Our specialists would advise bridging loans as a last resort. If you’re unable to remortgage or withdraw funds elsewhere, then a bridging loan may be your only option. The advice is based on the fact that bridging finance has very high rates. In the worst-case scenario, if your plan didn’t go as expected, you could be left with ever-increasing debt.
Bridging finance can be a powerful tool if used correctly. We’ve had many clients, especially developers and landlords who repeatedly use them and have generated significant profits as a result.
Certain property deals wouldn’t be possible without the aid of bridging, so they can be great when they work. Proceed with caution and have a contingency plan in the event that things don’t work out as you planned.
Alternative options for bridging
Check with your advisor to see if a remortgage is possible to withdraw funds from equity. If speed is important in securing your property deal, then bridging finance or a personal loan may be the only options.
Let to buy is also another option to consider. Let-to-buy is where you can remortgage your current home from a residential mortgage and switch it to a buy to let.
The equity released can then be used to fund the purchase of your new home. Remortgaging takes longer than bridging, so you’ll need to assess your options.
Speak to a specialist bridging advisor
Always speak to a specialist broker. Regardless of whether it’s bridging finance or a standard mortgage, a broker can save you time and money. As bridging is considered to be high risk, using the expertise of a broker becomes essential.
Bridging lenders have many different fees. As a result, a specialist advisor will do their best to find you the best deal with minimum fees. Some lenders may only deal with brokers, so using a broker ensures you have access to a wider variety of deals. An advisor can also provide you with other alternatives to finance, that you may not have thought possible.
Our advisors are experienced in bridging finance and can make an assessment of your financial circumstances to decide whether bridging is a viable option for you. You can make an enquiry below to get started.
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.