What is a bridging loan?
A bridging loan (or 'bridge loan') can be useful if you need to borrow money for a short period. It can help to ‘bridge the gap’ if you want to buy a new home before selling your old one.
Bridging loans can also be used if you buy a property at auction, where you’ll need the money immediately but may not have sold your current property yet.
In this guide, we explain how bridging loans work and who they could be right for.
How does a bridging loan work?
There are two types of bridging loan: ‘closed’ and ‘open’.
Closed bridging loans
With a closed loan, there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.
Open bridging loans
With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one year.
Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage.
They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it, as well as proof of what you are doing to sell your current property if relevant.
You should also have a back-up plan in place in case your repayment strategy fails.
What are first and second-charge bridging loans?
When you take out a bridging loan, a ‘charge’ will be placed on your property. This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans.
Both a first and second charge bridging loan take your property as security in case you default on repayments.
Typically, if you still have a mortgage on your property, the bridging loan will be a second charge loan, meaning that if you failed to meet repayments and your home was sold to pay off your debts, your mortgage would be paid off first.
But if you owned your property outright, or you were taking out a bridging loan to repay your mortgage in full, you would take out a first charge bridging loan. This means that the bridging loan would be repaid first if you fell behind with repayments.
How much does a bridging loan cost?
Bridging loans are priced monthly, rather than annually, because people tend to take them out for a short period.
One of the major downsides of a bridging loan is that they are quite expensive: you could face fees of between 0.5% and 1.5% per month.
That makes them much pricier than a normal residential mortgage. The equivalent annual percentage rate (APR) on a bridging loan is between 6.1% and 19.6% – far higher than many mortgages.
There are also set-up fees to consider, usually around 2% of the loan you want to take out, so it is advisable to only take a bridging loan out if you are confident that you won’t need it for a long period of time.
How much can you borrow with a bridging loan?
In cash terms, bridging loan providers might lend anything between £25,000 and over £25m.
But you’ll usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property.
If you are taking out a first-charge loan, you’ll typically be able to borrow more than if you were taking out a second charge loan.
What are the alternatives to a bridging loan?
If you want to move but can’t sell, you could also consider a let-to-buy mortgage arrangement.