Bridging Loans
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Bridging Loans
Ollie Callister talks to us about bridging loans.
What is a bridging loan and how do they work?
A bridging loan is typically known as a short term finance loan. They range between 12 and 24 months, unlike a standard mortgage which may be over a period of perhaps 10 to 40 years.
Are there two types of bridging loan: commercial and residential? What’s the difference between the two?
Correct. They are also either regulated or unregulated. A regulated bridging loan is typically where the client’s living in the property, while an unregulated loan is typically on a Buy to Let or commercial property where the client hasn’t lived there.
What are open or closed bridging loans?
It’s typically about whether there is an end date or not. A bridging loan will typically last between 12 and 24 months. An open one won’t necessarily have an end date, while with a closed bridging loan you would have an end in mind.
For example, you might be selling a property and buying a new one. You might use a bridging loan if you’re unable to sell before you need to complete the purchase. You might have an end date within a couple of months that is already in place. Here, we would be looking at a closed bridging loan with an end date.
But typically they’re open for a period, such as 12 months. We always recommend covering a longer period than you think you need, so you don’t end up needing to ‘re-bridge’ the loan, which becomes a little bit more complex.
Can you have a fixed or variable rate bridging loan?
Yes, you can have fixed or variable. Typically they sit in a fixed category, but both options are potentially available.
Who can get a bridging loan? What can bridging loans be used for?
Typically the user of a bridging loan will be an individual or a couple, on the residential side of things. They may be looking to sell and buy any property. The other kind of user might be a property developer or investor looking at the Buy to Let space or a ‘flip’ – to renovate the property and increase its value.
Bridging loans are typically used as short term finance. It’s helpful if you need to buy a property before you’re able to sell another, or you’re buying an auction and need to complete quickly.
They can also be used if a property is classed as unmortgageable. It may not meet building regulations, for example, or may not have a kitchen or a bathroom – which means you can’t get that conventional mortgage.
If you’re looking to flip a property, you’d want to buy, renovate and then resell. You could also use a bridging loan if you’re buying land, which isn’t typically mortgageable. You buy the land with planning permission, ideally, or sometimes without, then build a property and remortgage or sell it afterwards.
What is an exit strategy?
This is a very important part. All lenders will be looking at the exit strategy, which is essentially how that bridging loan will be repaid. Most commonly, the exit will be the sale of the property, but it could also be refinancing it.
Let’s say you were to buy a property that was unmortgageable. You use a bridging loan to buy it, renovate the property to become habitable and then look to remortgage elsewhere.
In that situation, a bridging lender will look for a Decision on Principle to confirm you can get that mortgage afterwards – that’s something we’ll get for the client.
Alternatively, savings or inheritance could be your exit. If you know some money is coming, that could be potentially used, as well.
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Bridging loans can be first charge or second charge. What does this mean?
A first charge is typically where there’s no other mortgage or finance secured against the property, so the lender has the primary charge on it. If you were to default on the mortgage and the property was sold, they would get their money back before you get anything. This type of charge is less risky to the lender.
With a second charge, typically the property would already have a mortgage or another charge on it. The bridging lender would then sit behind that first charge. In this scenario, if a property was repossessed the mortgage lender would get their money back first, and the bridging lender would get theirs second.
There’s a higher risk that they don’t get their money back should the property sell for lower than the market price. You’d obviously be third in line to get your money back.
How long does it take to arrange a bridging loan? Is this quite fast finance?
Bridging finance is there because it’s needed at speed. Typically, we allow between two and four weeks. It could be sooner than that, but you might pay a premium for a shorter timescale.
What if I have bad credit? Can I still get a bridging loan?
Yes, you can still get a bridging loan with bad credit. Again, the lender is typically looking at the asset itself – the property and its value – along with your exit strategy. If you plan to sell the property, it’s mainly focused around the value of that.
What do bridging loans cost? How do interest rates and fees work?
A typical bridging loan comes with a 2% arrangement fee – that’s 2% of the balance you’re borrowing. Then, typically, you have a monthly interest rate of 1% per month [correct at the time of recording in March 2025].
So you’re looking at 12% per annum. You would also have an exit fee of typically 1%, but not on every loan. Some lenders want you to have it for at least three months. If you only need it for one month, you may still be charged three months’ interest – that’s the exit penalty for leaving early.
It does vary from lender to lender. Some do have cheaper deals, but you might need a longer timeframe to get those in place.
There are other costs for valuation and potentially application fees. You would typically have a second solicitor in place, which means some extra legal costs as well.
How do you apply for a bridging loan? What is the process?
The way we work with clients is to have an initial conversation to find out about your circumstances. We’ll then approach lenders to offer you the best terms.
Those will depend upon the timeframe and how quickly you need that finance in place. If we do need it fast, obviously we’re focusing on lenders that can achieve that timescale, which may not be the best priced product.
If you’ve got a little more time, perhaps four weeks before you need to complete, we can approach lenders who don’t necessarily have the quickest timescales that may offer you more favourable terms.
Once you’re happy with the terms, we’ll make that application on your behalf. It’s also very important that a valuation is instructed as quickly as possible.
What are the alternatives to a bridging loan?
Definitely. Normally you look at bridging because you need a quick solution, or the property is unmortgageable.
But if there’s time and the property is habitable, another solution is a traditional residential mortgage – whether that’s a purchase, a remortgage or a second charge. If you’re looking to borrow more than your current lender is offering you, you could look at that option.
You could also look at a standard Buy to Let mortgage or commercial mortgage. If you need to make a lot of improvements to the property you might be looking at development finance, which is very similar to a bridging loan.
Alternatively, you could look at savings, help from family, or maybe even a personal loan to cover a small amount, if you need it.
What else do we need to know about bridging loans?
With any client situation, it comes down to your personal circumstances, what you’re trying to achieve and the property situation.
A bridging loan is definitely not the cheapest option, so if there is an alternative we can find, obviously we would recommend that first. If not, a bridging solution is always there, subject to how much money you need and where things stand.
Typically, you will be looking at having at least a 35% deposit to make this work. But again, it all depends upon the circumstances.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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