As the name suggests, bridging loans are designed to bridge a funding gap. They are short-term loans secured on property or other assets that help you carry out a property transaction or refurbishment until you can get longer-term funding or money from the sale of a property or another source to pay it back.
Although bridging loans have higher interest rates than mortgages, they are usually taken out for no more than 12-18 months. The lender will want to know you have an exit strategy in place (how you plan to repay the loan) when you apply so it can be confident it will get the money back.
Bridging loans can be either closed or open. With closed bridging loans, you know the timeframe of your exit strategy and have set a fixed date for paying back the loan, and they are cheaper than open bridging loans. An open bridging loan is when the timing of when you can pay back the loan is less certain. These are more expensive than closed bridging loans and harder to get because of the extra risk to the lender.
Compare bridging loan rates
Table: sorted by monthly interest rate
Overall representative example for regulated bridging loans
If you borrowed £195,000 over a 1-year term at 8.40% p.a. (fixed), you would make 12 monthly payments of £1,399.93 and pay £211,799.16 overall, which includes interest of £16,799.16, a broker fee of £995 and a lender fee of £3995.00. The overall cost for comparison is 11.6% APRC representative.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
Is it a good idea to use a bridging loan for property development?
If you want to buy a property to refurbish or renovate as an investment, with a view to either selling it at a profit or remortgaging it at its higher value to buy another property and then letting it, unless you have plenty of cash available you’ll need to borrow the money to get enough to buy it as well as carry out the work you plan to do.
You won’t be able to get a normal residential mortgage if you’re not planning to live in the property and you won’t be able to get a buy-to-let mortgage if you’re not planning to let it. Buy-to-let lenders also want properties they lend on to be in a habitable and therefore lettable condition, which won’t be the case if it needs full refurbishment.
In this situation, bridging finance can be ideal. Here’s why:
Lending criteria are flexible
Lenders will be less concerned about your personal finances, such as your credit history and income, when deciding whether to lend to you compared with when you’re taking out a mortgage. They will focus more on the property and whether you’ll be able to sell or remortgage it for enough money when the time comes to pay back the loan.
Bridging finance that isn’t taken out to buy a property that you or your close family plan to live in isn’t regulated by the Financial Conduct Authority so it can be more tailored to your needs than a regulated loan. You should take extra care to make sure you understand the terms and conditions of the loan though as you don’t have the protection you get with regulated loans.
Bridging loans let you access funds quickly
As they are a type of short-term finance with a relatively straightforward application process they can be arranged quickly – in as little as 10 days or even less. This means you’ll be able to act quickly to buy the property you want and may be a more attractive buyer than someone who is buying it for residential or buy-to-let purposes and needs to wait longer for their mortgage to be approved.
You don’t have to pay interest every month
The interest can be “rolled up” over the period of the loan so that you pay it all off at the end with the capital. This means you don’t have to find the money to make interest payments until you’ve sold the property or remortgaged it once the development is complete.
Bridging loans don’t have to be secured on the property you’re buying
If it will be hard to prove to the lender that the property you’re buying can be sold at a high enough value or quickly enough to pay back the loan, or that you’ll be able to get a buy-to-let mortgage on it when the work is complete, you can secure the loan on a property you already own.
If this property already has a mortgage on it you can take out a bridging loan as a second charge, although it will be easier to get the finance if it doesn’t.
Bridging loans can be used to buy auction properties
Buying a property at auction can be a great way to get a bargain as you’ll often find repossessions and probate sales, where a quick sale is required, and dilapidated properties that are not mortgageable. This means you can maximise your profits once the development is complete.
As bridging loans can be arranged quickly you should easily be able to complete on the property within the specified timeframe. With a traditional auction you get 28 days to complete and with an online or “conditional” auction you get 56 days.
You can use a bridging loan to buy property without planning permission
If you find the perfect property or land to buy that doesn’t have the planning permission you need to do the development you want, it will be difficult to get other types of funding, such as development finance. This is specifically designed to fund major building or conversion projects and lets you borrow for a longer period than bridging loans – up to three years.
Although you can apply for development finance if there is no planning permission, you won’t be able to complete on the loan until it has been granted, which can be a lengthy process.
You can use a bridging loan to buy property without planning permission, and once it’s granted, refinance to development finance if necessary. Make sure you have a good chance of getting planning permission before you buy it though, so you’re not stuck with property you can’t develop or resell easily.
As with any type of property finance, it’s best to speak to a specialist broker to find the right option for you.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our
terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.
