How Do Bridging Loans Work?

Written by Editorial Team
Last updated: 21st July 2023

Example of how a bridging loan works

Bridging loans are secured loans, which are often taken out when conventional mortgage finance is not available for whatever reason.

As the name suggests, a bridging loan is a short-term facility, which is used to bridge a gap while you put in place an alternative arrangement. The term of the loan might typically be no longer than 12 months – 24 months is the typical maximum term of a bridging loan.

After this time, you might repay the loan by selling the property, or by taking out a standard mortgage.

As with any loan, you need to repay the amount you have borrowed, plus interest.  However, many bridging loans involve ‘roll-up’ interest, where you make no monthly repayments, and instead you repay all of the capital and interest in one go when you repay the loan. Other bridging loans are on an ‘interest only’ basis, where you repay the interest each month and repay the capital when you clear the loan.

If you are in a position to clear your bridging loan prior to the end of the term, then there may be exit fees of around 1-2% of the loan amount, but this will depend on the lender, and some deals have no exit fees.

Bridging loans may typically be available for up to 75% of the property value. Loan amounts start from around £25,000.

Open and closed bridging loans 

A closed bridging loan is one where the date for repayment is already set, for example the date on which the property will be sold to provide the funds to clear the loan has already been agreed.

An open bridging loan does not have a fixed date on which the loan will be repaid. However, you should never enter into a bridging loan without having a clear plan as to how you will repay it. An example of when an open bridging loan might be used is when you are planning to sell the property to repay the loan but have not yet put the property on the market. Alternatively, you may be planning to re-finance, but have not yet arranged this new mortgage.

First and second charge bridging loans

If your bridging loan is the only loan secured against the property, then it will be a 1^st charge secured loan. It is also possible to obtain a 2^nd charge loan via a bridging arrangement, where there might already be a mortgage in place. One example of when you might do this is when a lender declines your application for a second charge standard mortgage when you are seeking to renovate or extend your property.

How much does a bridging loan cost? 

Bridging lenders charge interest at levels that are higher than you might expect for a standard mortgage. You can also expect to pay various arrangement fees, such as legal fees, lender fees, survey fees and broker fees.

Bridging loan interest rates are quoted as monthly amounts and you might receive a rate of between 0.5% and 1% per month.

Lower rates might be offered for lower loan to value loans, for properties that don’t require extensive refurbishment and for applicants with good credit histories.

A typical example of the costs of a loan might be:

• A £260,000 loan was set up with a monthly interest rate of 0.59%
• After six months, the clients had sold the property for £300,000 and were able to pay off the bridging loan

They needed to repay:

• The original loan – £260,000
• The accumulated interest – £9,204
• The arrangement fees – £5,200 (calculated as 2% of the loan)
• This meant the total to repay was £274,404 and the balance paid to the clients was £25,596

If you are considering bridging finance, use our bridging loan calculator to see how much it might cost for various loan amounts and terms.

Min & Max Loan

£100,000 to £50 million

Max LTV

Up to 80%

Loan Term

1 month to 2 Years

Interest Rates From

0.55% pm

More info

Bridging finance for downsizing/upsizing residential property; Light & heavy refurbishment finance for residential and buy to let property; Finance for unmortgageable properties

Clifton Private Finance are an award winning specialist finance broker working with a wide range of market leading lenders who provide residential and commercial short term finance for property transactions.

How quickly can I get a bridging loan?

Bridging lenders are essentially making lending decisions based on the value of the property, rather than conducting a detailed assessment of your financial circumstances, so this helps to speed up the decision making process. It has been known for applications to complete in as little as one week, especially when the purchase is for investment purposes; on other occasions it might take four to six weeks, but it will still be faster than you might expect for a standard mortgage application.

Mortgage v bridging loan

It’s possible you could obtain bridging finance if your credit history means it’s difficult for you to obtain a standard mortgage.

Bridging loans also have several uses that make them especially useful to property developers. You won’t be able to get a standard residential mortgage on an uninhabitable property, or on an area of land that doesn’t have planning permission, but it is possible to obtain bridging finance in these circumstances. It’s not uncommon for a developer to use a bridging loan to buy an uninhabitable property, then to renovate the property, before obtaining a standard mortgage, which is used to pay off the bridging loan.

Other examples of when a bridging loan might be used 

Bridging loans are often used when people buy a new home at auction, especially if they use the traditional auction method. This is because there is often a requirement to complete the purchase within 28 days, and there just isn’t time to complete the normal mortgage application process in time. Having a bridging loan effectively gives auction purchasers the flexibility to act as if they were a cash buyer.

Alternatively, you might need to buy a new property before the sale of your existing property has completed. You might still want to proceed with the purchase when a buyer pulls out and breaks the chain, or you might be a landlord who wants to complete the purchase of an investment property swiftly.

For examples of how bridging loans can work in different property scenarios see a range of bridging loan case studies across the UK.

Is bridging finance regulated? 

As with most financial services firms, bridging lenders will usually be authorised and regulated by the Financial Conduct Authority. Your bridging loan will be regulated if it is secured against your own home – it won’t be regulated if you let out the property, or it’s a commercial property, or you don’t intend to live in it for any other reason.