What is a Bridging Loan?

A Bridging Loan is a loan that is taken out to solve a temporary cash shortfall that may arise when buying a property or business, or perhaps paying for a renovation. A typical example would be a requirement to pay for a new house before moving out of the present one (due for example to delays in exchanging contracts). Or a bridging loan may be needed when buying property at auction.

As these loans are more risky for the lender than the usual loan, bridging loans are more expensive, and should only be used where they can be repaid within 6 months or so.

How they work?

In the case of buying property, a Bridging Loan is normally secured by getting a mortgage on the new property, and taking out a second mortgage on the property being sold. In this case the loan will depend on a positive valuation of the relevant properties.

Lenders will usually allow Bridging Loans of up to 65% of the value of the properties – minus the value of any existing mortgage. But this will depend on the lender. Shop around for best deals. It is usually possible to borrow between £25,000 and £500,000 as standard. Larger loans are possible but may take slightly longer to arrange.

Where to get a bridging loan?

It is often possible to obtain a Bridging Loan from a bank, or alternatively, from a specialist bridging lender. The specialist lender is usually preferable because they are geared up to process loan applications very quickly. They can often transfer the funds within a few days of the application being received. The average would be a week or so – depending on how long the conveyancing takes to complete.

Activity in the bridging-loan market is small scale, especially during a property boom when there is rarely a problem with selling a home quickly. But when the market slackens off, more home owners are forced to consider these loans.

Types of bridging loan

There are two main types of bridging loan; the ‘closed’ bridge and the ‘open’ bridge. A closed bridge is only available to homebuyers who have already exchanged on the sale of their existing property. Very few sales fall through after exchange, so lenders are happy to offer closed-bridge financing.

An ‘open’ bridge is taken out by buyers who have found their ideal property, but may not have put their existing home on the market. A lender will require a considerable amount of supporting information. It will also insist on there being substantial equity in the existing property. Most lenders put a 12 month limit on an open bridge. After that, they will probably renegotiate as long as interest payments on the loan are up to date, and the property has not lost significant value due to the prevalent market conditions.
Interest rates

All bridging deals involve high interest rates. Usually this rate is equivalent to the Bank of England bank rate plus 2% to 2.5%. There will also be an arrangement fee amounting to 0.5% to 1.5% of the value of the loan. Some lenders charge higher rates of interest and lower arrangement fees. There are also specialist lenders that are faster at issuing the cash, but borrowers can expect to pay a high price for this service.