Bridging Loans: How do they Work?


Bridging loans can be useful for a variety of different reasons, especially if you’re trying to buy a new home before you sell your current one. 

In this guide, we’ll explain what bridging loans are, how they can be used and the pros and cons of them. 

What is a bridging loan?

A bridging loan is a short term loan that is used to essentially “bridge the gap” when you want to buy something, such as a house, but you’re waiting for the funds to become available from the sale of something else. 

What can I use a bridging loan for?

Bridging loans are often used by those who want to buy a new property before selling their current one. 

As well as buying property they can also be used for:

Types of bridging loans

There are two types of bridging loans which are appropriate for mortgages:

Open bridging loans 

Open bridging loans have no fixed repayments dates, and so they can be paid whenever the funds become available to do so. 

However, lenders will usually expect the debt to be cleared within one year. Some may offer longer repayment terms, but this can vary from lender to lender. 

Closed bridging loans

Closed bridging loans have fixed repayment dates. This date will usually be based on when you know the funds will be available, such as when the sale of your house has taken place. 

Closed bridging loans are usually cheaper than open ones since there is less flexibility available around repayments. 

Whichever type of bridging loan you choose, lenders will want to see how you plan on repaying it. This is sometimes referred to as an ‘exit plan’. 

What are first charge bridging loans?

When you take out a loan, your lender will place a ‘charge’ on your property. This basically means if you fail to repay the loan, they will take their repayment from the sale of your property. 

A first charge bridging loan is when you don’t have any other loans already secured on the property, for example, if you own it outright. This means if you fail to repay the loan and your home is sold to pay the debt, the bridging lender will receive their repayment first. 

What are second charge bridging loans?

A second charge bridging loan is when you already have one or more loans secured on your property, such as a mortgage. This means if you fail to repay the bridging loan and your home is sold to pay off the debt, the bridging lender will take their repayment second, after the mortgage provider has taken theirs.

Second charge loans are more expensive than first charge loans. This is because there is a greater chance the second charge lender won’t get their money back if you can’t keep up the repayments. A second charge lender will usually also require the consent of the first charge lender, which is typically the mortgage provider. 

How much can I borrow with a bridging loan?

Generally speaking, lenders will offer bridging loans from anything between £5,000 to £25 million. The amount you can borrow will depend on your current financial circumstances and your credit history. 

Most lenders will allow you to borrow up to 75% of the value of your property. 

Pros and cons of bridging loans

Whilst there are some unique benefits to bridging loans, there are also cons too. 

Pros of bridging loans 

Listed below are several benefits to bridging loans:

  • Speed of arrangement – Bridging loans can typically be arranged in a very short timescale, usually in as little as a few days. This makes them ideal for raising the funds for critical purchases. 
  • Low borrow costs – Depending on your financial situation, you may be able to get lower interest rates and fees. However, this will be assessed on an individual basis. 
  • Simple lending criteria – Applications for bridging loans are considered on an individual basis by the lender and they are generally open to all applicants, even those with a less than perfect credit history. 
  • Deferred payment – Bridging loans are typically repaid in full, including any interest that has accumulated at the end of the loan period. 

Cons of bridging loans 

Although there are positives, it’s important to be aware of the negatives to bridging loans too:

  • High interest rates – Compared to traditional loans, bridging loans tend to have higher interest rates due to the short term nature. 
  • Collateral – Since a bridging loan is a secured loan, it is necessary to have sufficient collateral to offer the lender as security. If you don’t have enough equity or assets to guarantee the loan, finding a lender who is willing to lend to you may be difficult. 
  • Fees – There are various fees and charges that are associated with bridging loans which can very quickly increase the overall cost of the loan. Since many lenders will charge administrative fees and completion fees, it is worth knowing what costs you will need to take into account. 

How long does it take to get a bridging loan?

Depending on various factors, it can take anywhere from 72 hours to a couple of weeks to receive your bridging loan. 

Although it isn’t the quickest type of finance to get approved for, once you have been approved, actually receiving the loan is a relatively quick process. 

Differences between a mortgage and a bridging loan

Although bridging loans and mortgages are similar in the sense they are large loans that can be used to fund a property, they do have a few key differences between them. 

Bridging loans are short term loans that allow borrowers to bridge the financial gap, whereas mortgages are long term loans that span up to 35 years and consist of monthly repayments.

FAQs about Mortgages and Bridging Loans

How are bridging loans paid back?

When it reaches your bridging loan repayment date, usually 12 months after the loan was taken out, you will pay back whatever you’ve borrowed as one lump sum as soon as you’re able to. 

Like with all loans, you will be charged interest each month. Depending on what type of bridging loan you have, the interest may be payable each month, or added onto the final lump sum payment. 

Can I get a bridging loan with bad credit?

Yes, it is possible to get a bridging loan even if you do have bad credit. Lenders have quite a flexible approach to bridging loan applications compared to other types of loans.

However, those with very poor credit scores may find that the extended rate is not as favourable as applications made by those with clear credit scores. 

Is a bridging loan more expensive than a mortgage?

Bridging loans are typically more expensive than mortgage loans in the short term, as you’ll face additional costs. 

These costs tend to come from higher interest rates and a mixture of different fees, such as valuation and underwriting fees. 

However, mortgages are of course more expensive in the long run since you pay them for a much longer length of time compared to bridging loans. 

Can I use a bridging loan for a Buy to Let property?

Yes, there are bridging loans specifically made for the buy-to-let market. The loan can be used to secure a property that you intend to rent out but don’t have a basic mortgage or deposit organised. 

You can use a bridging loan for either commercial or residential properties.

About the author 

Gary Oxborough

Gary is the Founder and Director of Barlow Irvin Financial Services Ltd. He has been in the Finance industry for over 20 years and has specialised in Mortgages since 2003. As well as running the firm, he is still actively involved in advising clients.

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