What is a bridging loan? A plain English guide

What is a bridging loan?

A bridging loan is a short-term, secured loan designed to bridge a gap in funding. The gap might be a timing gap (you need money now but your long-term finance will not be in place for a few weeks), a property gap (you want to buy something before you have sold something else), or a suitability gap (the property does not qualify for a standard mortgage in its current condition).

The "bridging" name comes from the original use case of bridging the gap between buying one property and selling another. The concept has broadened considerably and bridging finance is now used for property development, auction purchases, commercial acquisitions, and a wide range of other situations.

Bridging loans are always secured against property. The lender takes a legal charge over the property (or properties) being used as security. If you do not repay the loan, the lender can take possession and sell the security to recover what is owed.

How does it work?

You borrow a fixed sum against a property. The lender agrees a loan amount, an interest rate, and a term (usually between one month and 24 months). At the end of the term, you repay the full loan plus any outstanding interest and fees.

Interest on bridging loans works differently from a standard mortgage. There are two common approaches:

• Retained interest — the total interest for the full term is calculated upfront and deducted from the loan before it is paid out. You receive a net loan and make no monthly payments. At the end of the term you repay only the original loan amount (the interest has already been retained).
• Serviced interest — you pay the interest monthly, as you would with a mortgage. The monthly payments are lower than the equivalent mortgage payment because you are only paying interest, not capital.

Some lenders offer a combination of both, or allow you to service interest for a period and then roll it up for the remainder.

What does it cost?

Bridging loan interest is quoted monthly rather than annually. Rates currently start from around 0.55% per month for straightforward residential security with a strong exit strategy and a clean borrower profile. More complex cases, commercial security, or higher loan-to-value ratios typically attract higher rates.

In addition to interest, you will normally pay:

• Arrangement fee — typically 1 to 2% of the loan amount, payable to the lender
• Broker fee — if you use a broker (like us), there may be a fee for arranging the loan. We are transparent about this from the start
• Valuation fee — the lender will instruct a RICS valuer to assess the security property
• Legal fees — both you and the lender will have solicitors, and you will normally pay both sets of costs
• Exit fee — some lenders charge a fee when you repay the loan, though this is less common

What is an exit strategy?

An exit strategy is your plan for repaying the bridging loan at the end of the term. Lenders will want to understand and be satisfied with your exit before they will offer you a loan.

Common exit strategies include:

• Sale of the security property — the most straightforward. You sell the property and use the proceeds to repay the bridge.
• Sale of another property — for example, you have bought a new home on a bridge and are selling your existing home. When the sale completes, the bridge is repaid.
• Refinance to a mortgage — once the property is in a suitable condition, you refinance onto a standard buy-to-let or residential mortgage. The new mortgage pays off the bridge.
• Refinance to a development loan — if you have bought a site on a bridge, you might refinance to a longer-term development facility once the project is more advanced.
• Other funds — sale of other assets, inheritance, business sale proceeds, and similar.

Your exit strategy needs to be realistic and achievable within the loan term. A lender will scrutinise it carefully and may ask for evidence that it is credible.

When does a bridging loan make sense?

A bridging loan can be the right solution in a surprisingly wide range of situations. Common examples include:

• You want to buy a property at auction and need to complete within 28 days
• You have found your next home but your existing home has not sold yet
• Your property chain has collapsed and you want to proceed anyway
• You are buying a property that needs work before it is mortgageable
• You are a developer funding a ground-up build or heavy refurbishment
• You need to move quickly to secure a time-sensitive deal
• Your property is unmortgageable for any reason (non-standard construction, no kitchen, structural issues)

What are the risks?

Bridging loans are more expensive than standard mortgages and carry real risks. The main ones to understand are:

• Your exit does not materialise in time. If your property does not sell or your refinance falls through, you may not be able to repay the bridge before the term ends. This can lead to expensive extensions or, in the worst case, the lender enforcing their security.
• Costs add up quickly. Monthly interest of 0.70% sounds modest, but over 12 months that is 8.4% of the loan amount in interest alone, before fees. On larger loans the total cost is significant.
• Property values can fall. If the security property falls in value during the term, you may find it harder to refinance at an adequate LTV or achieve the sale price you planned for.

We will always talk through these risks with you honestly before recommending a bridging loan. If it is not the right solution for your situation, we will tell you.

How to apply for a bridging loan

The process typically works as follows:

1. We have an initial conversation to understand your situation, the security property, and your exit strategy
2. We identify suitable lenders and obtain indicative terms
3. You choose a lender and we submit a formal application
4. The lender instructs a valuer and their solicitors
5. Legal work completes and funds are released

For straightforward cases, this can happen in as little as five to seven working days from the initial conversation to completion. Complex cases take longer.

If you would like to understand what might be available for your specific situation, call us on 01772 217917 or complete our online enquiry form. We are happy to have an informal conversation at any stage.