A bridging loan is a unique type of short-term loan that “bridges” the gap between something you’re purchasing (often a property) and the sale of what will fund it.
They tend to be necessary if you want or need to complete the purchase before you have the money to pay for it (for example, if you’re waiting for your own property sale to go through).
While these types of loans are fairly niche they are growing in popularity. According to data from Bridging Trends the proportion of bridging loans used by homeowners hit a three-year high at the beginning of 2024.
Tomer Aboody, director of property lender MT Finance, said: “Demand for bridging finance is growing as buyers demand a quick solution to prevent their purchase falling through.
“This is particularly useful if the buyer is in a competitive bidding scenario, perhaps vying against cash buyers who are able to move more quickly than someone relying on a traditional mortgage.
“With bridging finance often completed within a matter of days rather than months, it can put buyers ahead of the competition.”
If you’re completely certain that you can repay the bridging loan on time, it can be a good way to fund your next property purchase.
Here, Telegraph Money explains how bridging loans work and what you need to be wary of before securing a loan against your home.
How do bridging loans work?
Bridging loans are normally accessed via a mortgage broker. Lenders usually require you to have a deposit of 30-40pc and you will be charged a percentage of the loan amount.
The average monthly interest rate is around 0.89pc and you have the choice of a fixed or variable rate just like with a standard mortgage.
You can choose between an open loan, which has no fixed date, and a closed loan which fixes the borrowing period, usually around 12 months. It makes sense to keep the term of the loan as short as possible to minimise the interest you will pay.
Some loans can also be exited early without any exit fees or early repayment charges, which means you can repay as soon as you’re ready – but you’ll need to check the specific terms.
Laura Toke, bridging relationship director at broker SPF Short Term Finance, said: “The monthly interest charge is either paid monthly or it is added on to the loan and paid back at the end, depending on the type of loan.
“Interest is calculated on a monthly basis, so the longer you have the loan, the more it’ll cost. If you repay the lump sum before the term ends, you may save some interest. Any fees associated with the loan can be added on to it.”
It’s important to consider bridging loan repayments as one of your top priorities when repaying debt. Generally, your mortgage will be the “first charge loan” on your property (that is, it takes precedence over other types of borrowing if you cannot make repayments). A bridging loan would be the second charge – however, if you don’t have a mortgage the bridging loan could be the first charge.
Why might I need a bridging loan?
There are all sorts of reasons you might consider getting a bridging loan.
For example, if you wanted to buy a property with a deposit of £300,000, but you only have £100,000 in savings to put towards it until your home sells. You can take out a bridging loan for £200,000 to secure the purchase of the new property if you’re under pressure to complete on your new home – perhaps because of a job relocation or if you’re worried you’ll miss out if you wait.
Bridging loans can also be used to fix a broken chain in cases where your buyer has pulled out and you need to complete on your purchase to avoid losing it.
Indeed, the latest report from Bridging Trends showed preventing a chain break was the second most popular purpose for obtaining bridging finance in the first three months of 2024, rising to 19pc from 16pc in the previous quarter.
The report said with conveyancing delays leading to protracted home purchase transactions, and the potential for a greater number of broken chains, more homeowners are turning to bridging to secure the home they want to buy.
Ms Toke said: “Bridging is also used for refurbishment, to raise funds to enable you to complete cosmetic or structural works to your property. Occasionally uninhabitable properties will come up for sale and bridging enables you to purchase the property, complete the required works and then either sell or obtain longer-term finance, such as a standard mortgage or buy-to-let.”
There are other more specialist reasons, such as if you’re purchasing a buy-to-let investment property.
Mr Aboody said: “Bridging is also widely utilised by investors, whether to purchase a property in the first instance or for light or heavy refurbishment. Unlike a standard mortgage there is no requirement to have a working kitchen or bathroom in place, giving investors much more scope.”
If you’re buying at an auction where you typically have only 28 days to complete, a bridging loan can allow you to bag the property you want if you don’t have the cash.
Ms Toke said: “A standard mortgage would simply take too long to organise.”
A loan might also help with a divorce where you want to pay a settlement without waiting for the main home to sell. It means your ex-spouse can fund a new house purchase earlier and avoids having to live together longer than you want to.
How to borrow with a bridging loan
If you decide that a bridging loan is right for your circumstances then you’ll likely need to find a mortgage broker to arrange one, if you don’t already have one.
While some high street banks and private lenders offer bridging loans, most of these are only available through loan brokers.
Using a broker means paying a fee for their services but it should be money well spent if you can secure the right loan for your circumstances – and get someone working on your behalf to get the money fast.
If you go ahead it’s crucial that you have a solid exit strategy – that is, a firm plan to repay the bridging loan.
It might pay to take financial advice and see whether an alternative form of borrowing might suit you better before you go ahead.
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