Bridging loans explained

Bridging loans explained

August 11, 2023

Bridging loans can be useful for lots of reasons such as helping you buy a house if your chain breaks down, if you’re downsizing but want to buy before you sell, or if you’ve bought at auction but can’t get the funds ready on time. We explain what bridging loans are, when they are used, pros & cons, costs and how to apply.

What is a bridging loan?

Bridging loans are a way to borrow money in the short term. They can be used to ‘bridge the gap’ if you need to buy one property before selling another. Unlike mortgages, bridging loans can be arranged quickly if speed is important.

However, bridging loans are a secured loan, meaning that you have to secure an asset against them, usually a property or properties. As there is a risk of losing your asset, bridging loans are sometimes known as the loan of last resort.

What can I use a bridging loan for?

Here are some examples of when you may consider using a bridging loan:

  • You are in a property chain that has collapsed and you don’t want to lose out on buying your dream home.
  • You are buying an auction property  and need to raise funds quickly.
  • If you want to downsize. By taking out a bridging loan to fund your new purchase, you’ll have longer to sell your current home so you may be able to achieve a higher sale price. It also removes the stress of having to buy and sell at the same time.
  • When buying a property that is un-mortgageable. Your plan is to make it habitable or lettable so a traditional mortgage can eventually be arranged.
  • If you’re buying land, it could help cover the cost of the land and building 

How do bridging loans work?

So, how do bridging loans work? You can typically borrow between £50,000 and £10 million with a bridging loan. The amount depends on how much equity you have available. The maximum loan, including interest, is normally limited to 75% loan to value. The loan is then secured on the property or it can be across multiple properties to raise the required funds. Bridging loans, unlike a mortgage, are not directly linked to your income.

Here’s an example of how bridging loans work:

  1. You want to buy a house for £300,000 and you need to put down a £100,000 deposit and borrow the rest on a mortgage.
  2. But your current house hasn’t sold yet and you only have £25,000 in savings.
  3. You ‘bridge the gap’ by taking out a £75,000 bridging loan for the rest of the deposit.
  4. When your current house sells, you use money raised by the sale to pay back your £75,000 bridging loan.

What are the pros and cons of bridging loans? 

Make sure you balance up the pros and cons before you apply for a bridging loan.

Pros of bridging loans

  • Speed: You can quickly borrow money, which could keep your property transaction on track.
  • Bigger loans: It is possible to borrow very large sums of money.
  • Flexibility: The repayment terms can be flexible to fit in with your plans.
  • Provide extra options: It may possible to secure lending on properties where high street lenders may not.

Cons of bridging loans

  • Secured against property: Bridging loans are a secured form of borrowing, so you’ll need to put up an asset against the loan. This means you risk losing that asset, for example a property, if you can’t repay the bridging loan.
  • Higher rates: You pay for the convenience of fast, flexible finance with a higher interest rate.
  • Fees: Bridging loans can come with a range of fees that add to their expense

For more information, please contact us to discuss the options available to you. 

Leave a Comment