Bridging Loan

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Full Guide to Bridging Loans

Bridging loans are a unique type of short-term property finance.

Despite their many uses and invaluable flexibility, most people don’t know much about them and how they can be used to guarantee a property purchase you have your hopes set on.

In this guide, we cover everything you need to know about bridging loans, including:

• How they work
• What they can be used for
• How much they cost
• How much you can borrow
• And how you can get one

And we include plenty of case studies to showcase precisely how they work in real-life scenarios.

Written by: Sam O'Neill & Sam Hodgson
Last Updated: 11/03/2023

What is a bridging loan?

A bridging loan is a short-term loan used to buy property and is repaid when long-term funding is put in place, usually via a mortgage or the sale of the property or another asset.

Unlike a standard mortgage that you repay monthly, a bridging loan is designed to be repaid in one lump sum at the end of your term (usually 12 months). 

So, you'll need an 'exit' to your bridging loan, which is most commonly selling another property (your old home, for example), but can also be flipping the property you bought with a bridging loan, or getting a standard mortgage to refinance. 

They're often used to buy property while you wait for another property or asset to sell - bridging the gap in your funding - and are repaid when your sale is completed.

They're also secured against property - either one you're buying, one you currently own, or both - so the interest rates can be lower than other types of short-term loans.

For example:

• You are buying a new family home and selling your existing one.
• You’ve made an offer on a property you’ve fallen in love with, but the buyer of your current house pulls out, meaning you can’t complete your purchase.
• To avoid losing the new home, you can use a bridging loan secured against your current property to fund your purchase.
• Bridging loans usually have a 12-month term, so you’ll have 12 months for your house sale to go through, and you can exit your bridge (repay your loan) as a lump sum when the sale goes through.
• Keep in mind you'll only pay interest for the months your loan is outstanding (so if you sell after 6 months, for example, you'll only pay 6 months of interest)

So, you don't have to rush a sale and lower your asking price, and you don't lose out on your dream home.

Because bridging loans are secured against your existing property or assets, interest rates are much cheaper than what you’d expect to pay for an unsecured loan, and you can borrow a lot more.

Generally, you can borrow as much as you want as long as you have a verifiable way to pay it back within 12 months (your exit strategy). You can also get 24 month or even 36 month bridging loans depending on your situation and the lender.

In addition, the interest you pay on a bridging loan is rolled up into the total value of your loan instead of being charged monthly.

This means that you don’t have to worry about making monthly interest (or capital) repayments during the term of your loan, and you can protect your cash flow for your relocation or living costs.

Once your property or other asset has sold, you can then pay off your interest comfortably.

You'll also hear bridging loans referred to as a 'loan bridge', 'bridge loan', or just a 'bridge', which are simply other terms used to describe bridging loans. 

Watch our video below - Bridging Loans Explained: Costs, Timescales, Examples, & How To Get One:

What are bridging loans used for?

The clue is in the name. Bridging loans are typically used as a short-term solution to bridge a gap between a purchase and a sale or another combination of transactions where a standard, long-term mortgage wouldn’t be suitable.

The typical example above is using a bridging loan to buy a house before selling your current one.

However, other bridging loan uses are often overlooked, and many people don’t realise how useful they can be in certain situations.

Ranging from simple to complex, here are some examples of bridging finance solutions.

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9 Example Uses for Bridging Loans 

1. Residential Bridging loans

E.g., a bridging loan to buy a house before selling your home.

This is one of the most common uses of residential bridging finance, and it’s as simple as it sounds.

Buying a new house while selling your current home can be stressful. A considerable amount of administration and various costs are involved, and if something goes wrong, it can amplify the pressure.

Many people choose to use a bridging loan to secure their new house while they wait for their current home to sell for the following reasons:

• Using a bridging loan effectively makes you a cash buyer – this is a great position to be in, and your offer to buy will be attractive to property sellers.
• It gives you 12 months to sell your house – you give your current home time on the market to generate interest and generate a great offer.
• This means you don’t have to worry about buyers pulling out.
• And you can even raise more funds than your new purchase value and spend the extra money on some refurbishments to your old property to increase its value before selling.

Read our full guide to residential bridging loans.

And here's a detailed example: Bridging Loan For Buying A House: Example Of How It Works 

2. Bridging loan to downsize

Using a residential bridging loan to downsize into a smaller property is also an everyday use of bridging finance.

Along with all of the above benefits, you also benefit from raising a lot more than you are buying for, because the property you are securing your loan against will likely be more valuable.

For example, if you are selling your property for £500k and buying for £350k, a bridging lender would happily lend you £500k to be repaid upon the sale of your property, which after buying your new home, would leave you with £150k to fund:

• Moving costs
• Refurbishments on your current home to increase its value
• Any work required on your new home before you move in
• Legal costs and other fees you’ll need to cover throughout your house purchase process

Read our guide on How A Bridging Loan Can Help You Downsize Your Home In Retirement 

3. Bridging loan to fix a chain break

If your buyer has pulled out last minute you face losing the new home you have your heart set on, and you need to act fast with a solution.

One of the main advantages of bridging finance is its speed.

With a standard mortgage, your bank needs to ensure you can afford to gradually repay your loan over 25 or 30 years with money you don’t yet have (based on your income, credit score etc.)

The affordability calculations are complex and time-consuming, and there’s a lot of red tape to get through for your underwriter.

However, a bridging loan will be repaid as a lump sum within 12 months from assets you already have – in this case, the property you sell (or with a standard mortgage for which you'll just need a Decision in Principle for your lender).

This means bridging lenders can arrange finance significantly more quickly than a standard mortgage lender.

Our typical time frames for arranging bridging loans are from 2 to 6 weeks, with an average of 3 to 4 weeks, depending on the case's complexity. However, we can raise bridging loans as quickly as 3 working days in some situations.

If you’re unsure if we can meet your tight deadlines, give us a call and speak to a bridging adviser and find out if you need bridging loan advice.

Read our how-to guide on the process: How To Use A Bridging Loan To Buy A House Before Selling 

4. Bridging loan to buy an unmortgageable property

What do you do if you’ve found a significant development opportunity but can’t get a mortgage to buy it because of its condition?

If your property is uninhabitable, not wind and watertight, or has structural issues, you may be unable to get a mortgage.

So, if you don’t have the cash to pull together and buy the property outright, a bridging loan is probably your only solution. - but they're designed for exactly this type of transaction. 

Property developers frequently use bridging loans to purchase a property that can’t be mortgaged:

A bridging loan secures the property; you have 12 months to develop it up to mortgageable standards. You can then refinance onto a standard property loan (using the mortgage to repay the bridging loan and then repay the mortgage monthly as standard). Or, sell the property you've developed for profit. 

Please read our complete guide on this: How to get finance to buy an Uninhabitable property 

5. Bridging loan to buy a property at auction

If you’re buying a property at auction, you must complete the purchase within 28 days.

This time frame is too short for a standard mortgage.

Bridging loans can be arranged quickly under the agreement that you will later refinance with a standard mortgage.

Because your bridging lender knows that you will repay your loan as a lump sum through an entire mortgage, they can release the funds within 28 days in most cases.

You then have 12 months to remortgage your bridging loan to repay the bridge, and often your bridging loan adviser will recommend the right product for you that fits your requirements.

Read our comprehensive guide to property auction finance here

And here's a recent case study of how we helped a client buy a property at auction with a bridging loan:

6. Interest only mortgage bridging loan

Interest only mortgages are often used to purchase large, high-value properties that are typically very unique and/or bespoke to the owner.

This makes them hard to sell, and it can often take 12 months to find a buyer. This is where bridging loans come in.

You can use a bridging loan to fill the gap between when your interest-only mortgage ends and finding a buyer for the property - to buy you more time on your property sale and not have to lower the price and force a sale.

An interest only mortgage bridging loan provides an extra 12 months to your deadline, and you can repay it upon selling your property or other assets. 

7. Bridging finance to pay for care fees

Clients often approach us in the difficult situation of arranging for their parents or family members to move into care, and needing short-term finance to cover the costs.

Care fees can be costly, and if your family member doesn’t have the savings to cover the initial costs, on top of moving expenses, it can be challenging to find the money to pay for them.

The long-term solution usually uses the proceeds of the family member’s house sale to cover the ongoing care fees.

However, if they’ve moved into care unexpectedly, you probably won’t have time for the house sale to go through before care fees are due.

And if the property has been lived in for a while, it may need some TLC and refurbishments to get it up to its full market value before selling.

A bridging loan, secured against the property for sale, is the perfect solution to take the stress and pressure away from a delicate situation, creating the space and time for you to focus on the health and comfort of your loved ones rather than financial logistics.

A 12-month bridging loan can be used to pay for any initial care fees, moving costs, and property renovations, and can be repaid when the property sells, giving it plenty of time on the market to receive reasonable offers.

Because the bridging loan is secured against the property, interest rates are much lower than a standard mortgage would charge, and you can borrow much more – at least up to the full value of the property if needed.

Read our full guide for more on bridging loans for care home fees »

Related: Is a bridging loan a good idea? Find out if they're right for you. 

And here's a recent case study where we helped our client use a bridging loan to pay for care fees while waiting for their house to sell.

8. Bridging loan to flip a property (bridge to let)

Bridging loans for property development are becoming more popular in the UK. 

Whether you’re new to property development or have a portfolio behind your belt, a bridging loan can be a great short-term development funding solution.

For example, you may have significant wealth already - enough to cover the purchase of your new development project – but might not want to liquidate it to make the purchase, especially if you plan to flip the property for a profit after completing your work.

In this case, a bridging loan can secure the property under the condition you sell it before your term ends, and you can carry out your development work and keep the profit on the sale.

For more, here are our services for Short Term Loans For Flipping Houses

We also source bridge to let finance, which enables landlords to secure BTL opportunities and expand their portfolio quickly. 

The process is usually comprised of 3 steps:

Step 1: Purchase your development property project with a short-term bridging loan.

Step 2: Use the additional funds raised to complete development work on the property.

Step 3: Sell the property for a profit, covering the fees of bridge financing, the development costs, and your income.

The bridging loans we can arrange have the interest rolled up into the loan's value, which means you don’t have to worry about making monthly interest repayments throughout your loan. Instead, you can protect your cash flow for use on your project.

Here’s our full guide on how to use refurbishment loans to buy and sell a house 

9. Bridging loans for commercial development projects

Commercial bridging loans are a slightly different type of bridging finance.

Suppose you’re looking to run a business from your property, and the business profits will fund its mortgage.

The problem is that your business may not be earning enough (or anything at all) yet without the property, so you don't have the income for a commercial mortgage. 

In this scenario, a bridging loan can initially secure the property to start the business, and generate income, and you can then refinance later with long term funding.

Here's a step-by-step breakdown:

Step 1: Purchase a property with the potential to generate income with your bridging loan – for example, a property with land on which you can build a series of holiday lets.

Step 2: Include your development finance in the value of your bridging loan to allocate these funds to set up your business on the property – for example, converting 3 vacant buildings into holiday lets.

Step 3: Once the business is up and running and generating income, refinance onto a regular, long-term mortgage to be repaid by the revenue from your company.

For complex scenarios like this, it’s always best to speak to an adviser early on so that we can get an overview of your plans and assess the likelihood of us being able to secure the relevant finance.

Related guide: How to get refurbishment finance for a buy to let property

And here's a real case study where our clients used a bridging loan to secure a property they converted into a holiday let business before refinancing. 

Net and Gross Bridging Loan Calculations

Understanding the difference between net and gross calculations is essential when comparing deals from bridging loan lenders.

The calculation determines the maximum LTV (Loan-to-Value), how much you can borrow, and how much you will eventually repay.

Here’s the difference:

When calculating the net loan amount for bridging loans, the borrower deducts the loan costs and additional fees (such as the arrangement fee) from the total loan amount - this is known as net loan calculation.

Contrary to that, gross loan calculation is based on the loan amount the borrower can receive without deducting any costs or fees.

In brief, the gross loan calculation represents the total amount available to the borrower, while the net loan represents what the borrower ultimately receives after deductions.

Which calculation do lenders use for bridging loans?

A common complication arises when it comes to comparing bridging lenders, as different lenders advertise their bridging loan products differently. The upshot of this, is that it can become difficult to determine if a higher LTV (loan-to-value) represents the actual amount you could receive.

Lenders typically use a gross loan calculation when advertising or promoting their bridging loan products.

This is because the gross loan amount represents the maximum loan amount the borrower is eligible to receive, and can be used as a marketing tool to attract potential borrowers.

Nevertheless, the net loan calculation is used when negotiating an agreement, which is the amount the borrower will receive after deducting fees and other costs.

Borrowers are responsible for repaying this amount, and lenders will use that amount to determine repayment schedules and other loan terms.

How a broker can help with bridging loan calculations

A broker can assist with bridging loan calculations by providing clarity, expertise, negotiation skills, and a comparison of loan options to help you make more informed decisions.

Bridging Loan Criteria

Each bridging loan lender in the UK has its own list of bridging loan criteria that a borrower has to fulfil to qualify for a loan. Some lenders look for low-risk borrowers, while others have niche areas they specialise in and can facilitate. 

As a rule, there are two essential criteria you'll need to meet:

• You will need to have a form of security (or deposit for your bridging loan) - usually one or more properties or an asset that the loan can be secured against.
• You will need to have a solid exit strategy to repay the loan. A lender will want to know how you will repay the loan by the end of the agreed term. In most cases, this is either be through selling the property, selling another property, or refinancing with a traditional mortgage loan.

Since the loan is secured against property or other collateral, a lender won't need proof of income. Equally, your credit history won't affect an offer as long as any outstanding debts or adverse credit doesn't impact your ability to repay the loan. However, if you do have a bad credit rating, you may have to pay higher interest rates.

Read our full guide on bad credit bridging loans.

Other basic criteria you will need to fulfil include:

• Minimum age of 18 years old
• You must use the loan to purchase or refurbish residential or commercial property
• Live or have a registered address in the UK (UK expats are eligible for bridge finance in the UK)

Bridging finance is available to individuals and businesses. Loans can be set up for:

• Private individuals
• Limited Companies
• Partnerships
• Offshore companies

If you have any questions about your eligibility for a bridging loan, speak to one of our advisors who will be happy to discuss your situation.

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How much does a bridging loan cost?

There is a range of different costs involved with bridging finance. What your exact bridging loan cost will be depends on the complexity of your case, your loan size, and other factors.

Here’s a list of bridging loan costs and how they work:

• Bridge Loan Interest Rates
• Valuation fee for any properties (we can negotiate a £99 automated valuation option for properties up to £1 million)
• Legal fees (can be around £850)
• Broker fees (typically £995 but varies depending on complexity)
• Facility/arrangement fees (typically 2% gross of the loan)
• Drawdown fee (doesn't always apply but typically £295)
• Exit fees (can be 1.25% of your loan size, but at Clifton Private Finance we try to avoid working with lenders that charge exit fees)

The interest you repay on your bridging loan is calculated as a monthly rate instead of an annual rate, like with a standard mortgage.

This is because you may not hold your bridging loan for a whole year, and most bridging lenders allow you only to pay interest on the months you’ve held your loan if you repay it early.

Because of the short-term nature of bridging finance,  interest rates are usually much higher than a typical mortgage, but you only need to pay the rate for a much shorter period.

• Your bridge loan rates will be affected by several factors, including:
• Your loan to value ratio (LTV)
• How much do you want to borrow, and for how long (for example, we can source lower rates for bridging loans over £750,000)
• The condition of the property and what you’re planning to do
• Whether it’s a regulated or unregulated bridging loan
• The location of the property
• Your credit history

For more information, please read our complete guide to bridging loan costs.

The bottom line

When weighing up the cost of a bridging loan, the critical thing to remember is how much value the loan can add to your life or business.

If it means you can snap up your dream property and there’s no other alternative, it’s likely more than worth it.

And our clients often find that they entirely cover the cost of their bridging loan from the profit they make on refurbishing their existing property and securing its total value on the market with longer to sell.

Use our free bridging calculator to see how much your property finance could cost.

There are cheap bridging loans out there, and we think it's worth using a broker to help you find them.

Related: Our guide on how to compare lenders and find the best bridging loans.

Are bridging loans regulated?

There are two types of bridging finance: regulated bridging loans and unregulated bridging loans.

It simply depends on the intended use of the property you're purchasing. 

When you or a family member intend to live in the property you’re purchasing with your bridging loan, you’ll need a regulated bridging loan.

If you're getting bridging finance on property that you or a family member will not be living in, or if it’s a commercial property, then you’ll need an unregulated bridging loan (commercial bridge loan). 

And if you intend to sell the property to repay your bridging loan (flipping the property) instead of refinancing or selling another property, you’ll get an unregulated bridge loan.

Regulated bridging loans are authorised and regulated by the FCA and are usually locked to a 12-month maximum term.  Unregulated bridging loans, meanwhile, can have extended periods of up to 36 months and are generally more flexible.

If you’re unsure, it’s best to speak to a qualified adviser to go over exactly what you need and find the best bridging loan for you. 

How short-term are bridging loans?

Almost all regulated bridging loans are short term, and have a duration of 12-months.

Bridging loans are short-term by nature. However, there can be some flexibility on term length, particularly for unregulated bridging. For example, bridging for development projects, flipping properties, buy to let bridging loans and commercial bridging loans can all have longer terms up to 36 months. 

Some bridging loan lenders allow you to extend your term if at the end of 12 months your property hasn't sold or your alternative funding hasn't come through yet - however, this is down to the lender's discretion and there are no guarantees. It's important to be aware of the risks of bridging loans, and your property can be seized and sold to compensate for failure to repay. 

Alternatives to Bridging Loans

Here are some of the most common alternatives to bridging loans:

1. Second-charge mortgages
2. Remortgaging
3. Equity Release
4. Personal Loan
5. Savings or Family Support
6. Development Finance
7. Commercial Mortgages
8. Refurbishment Loans

We break down each of these other financing tools in our full guide to alternatives to bridging loans. 

While none of these options provide the flexibility, loan size and low-interest rates that bridging loans do for property transactions, you may find they are more appropriate finance options for your specific situation. 

How to get a bridging loan

Typically you need to speak to a bridging loan broker to get a bridging loan. 

You can go direct to lenders, but not all lenders accept directla applicants. Also, most people use a bridging loan broker to guide them through the process, compare rates and get the best deal. Unless you've used them before, we generally don't recommend trying to go direct.

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