What is a bridging loan, and when should you use one?

A bridging loan is a short-term loan, usually secured against property, designed to "bridge" the gap between needing money now and a longer-term source of funds arriving. They can often be arranged far faster than a standard mortgage, which is why they are widely used when a property transaction is time-critical.

How a bridging loan works

The lender takes a legal charge over a property and you borrow an agreed amount for a fixed term, commonly measured in months rather than years. Interest is usually quoted monthly. Depending on the lender and the case, it may be paid monthly, rolled up and added to the loan, or deducted from the loan at the start.

Common uses

• Buying a property at auction, where completion is normally required within 28 days
• Buying a new property before your existing one has sold (a chain break)
• Funding a refurbishment before refinancing onto a longer-term mortgage
• Buying a property that a standard mortgage lender will not lend on in its current condition
• Raising short-term funds against property for business purposes

Why the exit strategy matters

Every bridging lender will ask how the loan will be repaid. Typical exits include selling the property, refinancing onto a longer-term mortgage, or repaying from another source such as the sale of a different asset. A realistic, evidenced exit is as important to a lender as the property itself, and they will look at the timescale and at what happens if the plan runs late.

What affects the cost

• How much you borrow compared with the property value (the loan-to-value, or LTV)
• The type and condition of the property
• Whether the lender takes a first or second charge
• The length of the term and the strength of the exit
• Fees, which can include arrangement, valuation and legal costs

Because rates and fees vary between lenders and between cases, it is worth comparing the total cost of the loan over its whole term, not just the headline monthly rate.

Is a bridging loan right for you?

Bridging suits situations where speed matters and there is a clear way to repay. It is generally more expensive than a long-term mortgage, so it is normally used for a limited period rather than as a permanent solution. If you are unsure whether it fits your plans, talk the numbers through before committing.