Do you need a short-term loan?
Bridging loans offer short-term finance for buying a property before your longer-term funding comes through. Find out about terms, rates and risks.
- A bridging loan is a short-term loan aimed at property buyers
- They're often used to ‘bridge’ the gap between incoming funds from a sale and outgoing funds for a purchase
- Bridging loans typically have high-interest rates and fees
- Talk to a professional mortgage adviser to see what’s right for you
Bridging loans are a short-term finance option, usually used by property buyers to ‘bridge’ the gap between the sale of their current home and completion date on the purchase of their next home.
These loans let homeowners who are struggling to find a buyer move into a new property before selling their existing home.
This would mean that the person taking out the loan will own two properties for a short time, potentially leaving them with a large amount of secured debt if it takes a long time to sell the original property, if the buyers withdraw completely, or you sell your home for less than you expect.
Who are bridging loans for?
You might not be able to get another mortgage until your current home is sold, so you might consider a bridging loan to cover that period.
As well as using it to cover the gap between buying a new home and selling your old one, bridging loans can be useful for someone who’s in a chain and part of it collapses - a bridging loan could salvage the rest of the chain.
Bridging loans can also be used to:
- Buy a property at auction
- Pay for renovation work
- Buy land for development
- Purchase an uninhabitable property
- Buy stock
- Pay for machinery or IT equipment
Bridging loan interest rates and fees
When taking out a bridging loan you could face much higher interest rates than with a traditional mortgage.
As the loans are short-term, rates are sometimes expressed as the rate per month.
For example, a rate of 0.48% a month translates to 5.76% APR.
There can also be administration fees involved before you even take interest into account.
Admin charges can be placed on the property you want to sell, the property you want to buy, or both
Types of bridging loan
Fixed and variable rates
Just like mortgages, bridging loan rates can be fixed or variable.
A fixed rate means the interest rate is fixed across the term of the loan, so each monthly payment will stay the same.
For a variable rate bridging loan, the interest rate might change pushing your payments up or down.
The variable rate's usually set by the lender. It may follow the Bank of England's (BoE) base rate which can change as often as every six weeks. Your bridging loan should only be in place for a short time, so you may not be affected by a changing interest rate, but contact the lender and keep a close eye on the changing rate and payments.
First charge and second charge
When you're offered a bridging loan, you’ll be told it’s either a ‘first charge’ or ‘second charge’ loan - this denotes who has priority of repayment if you default on the loan.
So, if you take a bridging loan to buy your next home but you still have a mortgage on your current home, your mortgage will be a first charge loan against your current home.
This means the bridging loan might be a second charge loan on your current home – it also takes your current home as security, but your mortgage will take priority for repayment if your home is repossessed.
Alternatively, the bridging loan could be used to pay off your original mortgage, in which case the mortgage is settled so your bridging loan is registered as a first charge loan.
It would also be a first charge loan if it instead takes the property you're buying as security.
It’ll be stated in your loan documents whether your bridging loan is a first charge loan or a second charge loan, and which property it’s using for security.
If the bridging loan uses your current and new properties as security, both would be at risk if you fell behind on payments.
Given the complications and potential consequences, you should consult a financial adviser before considering taking out a bridging loan or putting any charges on your property.
Closed-bridge and open-bridge loans
A closed-bridge loan is for people who have set a fixed date to repay the loan - for example, someone that’s selling a property, and is waiting for completion to happen to get the money to repay the bridging loan.
As with all loans, don’t rush to take out finance you might not need. Consider all your options so you can be sure you’re making the right choice for your finances
Matt Sanders, GoCompare
An open-bridge loan has no set date for settling the loan.
For example, this type of loan could be used by buyers who find a house they want to purchase but haven’t yet found a buyer for their existing home, or an investor buying a property to renovate before selling it and repaying the bridging loan.
How do I get a bridging loan?
Bridging loans are available from mortgage brokers and advisers – they aren’t widely available and aren’t usually offered by high street banks.
Bridging loans also aren’t available via comparison websites as they need to be tailored to your specific financial situation and needs.
Although bridging finance is generally quicker to arrange than a mortgage, lenders will still make thorough checks into your credit history, your mortgage commitments, the value of your current home and your prospective one.
Alternatives to bridging loans
Before you take out a bridging loan, investigate how else you could secure finance and make a balanced decision based on your options.
You might be able to make use of an overdraft, asset financing - a short-term loan that uses your possessions as collateral - or you could seek private equity.
There are also drawbacks to asset financing and private equity, so be cautious and get advice based on your financial situation before committing to a loan or any funding from a third party.
Advice on mortgages
- Follow the instructions on our mortgage page for fee-free, award-winning advice
“It’s important that customers proceed with extreme caution when looking into bridging loans,” said GoCompare’s Matt Sanders.
“Customers should go to a regulated adviser who can best assess their needs.”
Are bridging loans regulated?
If secured by a first or second charge, the bridging loan will be regulated by the FCA. These bridging loans are usually secured against property which you live in, or you're planning to move into.
Unregulated bridging loans are usually associated with commercial buy-to-let properties. Speak to a mortgage adviser to find out more.