A bridging loan is a short-term finance option for buying property. It 'bridges' the financial gap between the sale of your old house and the purchase of a new one.
If you're struggling to find a buyer for your old house, a bridging loans could help you move into your next home before you've sold your current one.
This would mean that you'd own two properties for a short time, potentially leaving you with a large amount of secured debt if it takes a long time to sell your existing property, if the buyers withdraw completely, or you sell your home for less than you expect.
You might not be able to get another mortgage until your current home is sold so you might consider a bridging loan to cover the period between purchasing your new home and selling your old home.
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 are available from mortgage brokers and advisers – they aren’t widely available and aren’t usually offered by high street banks.
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 the one you're buying.
1. Buy a property at auction
A mortgage might be too slow to arrange or unsuitable for an auction property
2. Pay for renovation work
Bridging finance could cover the cost of renovation until a remortgage is possible based on the increased value of your home after the work
3. Buy land for development
The bridging loan covers the cost between buying and building on the land and getting a mortgage once the house is finished
4. Purchase an uninhabitable property
The loan covers the purchase cost until you can apply for a mortgage (potentially after the work is completed)
Find a loan that's suitable for your needs
Tell us about your property – the type of building, the address and your postcode
Tell us how much you want to borrow and for how long
Tell us about yourself, like your name and email address
There are a few types of bridging loans:
Just like mortgages, bridging loan rates can be fixed or variable.
A fixed rate means the interest rate won't change throughout the term of the loan, so each monthly payment will stay the same.
With a variable rate bridging loan the interest rate can change, which will push your payments up or down.
The variable rate's usually set by the lender. It might 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 might not be affected by a changing interest rate, but contact the lender and keep a close eye on the changing rate and payments.
An open-bridge loan has no set date for settling the loan.
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.
When you're offered a bridging loan, you’ll be told it’s either a ‘first charge’ or ‘second charge’ loan – this refers to the priority of repayment if you default on the loan.
If you take a bridging loan to buy your next home but still have a mortgage on your old home, your mortgage will be a first charge loan against your current home.
The bridging loan would 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.
Alternatively, the bridging loan could be used to pay off your original mortgage. In this case the mortgage is settled, so your bridging loan is registered as a first charge loan. It'll also be a first charge loan if it's secured against your new home.
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.
Watch the costs – bridging loans often have higher interest rates than other loans. Rates are often shown as monthly, so make sure you're aware of what that equals annually. Also, check for admin fees – these are typically around 1% of the loan.
Before you take out a bridging loan, consider any other ways you could get the finance you need. If there are alternatives available to you, they might cost you less.
You might be able to make use of an overdraft, 'asset financing' (a short-term loan that uses your possessions as collateral) or you might be able to make use of some of the value of your current house, by remortgaging it.
Remortgaging might be an option – and you can do an eligibility check before-hand
If you're not looking to cover the whole of the purchase a personal loan might be cheaper, but check for early repayment charges
Another lower cost option could be to use your overdraft – although this will depend on whether you were planning to borrow the entire purchase amount
Peer-to-peer loans could also be worth a look – there does tend to be an upper limit to what you can borrow though
Bridging loans let you borrow large sums of money in the short term, but are usually more expensive than other finance options. If you're using a bridging loan to fund a business venture, make sure you factor all the costs into your profit calculations.
No. In most cases, you can add the monthly interest payments to the loan balance, which is then all paid off at the end of the loan's term.
It's possible that a bridging loan lender might not be as concerned by poor credit history or arrears, as the monthly payments can be added to the loan balance. So if you have equity, a definite means of repaying the loan and can offer the lender security, you might still be eligible for a bridging loan.