What is property bridging loan & how does it work in the UK?

A property bridging loan may be suggested if you’re struggling to coordinate a property sale and purchase. This guide will explain what they are and how one could help you move house.

In this guide

What is a bridging loan?
How does a bridging loan work in the UK?
How much does a bridging loan cost?
How high is a bridging loan interest rate?
How to get a bridging loan?
Bridging loan eligibility
Are there many bridging loan companies?
How long does it take to get a bridging loan?
Are bridging loans a good idea?
What are the alternatives to bridging loans?
Bridging loan calculator UK

What is a bridging loan?

A property bridging loan (also known as a bridge loan) is a short-term secured loan. It can enable a house purchase to proceed before the funds from a related property sale become available.

How does a bridging loan work in the UK?

Depending on your personal circumstances, you can either apply for a property bridging loan with a pre-determined repayment deadline (known as a closed bridging loan), or one with a flexible repayment date (known as an open bridging loan). You may also have the option of either repaying the interest monthly or storing it up. If you choose to store it up, you will pay it in one go when you repay the loan.

Should I choose an open bridging loan or a closed bridging loan?

A closed bridging loan would be appropriate if you have already exchanged contracts on the property you’re selling. This is because you will have a definite date for when the funds will be released.

An open bridging loan would be more appropriate if you’re unsure on the exact date you’ll have the funds available.

A property bridging loan is a short-term loan. The lender would usually expect the funds to be repaid in full within a year (although bridging loans with longer repayment terms may be available on request).

How much does a bridging loan cost?

In addition to monthly interest, there are a number of other costs and fees associated with a bridging loan.

These may include:

Broker fee – this is a fee for their services in finding and securing a bridging loan for you.
Lender fee or arrangement fee – this is paid at the point of securing the bridging finance. It is similar to a mortgage product fee and is usually around 2% of the value of the bridging loan.
Valuation fee – this is the cost to value the property you want your bridging loan secured against. The cost of the valuation will depend on the size, age and location of the property.
Exit fee – some lenders charge a fee at the end of the loan agreement. This is usually around 1% of the loan amount.

Here’s an example of how much a bridging loan might cost you.

Amount borrowed: £100,000

Lender fee: £2,000

Broker fee: £1,000

Valuation fee: £500

Exit fee (1%): £1,000

Interest accrued: £500-£2,000 per month

As you can see from the bridging loan example above, a bridging loan is not a cheap option, but does offer a certain level of convenience.

How high is a bridging loan interest rate?

You can expect to pay between 0.5% and 2% interest each month.

How to get a bridging loan

You can search for competitive property bridging loans on most online comparison sites. Bridging finance is usually provided by a bank or mortgage lender, or through a financial advisor.

When you apply for a bridging loan, you will need to provide a range of personal and financial information. This may include:

The details of the property you’re buying
The details of the property you currently own
Details of any outstanding mortgage
How long you will want the loan for
Your plan for repaying the loan
A contingency plan for how you will repay the loan if your current plans don’t pan out

Bridging loan eligibility

Most bridging loan applications will be assessed on an individual basis. However, you’re more likely to be accepted and get a better rate if:

You have a clear and credible strategy for how you plan to repay the bridging finance.
The property you’re using as loan collateral is desirable and likely to sell easily, if necessary. Lenders will consider the location, property type, whether it’s freehold or leasehold, and if it has any restrictions on it.
You have a good credit score.
You have a healthy deposit. Most bridging finance will be offered with a loan to value ratio of up to 75%.

Are there many bridging loan companies?

The bridging loan industry is growing. There are currently more than 100 property bridging loan lenders in the UK.

How long does it take to get a bridging loan?

Bridging loans can be arranged in just a few days, if required.

Are bridging loans a good idea?

Taking out a property bridging loan has pros and cons. Whether a bridging loan is the right option for you will depend on your personal circumstances.

Pros:

Quick process

Unlike other types of loans, a property bridging loan is designed to step in last minute to enable a property purchase to proceed. This means the process can be completed very quickly, often in just a few days.

Can stop a property purchase falling through because your sale is held up

If you’re struggling to make your sale and purchase tie up, and are worried that one or both of the transactions could fall through, a property bridging loan could allow you to keep both on track and secure your new home.

Flexible repayment schedule

If you don’t yet have a date for the sale of your property, and aren’t sure when you’ll be able to repay the loan, an open bridging loan can give you flexibility. You will need to consider what you will do, and how expensive the loan will become, if you’re still struggling to sell the property several months down the line. A property bridging loan is only a short-term solution, designed to buy you some extra time.

Cons:

Bridging loans are an expensive way to borrow

Interest rates on property bridging loans are very high. You can expect to pay between 0.5% and 2% interest each month. Many property bridging loan companies will lend a minimum of £100,000. This would mean minimum monthly interest of between £500 and £2,000.

Other costs and fees

In addition to a high interest rate, you’ll be required to pay a number of other fees and costs. These can amount to several thousand pounds.

The loan is secured against your property

A property bridging loan will need to be secured against a property. This means if you struggle to repay the loan, your property will be at risk. It is therefore not something to enter into lightly.

What are the alternatives to bridging loans?

If you’re looking for a way to move forward with the purchase of your new property but are struggling to tie up the sale of your current home, there are a few different options available to you.

Cash home buyer:

If you need a quick solution, a cash home buyer could be a great option. They offer a fast, guaranteed sale of your current property, leaving you free to purchase your new home with no hassle, no ties and no financial commitment.

A genuine cash home buyer will purchase your property at a discount, but they can complete the sale in as little as a week so they’re a great option if you need a quick solution. The discount applied is also likely to work out cheaper than the cost of a bridging loan if you think you’ll need the bridging loan for longer than a few months. A cash home buyer can buy your property on a date of your choice. This gives you complete flexibility to move when your new property is ready. You’ll also have the freedom of being able to enjoy living in your new home without the financial worry of loan repayments and struggling to sell your old property.

Property auction:

If you can’t afford a property bridging loan and think your property might appeal to property investors or landlords, you could consider selling your property at auction. Whether this is the right option for you will depend on how quickly you need to sell, as auction sales often take longer than people think. You’ll need to allow around a month for pre-auction marketing and another month for the sale to complete. It is worth noting, however, that there’s no guarantee your property will sell at auction. It can also be tricky to time a property auction sale with the purchase of a new home. Property auction sale prices are also notoriously unpredictable, which can make it hard to budget for your move.

Buy-to-let:

If you have enough equity in your current property, you could consider refinancing and letting it out. Of course, this will only be an option if you have enough equity in the property to remortgage and release enough funds for your new property deposit, or if you have other means of raising a deposit. You’ll also need to factor in time to find a tenant and consider how you would manage financially during any vacant period.

Bridging loan calculator UK

An online bridging loan calculator is a great tool to give you a clearer idea of how much bridging finance might cost you. It will allow you to consider your individual circumstances and whether a bridging loan is the best option for you.

A property bridging loan can offer a quick and convenient solution to help you secure your new home before your current property sells. However, it is definitely not a cheap option. It should only be used if you’re happy that you can comfortably afford it and only need a short-term solution.

What is a property bridging loan?