What is a bridging loan?
A bridging loan or ‘bridge loan’ is a short term loan given to ‘bridge the gap’ between you buying a new house and selling your previous house.
Bridging loans can also be used as a short term loan to help you buy a property at auction, where you’ll need the money immediately but may not have sold your current property yet.
A bridging loan (or bridge loan) can be useful if you need to borrow money for a short period. The most common use of these loans is to help fund a new house purchase while you’re waiting for your existing property to sell.
Bridging loans can also be used to help you buy at auction – where you’ll need to put down a deposit as soon as the hammer comes down.
In this guide, find out how bridging loans work, who they are right for, and how Which? Mortgage Advisers can help you find the right deal.
How does a bridging loan work?
There are two types of bridging loan – ‘closed’ and ‘open’.
Closed bridging loan
With a closed loan, there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for a property sale to complete.
Open bridging loan
With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one year.
Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy; such as using equity from a property sale or taking out a mortgage.
They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it – as well as proof of what you are doing to sell your current property if relevant.
You should also have a back-up plan in place for if your repayment strategy fails – for example if a planned sale falls through.
What are first and second-charge bridging loans?
When you take out a bridging loan, a ‘charge’ will be placed on your property. This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans.
Both a first and second charge bridging loan take your property as security in case you default on repayments.
Typically, if you still have a mortgage on your property, the bridging loan will be a second charge loan, meaning that if you failed to meet repayments and your home was sold to pay off your debts, your mortgage would be paid off first.
But if you owned your property outright, or you were taking out a bridging loan to repay your mortgage in full, you would take out a first charge bridging loan. This means that the bridging loan would be repaid first if you fell behind with repayments.
How much does a bridging loan cost?
One of the major downsides of a bridging loan is that they are quite expensive.
You could face fees of between 0.5% per month and 1.5%. Bridging loans are priced monthly, rather than annually, because people tend to take them out for a short period.
That makes them much pricier than a normal residential mortgage. The equivalent annual percentage rate (APR) on a bridging loan at between 6.1% and 19.6% – far higher than many mortgages.
There are also set-up fees to consider, usually around 2% of the loan you want to take out, so it is advisable to only take a bridging loan out if you are confident that you won’t need it for a long period of time.
How much can you borrow with a bridging loan?
You’ll usually only be able to borrow a maximum loan-to-value of 75% of the value of your property.
If you are taking out a first-charge loan, you’ll typically be able to borrow more than if you were taking out a second charge loan.
In monetary amounts, bridging lenders allow you to borrow as little as £25,000 to more than £25m.
What are the alternatives to a bridging loan?
If you want to move but can’t sell, you could also consider a let-to-buy mortgage arrangement.
You can do this by remortgaging your current home onto a buy-to-let deal and using the equity released to buy a new property.
Find out more in our guide to let-to-buy mortgages