What are bridging loans and how do they work?

In this guide we look at what bridging loans are, how they work, how much they cost and if they’re the right type of loan for you.

What is a bridging loan?

A bridging loan is a short-term loan used to help you ‘bridge the gap’ when you want to buy something, but you’re waiting for funds to become available from the sale of something else.

What can I use a bridging loan for?

Bridging loans are often used by people who want to buy a new home before selling their current one.

Landlords, homeowners and property investors use them to help with things like:

• Buying property
• Property development
• Investing in buy-to-let opportunities
• Tax payments

Types of bridging loan

There are two types of bridging loan:

1. Open bridging loans
   This type of loan has no fixed repayment date and so can be repaid whenever your funds become available. However, lenders will normally expect you to clear the debt within one year although some lenders offer longer repayment terms.
2. Closed bridging loans
   A closed bridging loan has a fixed repayment date. The date will usually be based on when you know you’ll have your funds available (for example when the sale of your house has gone through). This type of loan is usually cheaper than an open bridging loan because there is less flexibility available around repayment.

Whichever type of bridging loan you go for, lenders will want to see details of how you plan to repay it (such as money from a property sale). This is sometimes called an ‘exit plan’.

What are ‘first charge’ and ‘second charge’ bridging loans?

When you take out a bridging loan, the lender will place a ‘charge’ on your property. This means that if you fail to repay the loan, the lender will take its repayment from the sale of the property.

If you don’t have any other loans secured on your property (for example, you own it outright) then this will be a ‘first charge’ bridging loan. With this type of loan if you fail to repay the loan and your home is sold to pay off the debt, the bridging loan lender will receive its repayment first.

If you already have one or more loans secured on the property (such as a mortgage) then it will be a ‘second charge’ bridging loan. If you fail to repay the bridging loan and your home is sold to pay off the debt, the bridging loan lender would take its repayment after your
mortgage provider had taken its.

Second charge loans are usually more expensive than first charge loans as there’s more chance the second charge lender won’t recover its money if you can’t keep up repayments. A second charge loan will also require the consent of the first charge lender which is normally
your mortgage provider.

How much can I borrow with a bridging loan?

Lenders offer bridging loans from anywhere between £5,000 to £25m or more, so the amount you can borrow will depend on your current financial circumstances and your credit history.

Most lenders will allow you to borrow up to 75% of the value of your property. They generally allow you to borrow more for a first charge bridging loan than a second charge loan.

How much does a bridging loan cost?

Due to the short-term nature of bridging loans, they tend to be very expensive compared to other types of loan. Companies will usually charge monthly rather than annual percentage rates (APR).

This type of monthly charging means that just a small difference in interest rates can have a big impact on the overall cost of your loan. For example, a 1% monthly interest rate is equivalent to 12.7% APR (taking compound interest into account). While a 2% monthly interest rate is equivalent to 26.8% APR.

Not all companies charge interest monthly. You might also find your loan payments are deferred or rolled up. This means you don’t pay the interest on your loan until the end of the agreement.

There are also set-up fees. These can include:

• Arrangement fees
• Exit fees if you repay your loan early
• Administration/repayment fees
• Legal fees
• Valuation fees

Can I get a bridging loan with bad credit?

There are companies which will consider lending to you if you have ‘bad credit’, but you will be seen as ‘higher risk’ and so the cost of your loan will probably be higher too. See our Loans for bad credit page to find out more about unsecured personal loans for people struggling with bad credit.

It’s worth checking your credit report before you apply so you can get an idea of what your current credit history looks like. If you do have bad credit, there are things you can do to improve your credit score.

What alternatives are there to a bridging loan?

A bridging loan is designed specifically for when you need a short-term loan, but it isn’t the only option available. Here are a few others to consider.

• Secured loan — secured loans let you borrow larger amounts than personal loans and tend to charge lower interest rates than bridging loans. But like bridging loans, your home is at risk if you don’t keep up the repayments.

• Personal loan — some lenders offer personal loans of up to £50,000, although £25,000 is a more common limit. A personal loan could be an alternative if you only need a relatively small bridging loan. The interest on a personal loan is
  charged annually rather than monthly, so the repayments are likely to be cheaper. These loans aren’t secured against your property so your home isn’t at risk of being repossessed. Depending on the amount you need to borrow, you could consider taking out a long-term loan. The monthly repayments would be lower as the loan can be repaid over a longer time period. If the amount you need is smaller you could consider taking out a small loan.

• Credit cards — you could switch to a 0% balance transfer credit card and save money.
• Remortgage — you could remortgage your current home to free up money. But think carefully before remortgaging as it’s a long-term decision (consider what would happen if interest rates change or your income were to fall). If in any doubt, seek expert advice from a professional.
• Let-to-buy — this is where you switch your existing mortgage to a buy-to-let mortgage, and use any equity released to buy a new home. Rather than selling your old home, you rent it out (this is why it’s called ‘let-to-buy’). There are lots of things to think about with this option. What if you struggle to find tenants? Can you afford two mortgages, especially if interest rates change? If you’re considering this option, it’s best to seek professional advice if in any doubt.

How do I find the best bridging loan for me?

Here are our top tips to help you find the right bridging loan.

1. Be clear on what you need from your loan
   Before you start looking, work out exactly how much you want to borrow and how long for. Bridging loans are expensive, so the shorter the term, the less it will cost you.
2. Know your situation
   Lenders will want to know about your situation so make sure you have all your answers ready. Questions you can expect include:

• How much is the property worth?
• Do you have a mortgage – and if so, how much do you owe?
• How much equity do you have in the property?
• What is your monthly income and expenditure?

3. Do your research
   There are lots of loans available so make sure you compare different borrowing options. Some, such as low-interest loans, may be much cheaper than bridging loans or you can even find interest-free options. If you decide on a bridging loan, consider using a bridging loan broker who can research the market for you. Brokers can often access exclusive rates and deals but will often charge a fee for their services.
4. Read the small print
   Check what fees are included before you sign on the dotted line.
   Try to apply for loans you're more likely to be accepted for. Experian doesn’t compare bridging loans but we do compare personal, secured and guarantor loans. You can check your eligibility rating when you compare loans with us.

Just remember, we're a credit broker, not a lender†. This means we can help you find deals, but we don't provide credit or decide whether to approve you.