Bridging Finance

What is Bridging Finance?

Bridging finance is a type of short-term funding designed to help you buy property quickly while you wait for other funds to come through.

For example:

You have your heart set on a new family home and don’t want to let it slip away to other buyers.

So, instead of waiting for offers to come through on your existing home, you take out a bridging loan almost instantly to buy the property in ‘cash’.

This makes you very attractive to sellers, as it helps to break any property chains, and gives you a much better chance of securing that property.

You then repay the bridging loan after the sale of your existing home. Loans generally last up to 12 months, but if you repay early you usually stop paying interest the same day.

So, in a nutshell, bridging finance gives you incredible power and flexibility in the property market, with the caveat that it comes with a cost: fees, and a monthly interest rate (more on that later).

Contents

1. How It Works (An Overview)
2. Eligibility and Loan to Value
3. Our Bridging Loan Calculator
4. The Costs
5. Example Uses
6. FAQs

How it Works

Most people tend to use a bridging finance broker when they take out a bridging loan – mainly because:

• Bridging finance can be complicated and comes with risk
• The paperwork can be a little intimidating and confusing
• It’s very difficult to compare options and rates by yourself (bridging loans aren’t on comparison websites)
• In fact, some lenders only accept applications through a broker
• And some brokers are fee-free (like us), so there’s not really a downside.

However, it is possible to go directly to a lender if you want to – just keep in mind all of the caveats above!

So, that being said, what does the process actually look like?

1. It usually starts with research – if you’re reading this guide, that’s a great start!
2. You can then use a bridging finance calculator to check if you’re eligible for a loan, and roughly how much it’ll cost.
3. You then speak to a broker to sense-check your numbers and plans, getting an honest assessment of whether it’s right for you.
4. You get a free quote that gives you a better idea of the exact costs and terms to expect. No credit checks here.
5. You chat these through with your broker again.
6. You secure your decision in principle (this can all be done within 24-48 hours if needed!), which will put you in a very strong position for your purchase – show it to the estate agent!
7. If your offer on the property is accepted, you make your official loan application with the help of your broker.
8. Once approved, funds will be released in as little as 72 hours, depending on the nature of your application.
9. Your broker handles all the admin, and chases through each party involved, keeping you up to date with progress.
10. A key moment is the property valuation(s) – these can make or break an application, as the figures that come back will finalise your loan-to-value ratio.
11. When funds are released, you’ll start paying interest on your loan, and you can complete your property purchase.
12. You’ll usually stop paying interest on the day you repay your loan – typically when your own property sells or when your mortgage comes through.
13. Success! You now own a property that likely wasn’t possible without bridging finance – and it’s probably been well worth the costs.

Eligibility and Loan to Value

The eligibility for a bridging loan, along with the rate you get, is almost exclusively dependent on your loan-to-value ratio. Your ‘loan’ being how much you need to borrow to complete your purchase plus any relevant mortgage debt you have, and your ‘value’ being the value of all properties involved in the transaction. So, this can include the property you’re buying, and any other property, or properties, you own – minus any mortgage debt you have.

Your income, and even your credit score, are not significant factors for bridging finance, because the loan is repaid through your ‘exit strategy’, and not long-term monthly repayments.

The maximum loan-to-value for a bridging loan is around 80% – any higher, and it becomes too risky for lenders.

This doesn’t mean you need a 20% cash deposit, though. It simply means your loan plus any relevant mortgage debt must come to lower than 80% of the property value(s) you have as security.

And this loan-to-value also affects your interest rate – the higher your LTV, the higher your rate, and visa versa.

The easiest way to check your eligibility is with a bridging finance calculator. You can use ours for free below and play around with the figures as you need.

BRIDGING LOAN CALCULATOR

Costs

This brings us nicely to the costs of bridging finance.

As you can see above, the interest is the biggest cost you’ll pay, typically ranging from 0.68 to 1% of your gross loan value per month.

However, it’s important to note that as soon as you repay your loan, you stop paying that interest, and there are usually no early repayment charges. So, if you can repay after just 3 months, for example, your costs might be smaller than you’d expect.

However, it’s important to feel comfortable with the full costs should your loan reach its full term at 12 months, and be prepared for that happening.

It’s also worth noting that your interest is usually rolled up into the value of your loan. This means you don’t need to pay it back monthly – you just repay everything at the end. This means your cash flow is freed up to spend on moving costs or refurbishments.

The next biggest bridging cost is your lender’s facility fee – this is typically 1.5-2% of your loan value, depending on the lender and product.

Finally, here are a few other costs to factor in:

Property valuation fee(s):

Your lender will need to value the properties involved in the transaction using a surveyor from their panel. The fee for this can vary, but £950 is a ballpark figure.

Some lenders can provide a desk-based valuation, meaning there’s no need for anyone to visit the property. This is free and can save this cost completely, so we try to facilitate this where possible – but, it’s generally unavailable for properties over £1m.

Lender’s legal fees:

You’re required to pay for your lender’s solicitor’s fees – as well as your own. These can vary, but £1,000 for a property worth £250k is a general average.

Some lenders allow for joint representation, meaning you and your lender share the same solicitor. This can speed up the process and save money, so we’ll help you to do this where possible.

Exit fees:

Some lenders charge an exit fee if you pay back your loan early. However, at Bridging Finance we generally avoid working with these lenders as it’s an outdated practice and greatly limits your flexibility – which is the whole point of bridging finance!

Redemption fee:

Most lenders charge a small administration fee for removing the legal charge from your property once you’ve repaid your loan – this is usually about £100-150.

Bridging broker fees:

At Bridging Finance, we don’t charge a fee for our advice – so, if you choose us as your broker, you can skip this cost! However, some brokers charge from £495 to £995 for their advice.

If you’re wondering why we don’t charge a fee, it’s because all brokers earn a ‘procurement fee’ through the lender – in the same mortgage brokers do for standard mortgages – and at Bridging Finance, we decide not to charge you a fee on top of this.

Example Uses of Bridging Finance

Buy Before Sell

Bridging finance is ideal if you need to purchase a new property before selling your existing one.

For example, you find your dream home, but the sale of your current home is delayed.

With a bridging loan, you can secure the funds to buy the new property outright, making you an attractive buyer in a competitive market. Once your existing home sells, you repay the loan in full. This flexibility allows you to move quickly and avoid missing out, while also breaking the dreaded property chain that often stalls transactions.

Buying an Unmortgageable Property

Some properties, like those in need of significant renovation or without proper planning permissions, are deemed unmortgageable by traditional mortgage lenders, meaning you need alternative finance to bridge the gap.

For instance, if you’re buying a house that lacks a functioning kitchen, you can use bridging finance to purchase it outright, complete the necessary renovations, and then refinance onto a standard mortgage (or sell the property).

Buying at Auction

Auction purchases often require completion within 28 days, making bridging finance a perfect solution. If you win an auction bid, a bridging loan ensures you have the funds ready to meet tight deadlines. You can then repay the bridging loan with your mortgage once it comes through from your bank.

Bridge to Let or Flip

For investors, bridging finance is a powerful tool to bridge the gap between purchase and profit.

For example, you might buy a property with a bridging loan, renovate it to increase its value, and then either refinance it onto a buy-to-let mortgage (bridge-to-let) or sell it for a profit (flip).

To Repay an Interest-Only Mortgage

If you have an interest-only mortgage reaching the end of its term and no repayment vehicle in place, a bridging loan can help extend your timeframes.

You can use bridging finance to pay off the mortgage balance, giving you 12 months to sell the property or arrange longer-term financing. This flexibility can prevent repossession and give you breathing space to explore the best exit strategy.

To Pay for Care Fees

Bridging finance can also assist with urgent personal expenses, like funding care fees for a loved one.

For example, if you need to cover care home costs but are waiting for the sale of a property or other funds to come through, a bridging loan provides the necessary interim capital.

FAQs

Is a bridging loan worth it?

Whether a bridging loan is worth it depends on the emotional and practical values of completing your property purchase vs the financial cost of bridging finance.

Fortunately, you can use our bridging finance calculator to get a good understanding of how much it’ll cost depending on how long you take to repay – and you can weigh up the pros and cons from there.

Do you pay a bridging loan monthly?

No, you usually do not repay a bridging loan monthly. Although it is an option, most people choose to roll up the interest into the loan value to be repaid on exit, so as to free up cash for moving or refurbishment costs during the loan term.

Do I need a salary for a bridging loan?

No. As bridging loans are calculated against an ‘exit strategy’, you don’t need a salary to get a bridging loan – unless you’re looking to refinance it via a standard mortgage that you’ll need to qualify for.

Who is eligible for a bridging loan?

Eligibility for a bridging loan is mainly based on the security you can put down and your loan-to-value. Most lenders max out at 80% loan to value for bridging finance.

What are the pros and cons of bridging financing?

The pros of bridging finance are:

• It provides you with great speed and flexibility in the property market
• It lets you purchase property that might otherwise be impossible for you

The cons of bridging finance are:

• It costs money in the form of fees and interest
• Your property is at risk of repossession if you fail to repay your loan (this is why it’s a good idea to get advice on your transaction)

Do banks do bridging loans anymore?

No mainstream banks offer bridging loans today. Instead, a collection of specialist lenders offer a range of products tailored to different bridging scenarios. There are lots of options to choose from, making the market competitive and bringing costs down.

Is bridging finance safe?

Yes, bridging finance is generally safe provided you have a sound exit strategy (way to repay your loan). The risk to bridging finance is in not being able to repay your loan and your property being at risk of repossession (your lender will do this to recoup their money).

This is why it’s recommended to use a bridging finance broker, like ourselves.

How do you pay off a bridging loan?

You pay off a bridging loan by either selling your existing house, selling the house you bought with your bridging loan, selling another property altogether, or with a new mortgage.

How quickly can I get a bridging loan?

Some bridging loans can be arranged in as little as 72 hours; however, the average is more akin to 3-6 weeks.

What happens if I can’t repay my bridging loan?

If you can’t repay your bridging loan, your lender can repossess your house and sell it to recoup their funds.

This is a worst-case scenario and is generally bad for both you and the lender, so they’ll often want to work with you to avoid this – but it’s a very real possibility.

What is the exit fee for a bridging loan?

Most lenders do not charge an exit fee for a bridging loan, and at Bridging Finance, we avoid recommending products that do.