Bridging Loans for Property — How They Work, Costs, and When to Use One

What is a Bridging Loan?

A bridging loan is a short-term secured loan used to “bridge” a funding gap in a property transaction. It is secured against property (either the property being purchased or another property you own) and is typically repaid within 12–24 months.

Unlike a mortgage, a bridging loan is designed to be repaid quickly — usually when the property is sold or a longer-term mortgage is put in place. The speed of arrangement (sometimes within 48–72 hours) is a key feature.

When Are Bridging Loans Used?

**Buying before selling:** You want to proceed on a purchase before your existing property has sold. A bridging loan funds the purchase; the loan is repaid from the sale proceeds.

**Auction purchases:** Property auctions require completion within 28 days. A bridging loan can be arranged quickly enough to meet this deadline; a standard mortgage typically cannot.

**Unmortgageable properties:** Properties in poor condition, without a kitchen or bathroom, or of unusual construction type are often declined by standard lenders. A bridging loan can fund the purchase and renovation; a standard mortgage is then arranged on the improved property.

**Chain break:** Your buyer has dropped out but you still want to proceed on your onward purchase. A bridging loan funds the gap until your property re-sells.

**Development finance:** Light refurbishment projects and small developments often start with a bridging loan and exit onto a term loan or sale.

Open vs Closed Bridging Loans

**Closed:** There is a fixed repayment date because the exit is certain — for example, you have exchanged contracts on a sale and just need funds until completion. Closed loans carry lower interest rates because the lender’s risk is lower.

**Open:** There is no fixed repayment date. The loan is repaid when the exit occurs (sale, refinance, inheritance). Open loans are more expensive because the lender faces more uncertainty.

Costs

Bridging loans are expensive relative to standard mortgages:

• **Interest rate:** Typically 0.5–1.5% per month (6–18% per annum). Note this is per month, not per year.
• **Arrangement fee:** Usually 1–2% of the loan value, added to the loan
• **Exit fee:** Some lenders charge 1% on repayment
• **Valuation fee:** £500–£2,000 depending on property value
• **Legal fees:** You pay both your own solicitor and the lender’s solicitor

**Example cost:** £200,000 bridging loan at 1% per month for 6 months = £12,000 in interest alone, plus fees. The total cost of bridging for 6 months can easily reach 10–15% of the loan value.

Loan to Value (LTV)

Most bridging lenders will lend up to 70–75% LTV on a first charge basis. Some specialist lenders go to 80% LTV. The lower the LTV, the better the interest rate.

If you already have a mortgage on the security property, the bridging loan will be arranged on a second charge basis, which is more expensive.

The Exit Strategy

The exit strategy is the single most important factor. Lenders will not advance funds unless there is a credible, documented plan for repayment. Acceptable exit strategies include:

• Sale of the bridged property (with evidence: listing, sold STC, exchange)
• Refinancing onto a buy-to-let or residential mortgage (with an AIP)
• Sale of another property

Always instruct a specialist broker for bridging finance. Terms vary enormously between lenders and the difference between the best and worst deal can be significant.