The Smart Guide to Bridging Loans
We explain how bridging loans work, when to use them and how to apply. Read our market insights, need-to-know tips and pros & cons of different...
Thinking about a bridging loan for your next project? Whether you’re a seasoned property investor or just dipping your toes in the market, understanding the cost is key.
Bridging loans have come a long way since their origins in the 1960s. Once a last resort for buyers stuck between selling and buying, they’re now flexible financial tools for all kinds of scenarios, from snapping up auction properties to financing big refurbishments.
With loan terms from 1 to 24 months and borrowing amounts between £25,000 and £100 million, it's vital to get a handle on the costs. These can include arrangement fees, drawdown fees, valuation, legal and intermediary fees.
In the article below, we'll explore these costs, providing an overview as to what they are and how much you can expect to pay, whilst also suggesting some practical tips to help you identify the most cost-effective solution for your property development needs.
Overview of Bridging Loans
Bridging loans are short-term, fast, and flexible financing solutions named for their role in bridging temporary funding gaps between buying and selling (or refinancing) property or land.
| Key Features | Key Figures |
| Loan Term | 1 - 24 months |
| How Much Can I Borrow | £25,000 - £100 million |
| Interest Rates | Starting from 7% (0.58% per month) |
| Arrangement Timeframes | 3 days - 6 weeks |
Some typical uses include:
- Temporarily funding a property purchase
- Buying a property at auction
- Buying unmortgageable properties, such as
- Uninhabitable houses due to having no working kitchen or bathroom
- Uninhabitable houses due to structural problems
- Properties built with non-standard construction
- Properties priced below £50k
- Buying land without planning permission or with only outline planning
- Buying land with planning that needs to be enhanced or altered
- Buying and refurbishing properties
- Exiting an existing development loan
- Quick transactions, where being a cash-buyer on a property with a reduced price tag is highly advantageous
To secure a bridging loan, the borrower must demonstrate a clear exit strategy, whether selling the property the loan is secured against, selling another property, liquidating other assets or refinancing.
When exiting a bridging loan agreement, refinancing options generally include:
- Re-bridging: Using another bridging lender to continue the project as what you wanted to do has not happened in the original timescale (e.g. delays in the planning process)
- Development finance: Tailored finance for ground-up residential or commercial property developments, large-scale renovations, or converting commercial into residential (or vice-versa).
- Buy to Let (BTL): A longer-term mortgage for residential investment properties.
- Residential mortgage: A long-term mortgage for residential properties where you live
- Commercial mortgage: A long-term mortgage, either for commercial investment properties that will be let to commercial tenants, or for owner-occupied business premises.
Breakdown of Typical Bridging Loan Costs
While bridging loans generally have higher costs than traditional financing like residential mortgages, they are not as expensive as you might think. In fact, with recent increases in mortgage rates, some bridging products are priced similarly to buy-to-let (BTL) loans.
There are hundreds of bridging loan lenders in the market, from high street banks to specialist lenders, each offering different rates, fees, and costs.
Let's take a look at the typical costs associated with bridging loans below.
Interest Rates
Interest rates on bridging loans are usually charged daily, so you only pay for the time you use the loan. Some lenders charge monthly, meaning you pay a full month’s interest if you exit partway through the month - find this out from the outset, as avoiding this type of arrangement can save you thousands of pounds.
Interest can be paid in two ways:
- Rolled up: Paid at the end of the term and compounded, making the final interest charges larger.
- Serviced: Paid monthly, like a regular mortgage, with lenders assessing affordability and monthly income upfront.
Rates currently range from 7% to 15% annually (H1 2024).
Various factors and perceived risk to lenders determine the rate you pay. Factors influencing rates include:
- Loan to Value (LTV): Loans with lower LTVs, typically 60% or less achieve lower rates
- Exit strategy and loan term: A solid exit plan can lower rates. Examples of this might include a set date for the completion of a sale or having a DIP in place for refinancing
- Property type and location: Desirable properties in good locations pose less risk
- Planned project: Riskier projects, like buying land without planning for example, might incur higher rates
- Borrower strength: Strong credit, healthy cash flow and net asset value, and experience in similar projects can lower rates
- Current market: Some bridging lenders rates align with the Bank of England base rate and as such, will change as the base rate changes
Arrangement Fees
What are they?
Lenders charge a fee for arranging the loan to cover administrative costs involved in processing an application, such as performing credit searches.
How much do they cost?
The cost of a bridging loan arrangement fee is up to 2% of the net or gross loan.
Brickflow’s live bridging loan calculator tells you exactly what the arrangement fees are on each loan option.
When are they paid?
They are typically included in the total loan and paid at the end of the term when the loan is settled.
Can arrangement fees be avoided?
No. Every lender will charge arrangement fees.
Exit Fees
Some lenders charge a fee when the loan is repaid, but this is uncommon in bridging finance. Almost none of the lenders on the Brickflow platform charge exit fees. Instead, there may be a minimum term, typically between 1 and 6 months, and exiting before this period would incur a charge.
Redemption Fees
What are they?
When the loan has been repaid, redemption fees cover the cost of removing the lender’s legal charge from the property.
How much do they cost?
It varies but the cost is typically around £120.
When are they paid?
When closing the loan.
Can they be avoided?
No.
Valuation Fees (Survey Fees)
What are they?
Lenders require a property valuation by a surveyor before arranging a bridging loan. Any additional assets used as security must also be individually valued.
How much do they cost?
Costs vary based on the property's value, the scale of any work, and its complexity. As a guide, budget around 0.1% of the property value.
When are they paid?
After securing a Decision in Principle (DIP) and submitting your application, you'll pay for the valuation before receiving a final offer (which will be based on the valuation figure). Valuation fees are therefore paid whether the loan completes or not.
Can they be avoided?
Almost certainly not, but there are a handful of private lenders that will conduct site visits and not always insist on formal valuations, or some lenders may accept less expensive desktop valuations for certain properties.
Legal Fees
What are they?
Any transaction involving a property title requires legal work. A bridging loan involves the lender placing a ‘charge’ against the property title, allowing them to legally possess the property in case of default. This process also applies when the loan is fully redeemed by the borrower.
How much do they cost?
You must cover both the lender’s and your own legal fees. Costs vary based on the solicitors used and the property’s type and value, but expect to pay a minimum of £ 2.5k + VAT for the lender's solicitor.
When are they paid?
Whilst not due until completion, you effectively pay them upfront as you’ll need to provide an undertaking for the lender's legal costs (and your own legal costs) to your solicitor before either side starts work. If the transaction aborts, then any legal fees incurred to that point will be deducted from the monies held with your solicitor.
Can they be avoided?
No.
Intermediary Fees (aka Broker Fees)
What are they?
Specialist Intermediaries/debt advisors earn a fee from the lender for finding and securing your loan, and leveraging their expertise and relationships in the UK bridging market.
How much do they cost?
Typically, broker fees are covered by the lender, with the 2% arrangement fee being equally split. Some brokers might charge an additional fee on top of this. Commitment fees for the intermediary to prepare the application are quite common . Ask about fees upfront.
When are they paid?
The arrangement fee is incurred when the loan completes. Administration or commitment fees would normally be paid at the start of the application..
Can they be avoided?
Yes, as they are generally covered by the lender.
A good intermediary can save you tens or even hundreds of thousands of pounds and ensure you secure the best loan, making their fees worthwhile for many property investors.
Tips to Manage and Reduce Costs
When calculating your project's viability, it’s important to consider all costs and fees that make up the bridging loan. While set fees like valuation and legal fees are unavoidable, you can reduce overall costs by comparing loans across the breadth of the UK lending market.
Compare Loans on Brickflow
Instantly search and compare loans from over 50 bridging lenders, including banks, non-banks, and specialists. Our real-time bridging calculator saves you time and money, helping you find the best rates and fees.
Additional Tips to Reduce Costs
- Secure a loan with a higher LTV to reduce your deposit input
- Perform a market-wide search to find flexible and cheaper lenders
- Offer a larger deposit (40% or more) for lower rates
It’s worth considering the bigger financial picture, though. As well as focusing on rates, consider your return on capital employed (ROCE) and whether or not having equity available to invest elsewhere simultaneously will offer greater returns.
Real-Life Cost Examples
To better understand how much a bridging loan costs, let’s take a look at a hypothetical scenario below:
| Purchase Price | £500k |
| Purchase Costs | £25k |
| Cost of Works | £300k |
| Location | South-East London |
| GDV (Gross Development Value) | £1.2m |
| Loan Type | Refurbishment bridging |
| Loan Term | 18 months |
With both loans, the additional costs would be approximately:
- Valuation fees - as a guide, budget up to 0.1% of the property value
- Redemption fees - lender may have a minimum term of between 1 & 6 months
- Legal fees - vary according to loan size and project complexity, the minimum a lenders lawyer will charge is £ 2.5k + VAT
- Loan arrangement fees - up to 2% of the gross loan amount, added to the loan on completion
The quickest, most accurate way to calculate how much a bridging loan will cost for your property investment is by using Brickflow’s real-time bridging loan calculator.
Final Thoughts
Bridging loans, like any specialist finance, tend to cost more than traditional long-term borrowing options, but they can be more affordable than you might expect and offer unique opportunities that justify the expense. Understanding the full spectrum of costs—from interest rates and arrangement fees to legal and valuation fees—allows you to make an informed decision.
To streamline your process and ensure you’re getting the best deal, use Brickflow to compare live borrowing costs from a wide range of lenders.
FAQs
What is the average interest rate for a bridging loan?
Bridging loan rates range from 7% to 15% annually. The rate depends on factors like LTV, property characteristics, loan term, exit strategy, borrower credit, and experience.
How much does a bridging loan cost in the UK?
Costs vary by lender and loan, including interest, arrangement fees, valuation fees, intermediary fees, legal fees, and drawdown fees. Exit fees are rare. Interest is typically charged daily, and therefore only for the time you use the loan (but some lenders charge monthly, so ask for clarification upfront).
How much deposit do you need for a bridging loan?
Deposits depend on LTV. For a £200,000 purchase with a 70% LTV, you need a £60,000 deposit plus purchase costs, but you also need to add the lender interest costs and arrangement fees to the total borrower contribution. Assume between 10% and 15% of the loan amount for 12 months. Therefore, the total deposit contribution might grow from £60k to £75k. Lower LTVs require more deposit but offer better rates. The maximum LTV for bridging finance is typically 75%.
Do you pay monthly for a bridging loan?
Usually not. Most bridging lenders roll up the interest and it is paid in full at exit. Some lenders will offer serviced bridging loans (paid monthly), but they will need to see evidence that you can comfortably afford the monthly repayments.
How difficult is it to get a bridging loan?
Securing a bridging loan can be straightforward if you can demonstrate to the lender a clear, viable proposal with a realistic exit strategy. Lenders will want to see detailed project plans with accurate costings, thorough market research, and evidence of your (and your team’s) previous experience. A spreadsheet with vague or estimated numbers won’t interest lenders.
Read more about bridging loan eligibility criteria.
Can I get a bridging loan with no money?
It can be possible to secure a bridging loan without contributing a deposit - instead you would use additional assets. This comes down to the lender and is assessed case by case.
Do I need proof of income for a bridging loan?
Not always, as the focus is on the exit strategy. However, proof of income and a good credit file can strengthen your application. For serviced loans, lenders will need to provide proof of income and will carry out affordability testing.
How long does it take to get a bridging loan approved?
Loan approval can be very quick; our record through the Brickflow software is just 7 minutes . You can complete the loan within a few days using lenders that work with automated valuation models (AVM), or desktop valuations, and accept title insurance without requiring searches. However, between 2 and 4 weeks is more common.
Working with a specialist solicitor will speed up the process.
What documents do I need for a bridging loan?
You'll need proof of ID and address, recent bank statements, an assets and liabilities schedule, a detailed project plan, and evidence of a viable exit strategy.
Can I get 100% bridging finance?
Yes, it is possible, but rather than 100% finance, it is more of a ‘cashless’ deal using alternate collateral (other properties that you own) instead of capital. This is not standard and is assessed on a case by case basis.
What is the longest bridging loan term?
Typically, bridging loans can last up to 24 months, with 12 to 18 months being standard.
Can you turn a bridging loan into a mortgage?
Yes, depending on the property type and condition, you can transition or refinance from a bridging loan onto a mortgage. Options include residential, buy-to-let, or commercial mortgage.