Bridging Finance

How Does a Bridging Loan Work?

Bridging loans are secured, which means they must have assets secured against them, usually one or more properties, or in some circumstances, high-value assets like artwork or jewellery can be used.

The loan can be secured against the property you’re buying with bridging finance, existing properties, or a combination of both. If the borrower cannot repay the loan, the lender could take possession of these assets. 

Whereas a standard mortgage amount is determined by one’s income, a bridging loan is not. Similar to development finance, lenders are more interested in the asset value and saleability, and a borrower's exit strategy. 

Whether using bridging finance for property development, property refurbishment or buying land or property, the loan will typically be repaid by:

• Selling another property
• Selling the property that the loan is secured against
• Refinancing through a traditional mortgage
• Refinancing/transitioning onto development finance or re-bridging

The process

Transacting quickly is one of the key benefits of a bridging loan, and certain factors make it possible.

• Application and Approval: Assessment can be quick because it is based on property/ asset valuations and the exit strategy, rather than lengthy personal financial due diligence or validating a full property development appraisal. Bridging loans also tend to be unregulated, cutting the paperwork and form-filling
• Funding: Specialist bridging lenders know the process inside-out. From application to receiving the funds can happen in as little as 2 weeks. The average time is between 2 and 4 weeks, but it can be done in a shorter time frame. Automated valuations (AVMs), completed instantly, are becoming more popular. Lenders will only want to use these when lower leverage is requested, and there is little to no improvement work to be done. In this case, loans can be completed in a few days
• Costs: Like most things, you pay more for speed and convenience, so interest rates are usually higher than for other finance types. For most borrowers, this is typically outweighed by the efficiency and flexibility offered by bridging. As of early 2024, bridging interest rates are in line with longer-term finance, such as BTL mortgages
• Repayment: Anywhere between 1 to 24 months, aligned with selling the property or securing long-term financing

How much can you borrow?

The amount that can be borrowed depends on the value of the assets and borrower deposit. Most bridging loan lenders in the UK are limited to 75% LTV (Loan to Value) on a gross loan basis. But it’s a vast lending scale, stretching from around £25,000 to £60 million or more. 

How is interest charged in a bridging loan?

Interest is normally charged on a daily basis, so you only pay for what you use. Some lenders still charge monthly, but try and avoid these loans if you can, otherwise redeeming partway through a month will see you pay a full month’s interest. 

Interest can be paid in one of two ways;

1. Rolled up: The interest is rolled up and paid at the end of the term, but it’s compounded, so the final sum is larger than if it had been paid monthly. E.g. The lender might agree to lend 75% LTV on a gross basis. From that loan sum, they will deduct the interest due for the loan terms and their arrangement fee. The amount leftover (the net loan) is what is made available to the borrower.
2. Serviced: The borrower services the loan like they would a normal mortgage. This is less popular with lenders, as the assets are often not income-producing, and they want the security of knowing the interest is paid upfront. If the lender does allow a borrower to service the loan, they’ll want to be very comfortable that the loan is affordable.
   
   

Take a look at our bridging loan eligibility guide to determine whether you are eligible for a bridging loan. 

Bridging Loan Uses

Different types of bridging loans are available for different purposes. Your project or property purchase will determine which bridging loan to use. 

Almost all transactions will fit into the following categories:

Planning Bridging

Funding for buying sites with existing properties you wish to change or land:

• Without any planning permission
• With only outline planning permission
• With detailed planning that has to be varied in some way

Securing planning permission is a long, arduous task. A bridging loan can provide liquidity and ensure you can pay the bills throughout the process. It also vastly improves your buying powers for development sites, whilst also increasing your Return on Capital Employed (ROCE). The value-add in taking bare land to being shovel-ready is significant, whether it’s you lifting the shovel or selling on to a builder.

Bridging can be used for sites with planning permission that don’t need to be altered in any way. This is sometimes referred to as land purchase bridging. For example, where a site has permission for 4 residential units that a developer or builder is happy to build out as per the existing plans but isn’t yet ready to build (most development loans will stipulate that the build phase needs to start within 3 months of the land loan being drawn).

Purchase or refinance bridging

Pretty much what it says on the tin, purchase/ refinance bridging is used to purchase a property or refinance it. Re-finance bridging, where the existing lender is a bridging lender, is typically referred to as a re-bridge. 

For example, where a property hasn’t sold or the works were not completed before the term is up and the existing bridging lender won’t issue an extension, re-bridging with another lender is an option. Although not all bridging lenders will allow it, so the number of options a borrower has are reduced.

Purchase or Refinance bridging also includes the following:

• Chain Break Finance: Allowing a new property purchase to proceed when an existing property sale is delayed would come under Purchase bridging.
• Auction Finance: This is one of the most frequent uses for bridging loans. Buying at auction requires a 10% deposit upfront, and buyers normally have just 28 days to complete the sale. Most regular mortgage lenders cannot complete a loan in this short timescale (and the property might not be mortgageable). Depending on the condition of the property, this could either be a purchase bridge or refurb bridge.
• Commercial Property Purchase: For the acquisition of commercial properties, whether for development or to retain as your business premises. All commercial bridging loans are unregulated.

Refurbishment bridging

Ideal for properties in need of renovation or refurbishment work that can be completed in a short time scale before selling at a higher value or refinancing in order to let it out. Unmortgageable and uninhabitable properties can be funded with refurbishment finance.

Developer exit bridging

If your development overran, or hasn’t sold yet, but you have reached Practical Completion (PC), a developer exit bridging loan offers a solution. 

Some development finance lenders can get antsy when your loan term ends and might push you to sell for less than you want to, or offer an extension with expensive/ unsuitable terms. With development exit bridging, you can repay the development finance lender, sell the units or refinance under less pressure and potentially access some of the equity you’ve created in the scheme and move on to your next project.

Are you in the process of exploring bridging financing options? Compare 40+ bridging loan providers through Brickflow right now.  

Different Types of Bridging Loan

The above categories can then be further broken down into types of bridging loans:

• Open Bridging Loans: There is no set repayment date (almost all bridging loans are open). The borrower will have a clear exit strategy, but they are unsure of the exact timing of it. For example, their house is on the market for sale but not sold yet. Open bridge loans provide flexibility, but there will be a cut-off point when the loan must be repaid. They carry more risk for the lender, so typically have higher rates.
  
  
• Closed Bridging Loans: have a predetermined repayment date, usually based on a known financial event. Typically, this is when a property sale has been agreed with a fixed completion date.
  
  
• First Charge Bridging Loans: First and second charge refer to which lender will recoup their debt first in the event of a borrower defaulting. Logically, first-charge loans are the primary loan against a property, and have priority over others regarding repayment. Lenders are more willing and flexible with loan arrangements when they are the first-charge.  
  
  
• Second Charge Loans: These are additional bridging loans taken against an already mortgaged property and secondary to the first charge lender in terms of repayment priority. Rates are usually higher than first-charge as lenders try to offset the perceived greater risk of repayment. The first-charge lender has to consent for a second-charge loan to be taken out. Second-charge bridging loans allow borrowers to conveniently access the equity in a property without fully replacing the first-charge loan, i.e. remortgaging.  
  
  
• Regulated Bridging Loans: Governed by the Financial Conduct Authority (FCA), these loans are secured against a property that the borrower or a close family member currently lives in or intends to live in.
  
  
• Unregulated Bridging Loans: Not overseen by the FCA, these loans are typically for commercial properties, investment properties, or buy-to-let properties where the borrower does not reside.

Bridging Loan Alternatives

Bridging finance works for many situations, but some alternative options may be better suited:

• Personal Loans: These are for smaller amounts, with longer repayment periods but lower interest rates than bridging finance. They can be used for home renovations or extensions
• Property Development Finance: While bridging loans can work for some property development projects, such as refurbishments and renovations, development finance would be used for ground-up developments and larger (4x units and above), heavy refurbishment/conversion projects
• Commercial Mortgages: These are used for purchasing commercial properties. The loan is based on a longer period, usually 15-25 years. Rates are usually lower than bridging finance
• Mortgages: For long-term financing needs with relatively low-interest rates

Speak to a specialist in commercial property finance to ensure that a bridging loan is the right fit for your circumstances. 

Cost of a Bridging Loan

Bridging loans are not as expensive as people think. When considering the overall cost of your project, a bridging loan could save you money. Being able to transact quickly gives you buying power and the ability to negotiate over your competition.

How much does a bridging loan cost?

Rates currently start from 8% (or 0.67% per month).

Regarding interest charges, bridging loan costs currently start from 8% annually and can reach around 12%. The interest rate you pay is determined by various factors, including the LTV of the property, property type and condition, your planned project, your exit strategy, and your own strength as a borrower, primarily your experience of doing the same, net asset value, and credit file.

With a lower LTV (i.e. higher deposit), you can secure better rates, but you would typically need a 40% deposit before rate reductions kick in.

Your setup costs will usually include:

• Valuation or survey fees
• Legal fees (the lender’s legal fees as well as your own)
• Broker fees (normally paid by the lender)
• Arrangement fees (up to 2% of the net or gross loan)
• Exit fees – they can exist but are not that common for bridging finance. Almost none of the lenders on the Brickflow platform charge exit fees, but they instead might stipulate minimum loan term – between 1 & 6 months normally

How to calculate the overall cost of a bridging loan

The overall cost of a bridging loan = loan amount + interest charges + fees.

Every lender and every loan will be different. The most accurate way to calculate the overall costs of a bridging loan is by running a bridging finance search on Brickflow. You can compare interest rates, maximum LTV ratios, lender fees and more. 

It takes just 2 minutes and will help you to make an informed decision on your finances. Search now!

Pros and Cons of a Bridging Loan

Property developers and investors need to be savvy when financing their projects, understanding the risks and benefits of different finance types.

Bridging loans have long since lost their stigma as a ‘loan of last resort.’ The market has evolved, and now, most property entrepreneurs, when asked if bridging finance is a good idea? will answer with a resounding yes. But like any financing solution, there are potential downsides to be aware of alongside the benefits.

Pros of a bridging loan

• Create market opportunities that might not exist using other types of finance
  Can complete within 2 weeks (or sooner if needed) – a traditional mortgage can take eight weeks or more
• Interest on bridging loans can be rolled up and paid at the end of the term, so borrowers lacking disposable income don’t have to meet loan costs from the first month of draw-down
• Lenders often offer flexible bridging loans that won’t incur early repayment charges (though they might carry a minimum loan term)
• It can be used for residential & commercial properties, as well as refurbishment and buying land without planning
• It can be unregulated; hence, lender flexibility and speed to arrange
• Applications are assessed on property value, project viability and the securing assets, so poor credit history, low income, or cash flow problems shouldn’t prevent loan approval
• Can facilitate the purchase of properties that don’t qualify for traditional mortgages

Cons of a bridging loan

• Bridge loans are short-term borrowing (typically 1-24 months), therefore it’s essential to have a reliable exit plan
• As well as higher interest rates, fees are usually higher than traditional borrowing
• There will likely be even higher default interest rates if the loan is not repaid by the 
  end of the term
• With retained interest (added to the loan and paid at the end of the term), interest will be compounded
• Bridging loans require a personal guarantee (if borrowing through a corporate entity), meaning the borrower has personal liability for the debt, and lenders can repossess the securing assets and realise the guarantee in the event of a default

Risks and Considerations

Being aware of the risks of a bridging loan from the outset can help you make the right financial choice. Consider your project; are there other types of longer-term finance that you could use with lower costs than a bridging loan? Is your exit strategy realistic and achievable? Your exit strategy is all that stands between you and your assets being repossessed, so you’ll want to ensure it’s foolproof.

Benefits of Bridging Finance

For any property developer or investor, bridging finance substantially widens market opportunities. From meeting auction completion timelines to purchasing properties ineligible for traditional borrowing, securing prime sites pre-planning to getting commercial premises up and running for your business.

Bridging finance can act as a quick cash injection and give you a competitive edge on hotly contested sites or properties – every seller loves a quick, sure-fire sale.

To read more about whether a bridging loan could be the right option for you, read our article Should I apply for a bridging loan?

Bridging Finance Application Process & Criteria

The easiest, most efficient bridging finance application process is via Brickflow.

Here’s how to get a bridging loan on our platform:

1. SEARCH & COMPARE loans from 100+ lenders on Brickflow
2. SHORTLIST your preferred lenders
3. RECEIVE a same-day DIP
4. APPLY for a loan

It takes just 2 minutes to run your property numbers through a Brickflow bridging loan search and get live loan results from the breadth of the market. With a broker, you can then apply to multiple lenders directly from the platform to receive a DIP(s)—one Brickflow user got a DIP within 8 minutes of submitting their application!

We’ve taken the heavy lifting out of the loan search so you can smoothly progress through the rest of the application process:

Presentation

Providing lenders with a professional presentation is key to approval. Brickflow’s online application form covers everything lenders need to see to make a quick, confident credit decision, but all presentations will typically need to include: 

• Property details, price, location, do you own it, or are you planning to buy it?
• Your experience in property investment/development
• How the loan will be used
• The exit strategy: will you sell or refinance, and what is your timeline for doing so? Do you have a secondary plan in the event your exit strategy isn’t achieved?
• Budget and cash flow on the project: does the bridging loan cover the total costs, and where is the shortfall coming from if not?
• Support your application with market research and comparables

Documentation

Start gathering supporting documents as soon as possible, such as ID documents, financial information, etc.

Underwriting

The lender completes the underwriting process and makes a formal offer. Solicitors are engaged on both sides, and your loan manager will ensure you’re happy with the offer and T&Cs.

Funds

When all sides are happy with the offer, and the necessary legal work is complete, funds are released into your bank

What is the criteria for securing a bridging loan?

As with any finance lender in the UK, the borrower must be a minimum of 18 years old and a UK resident to meet the basic bridging loan eligibility criteria. UK nationals living abroad and non-UK residents can still secure bridging finance from a UK bridging lender, but there are fewer options. When you search for a bridging loan on Brickflow, you can specify your criteria and filter out lenders who don’t lend to non-UK residents.

On top of the basics, bridging finance will only be considered if the borrower:

• Is seeking £25,000 or more (but more likely £150,000+ for a lender to want to engage)
• Has suitable collateral (usually property) that can be secured against the loan
• Has a clearly defined exit strategy
• Is employed, self-employed or retired
• Is an individual, partnership or limited company

Other elements that can influence a lender’s decision include:

• Good credit: Since bridging loans are asset-secured, credit history is less important than with residential mortgages, but having clean credit can help to secure better rates
• A healthy deposit: Most lenders offer 70-75% gross LTV. Interest and fees will be deducted from the gross loan unless you're servicing the loan, but the best rates start to kick in around 40% deposit
• Proof of income: Again, bridging loans are based on the asset value and a fool-proof exit strategy, so income is not as important, but it can help to bolster an application

Since every lender has specific bridging loan criteria, there will be additions to what’s mentioned here. Filtering out the lenders that can’t meet a borrower’s bridging loan requirements can be time-consuming.

Fortunately, at Brickflow, we’ve created software that allows you to filter out lenders based on eligibility at the start of the process, so time isn’t wasted submitting applications to inappropriate lenders.