What is a bridging loan?

Bridging loans are used for borrowing over short periods and are particularly popular among homebuyers who have found a property to buy but cannot get rid of their current house. In the case of property transactions, the loan is a short-term fix, bridging the gap between the purchase of a property and a completion on a sale.

How does a bridging loan work?

The loan is secured to the buyer’s existing home and the funds can be used as a down payment on the next property.

There are number of bridging lenders in the market. Some of the big names include Precise Mortgages, Dragonfly, Omni Capital and Bridgebank.

What do people use bridging loans for?

The most common uses are:

• to buy a new property

• to buy and refurbish a property before refinancing it with a mainstream lender. For example, no high street bank will lend money on a property without a bathroom, so if a property is run down you can buy it with a bridging loan, do it up and then, once it is ready, approach the high street bank and get a normal mortgage that will be used to pay off the bridging loan.

• to buy a property at auction. Once you secure a property at auction, you have very little time to pay for it – and if you don’t come up with the readies, you will lose your deposit (which can be tens of thousands of pounds).

As long as there is an asset to secure against, these loans can, in theory, be used for any purpose where money is needed quickly.

What are the risks?

Rates tend to be typically high and usually have hefty administration fees on top.

If you take out a bridging loan, you could face costs of up to 1.5% a month – which racks up to 18% per annum. Add to that admin fees and the costs easily start to mount up.

Each lender differs in the way it charges interest. Some make you pay it monthly; others accrue it and send you a large bill at the end of the loan.

So it is vital that a bridging loan should only ever be taken out when there is a viable ‘exit strategy’ in place, which is more often than not a remortgage with a high street lender. This is key: these loans should not be used as a loan of last resort by someone who is struggling with debts.

Who are bridging loans aimed at?

Generally, bridging loans are aimed at landlords and amateur property developers, including those purchasing at auction where a mortgage is needed quickly.

They may also be offered to wealthy or asset-rich borrowers who want straightforward lending on residential properties, and have the means to pay back sooner than the average Brit.

Where can you get a bridging loan?

In the current market, bridging lenders come in all shapes and sizes, from one-man outfits to professional companies regulated by the Financial Conduct Authority (FCA).

If you are considering a bridging loan, you should take one out with a broker that is FCA-regulated to afford you at least some protection and this broker should be able to give you the right information on whether this type of loan is the right option for you or not.