Bridging Finance

Bridging loans explained

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Wondering how bridging loans work? Our beginner's guide is here to explain the basics.

What is a bridging loan?

It's a short-term loan, typically lasting up to 12 months, that's designed to span the gap between an expense you need to pay now, and some money you're expecting to receive later.

The loan allows you to pay the expense immediately. And you repay the loan when you receive the money you were expecting.

What are the different types of bridging loan?

You can get a personal bridging loan (which is regulated by the Financial Conduct Authority) or a commercial one.

Personal bridging loans are secured against your home, or another property defined as personal property – like one you've inherited.

Commercial bridging loans are secured against properties you've bought (or are buying) either as an investment or to be your business premises.

How does a bridging loan work?

As it's a short-term loan, you repay whatever you've borrowed in a lump sum, as soon as you're able to.

As with all loans, you'll be charged interest on your bridging loan. This is calculated on a monthly basis – so the longer you have your loan, the more it'll cost you.

You can either pay the interest each month, or you may have the option to bundle the interest to what you've borrowed when you pay back the lump sum.

How do you repay a bridging loan?

When you're applying for your bridging loan, you'll be asked to confirm how you're intending to raise the money you need to repay it.

For example, if you were taking out a bridging loan for your business, it may be that you're using the loan to manage cashflow while you wait for a customer to pay a large invoice.

Or you might be planning to use the proceeds from the sale of a property; from an inheritance that's currently in probate; or another means, such as longer-term borrowing like a traditional mortgage.

Why would you take out a bridging loan?

There are several circumstances when a bridging loan might be a good option.

  1. When you want to repair a broken property chain when your buyer drops out, and this puts your new home at risk of falling through.
  2. When you want to invest in property as a cash buyer, because you can't wait for the buy-to-let or commercial mortgage you need to be arranged (e.g. you're buying at auction).
  3. When you quickly need an injection of cash– perhaps because you've received an unexpected bill, or you want to grow your business.
  4. When you're not planning to keep a property you're buying, because you're selling it after renovation.
  5. When you're using the loan to build a new property (or development) that you'll sell when it's completed.

A financial adviser can talk you through the pros and cons of taking out a bridging loan in each of these circumstances.

What should I consider when taking out a bridging loan?

There are some things you should mull over before proceeding:

Is my repayment method realistic? For instance, if you're planning on selling a property to repay the loan, is 12 months long enough to find a buyer and the sale to complete? Would you be able to repay the loan if you were forced into a quick sale at a lower price? Remember that if you're unable to repay your loan within 12 months, your property may be at risk of repossession.

What's the overall cost? It's important to remember that the longer you take to repay your loan, the more it will cost you so think about what it would potentially cost if circumstances meant you took the full 12 months to repay it. You should also compare more than just the interest rate and factor in any fees – like an Arrangement Fee, Exit Fee, or similar.