Head of Content
Head of Bridging and Commercial
Welcome to our guide to bridging finance. Here you will learn how these loans work, what criteria you need to meet to get one, how to compare deals and more.
What is a bridging loan & how do they work?
A bridging loan is a type of short-term finance that is quick to arrange and offered on a secured basis, meaning the debt must be secured against an asset the borrower owns, such as a property. As the name suggests, this form of lending is intended to ‘bridge’ the gap between an immediate debt and a longer-term form of finance becoming available.
Bridging finance is mostly used to purchase property in scenarios where a mortgage is not obtainable, either because it would take too long to arrange or the borrower is not eligible for one in the immediate term. Common examples include auction purchases and chain breaks.
These loans are offered on an interest-only basis, typically at a much higher rate than a mortgage. To get one, you need to evidence an acceptable exit strategy - i.e. a method for repaying the debt at the end of the term - to your bridging finance lender.
What can they be used for?
Bridging finance is most commonly used to invest in property - commercial or residential - when timing is critical or if the borrower cannot secure longer-term finance at the time.
Bridging loans can be useful in the following scenarios:
- Chain breaks: This is when you are unable to proceed with a house purchase because you need to sell your own property first. If there are any delays with your sale, a bridging loan can plug that gap and provide the funds to proceed.
- Auction purchases: A downpayment is usually made on the day of the auction purchase. Mortgages usually take too long to arrange but there is a specific type of bridging loan that can be used by buyers purchasing under the hammer.
- Renovation work: Some properties are not what mortgage lenders would class as ‘habitable’ and need work to meet the criteria for this. A bridging loan can provide the funds for renovation to bring the property into a ‘mortgageable’ state.
- Buying land: Bridging loans can be useful for securing plots of land while the buyer puts mortgage and planning permission applications in place.
The above situations are the most common where bridging finance can help, but since these loans are often unregulated, they can be used for any legal purpose.
Eligibility requirements
To get a bridging loan, you will need to meet the following criteria:
Have an exit strategy
Bridging loan eligibility largely comes down to the strength of the exit strategy. In other words, how you plan to pay the debt off and how viable this method is.
In most cases, the exit strategy will be a remortgage based on the property’s current value, with the funds being used to pay off the bridging loan in its entirety. If the property is for investment purposes, selling it based on its new market value is also an option.
Some lenders allow other exit strategies, such as using inheritance or investments to pay the debt, but this would be classed as a non-standard deal and may be less favourable.
Credit history requirements
As most bridging loans are unregulated transactions, lenders have plenty of flexibility to offer finance to borrowers with various types of bad credit - even severe ones - but your chances of approval will decrease if your adverse credit puts the exit strategy in jeopardy.
How much deposit you will need
You will usually need at least 25-30% of the property’s value to put down as a deposit, but the best bridging loan rates tend to kick in at around the 40% mark. You can potentially get approved with no deposit in the traditional sense if you have a property or asset that you hold the equivalent amount of equity in, and the lender agrees to secure the debt against it.
How to get a bridging loan
Follow these quick and easy steps to start your journey towards a bridging loan application:
Make sure you’re eligible: Check the criteria listed above to make sure you meet it. Remember, bridging lenders can be flexible with less-than-perfect applications.
Prepare proof of your exit strategy: This could be an agreement in principle if you plan to remortgage, or a valuation report showing it will raise enough when sold.
Speak to a broker: This is highly recommended with bridging finance applications as they can be high risk and complex. Our brokers have the knowledge, experience and lender contacts to help you secure a better outcome - speak to one of them here.
How much can you borrow?
Most bridging loan providers will allow eligible customers to borrow up to 75% of the property’s value. In terms of maximum monetary amounts, there is no hard and fast rule on this as some lenders will look at applications on a case-by-case basis. Others have maximum loan amounts starting at around £2 million but there can be room for negotiation.
At the other end of the scale, minimum loan amounts are not uncommon, and in most cases, you will need to be borrowing at least £25,000 to get approved for bridging finance.
Available lenders and rates
Bridging finance is mostly provided by specialist lenders. The table below shows examples of lenders who operate in this space, along with some of their criteria.
Bridging Lender | Loan Amounts Available | Maximum LTV |
£125k to £15m | 70% | |
£50k / No upper limit | Case-by-case | |
£75k to £15m | 75% | |
£50k to £10m | 70% | |
£26k to £5m | 70% (100% with extra security) |
The rates you will see quoted for bridging finance reflect the daily interest charges. They are typically higher than mortgages due to the short-term, flexible nature of this type of lending. At the time of writing (August 2024), typical daily rates are around 0.99% to 1.15%.
The actual interest rate you end up with can vary considerably, as most bridging loan arrangements are drawn up on a case-by-case basis.
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Bridging loan case studies
Head to our case studies page to read about some of the success stories our brokers have helped our customers achieve over the years.
Recent success stories include helping a client using bridging finance to purchase a property at auction, and helping an investor use a regulated loan for a change of use application.
How we helped an investor use bridging finance for a change of usage application
Things to consider before you apply
There are several key things to think about before you apply for bridging, including:
How do you want to pay interest?
Bridging finance lenders will give you three options for how interest is charged:
- Rolled up: The interest is compounded each month and paid off in one go at the end of the term. A potential option for those short on capital ahead of the exit strategy.
- Monthly: Borrowers make monthly interest payment and settle the capital debt at the end of the term, similar to how an interest-only mortgage works.
- Retained: Where you ‘borrow’ the interest on top of the loan amount and the final total is calculated at the beginning of the agreement to be paid at the end.
Do you need a regulated loan?
Most bridging loan agreements are unregulated, which means lenders are free to operate outside of the lending rules laid down by the Financial Conduct Authority. This means they can be far more flexible with criteria and offer you a bespoke bridging deal.
You might, however, need a regulated bridging finance provider if the agreement involves a residential property. For example, the debt is being secured against your home or you are using the funds to fix up a property that you later plan to live in.
Be aware of fees
When calculating the overall cost of your finance, be sure to speak to your broker or lender about the fees involved. These include arrangement fees (usually 1-2% of the loan amount), valuation fees, exit fees (typically 1% of the loan), and solicitor/conveyancing costs.
Using a bridging finance broker is recommended
Bridging finance can be costly and high risk without professional advice to fall back on. Luckily there are brokers on our books who specialise in bridging finance.
If you are applying for one of these loans, speaking to an advisor with the right credentials is highly recommended. Our brokers have the knowledge, experience and contacts to help you get the best bridging loan deal, or choose the right alternative if there’s a better option.
Unsure whether a bridging loan is for you? Read about their pros and cons here.
Why choose Teito for your bridging finance needs?
Our bridging loan advisors are experts in this type of finance and they have access to every lender on the market. They will compare deals for you and make sure you get the best one.
Here are just some of the reasons why our customers choose us for bridging finance:
- Our bridging advisors are whole-of-market
- They can access exclusive rates and deals
- They will save you time by overseeing the application process
- We are 5-star rated on leading review websites
Ready to get started with your bridging finance expert? Make an enquiry here and we will connect you with one of our advisors in no time.
FAQs
Yes. Although bridging finance is more commonly provided by specialist lenders, some high street banks including NatWest, HSBC, Santander and Barclays operate in this market too.
One of the benefits of using a whole-of-market broker is that they will compare bridging deals from these lenders with specialist providers and the exclusive deals they can access. You won’t have to lift a finger while they source the most suitable deal for you.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.