Bridge loans explained
A bridge loan can be a good solution for short-term borrowing. Our guide covers how bridge loans work so you can decide if it’s the right choice for you
A bridge loan can be a useful way to borrow money short-term – especially if you’re looking to buy a new home before you’ve sold your current one. But it’s good to know the facts – and the pros and cons – before you apply.
What is a bridge loan?
A bridge loan, also known as a ‘bridging loan’, is a type of loan that’s taken out for a short period of time until you secure the money you need – usually to help you buy a new home before you’ve sold your current property. Like other types of secured loan, bridge loans are secured against a valuable asset, usually your property, meaning if you struggle to keep up with your loan repayments your home could be at risk.
How do bridge loans work?
There are different types of bridging loans available. They include:
First charge and second charge
When you take out a bridging loan, a ‘charge’ is placed on your property - this is a legal agreement that lists the order in which lenders will be repaid if you're unable to repay your loans. If you have an existing mortgage, the bridge loan becomes a second charge, for example. But if you don’t already have a mortgage the bridge loan is a first charge
Fixed or variable interest
Bridging loan interest rates can be either fixed or variable. With a fixed rate you’ll know exactly how much you’ll be charged and that your monthly repayments will be the same for the life of the loan. With a variable rate the interest rate – and your monthly repayment amount - can change. Fixed rates are likely to be slightly more expensive
Open bridge loan
An open bridge loan means there’s no set date for paying off the loan, but you’ll usually be expected to pay it off within a year. This type of loan may suit you if you’ve found a house you want to buy but haven’t yet sold your current home
Closed bridge loan
With a closed loan you’ll have a fixed date to repay your loan. A closed bridge loan may suit you if you’re selling a property and waiting for completion to receive the money to put towards your new home. Typically, you only need to borrow the money for a short time.
What to consider before getting a bridge loan?
It’s a secured loan: When deciding to take out a bridge loan, it’s important to remember that it’s a secured loan. With secured loans, you put up a valuable asset as security e.g., your house. You need to understand that if you fail to pay your bridge loan back, you risk losing this valuable asset. Make sure you are able to commit to the payments
It’s a short-term loan: Bridge loans are usually taken out for a short period. Because of this, it’s important you can pay back the loan within the timeframe you’ve agreed with the lender
Exit strategy: When taking out a bridge loan, it’s important to have an exit strategy in place. Without an exit strategy, you won’t qualify for most bridge loans. The stronger your exit strategy the better rates you could get on your loan. Examples of exit strategies include having an offer to buy your property or a remortgage agreement in principle
When to get a bridge loan?
These are the circumstances when people usually consider taking out a bridge loan:
You’re in a property chain: Bridge loans can help you break free from property chains as you’re no longer relying on the money from selling your property
You’ve bought an auction property: If you’ve bought a house at auction, a bridge loan can help you raise the funds fast to secure your sale
Short term cash flow issues: If you’re having cash flow problems for a short period of time then you might be thinking of a bridge loan. A bridge loan could help you stay stable for a short while until your cash flow problems are fixed
Mortgage declined: You might have been turned down for a mortgage because you have bad credit or little/no income. A bridge loan can help you to purchase your dream property before another buyer snaps it up. However, it’s important to have an exit strategy, in this case, it would be switching to a mortgage when you’re eligible
Property renovation: If you’re looking to buy a property that’s been labelled ‘uninhabitable’ by mortgage providers – a bridge loan could be a solution. A bridge loan can give you the funds to renovate the property and bring it to a mortgageable condition. The exit strategy in this scenario would be selling the property or a remortgage
Do banks offer bridging loans?
You may be able to get a bridge loan from a high street bank, but they are likely to be hard to come by. You’re more likely to get a bridging loan from a secured loan provider or specialist bank. If you’re looking for the right bridging loan, why not compare with MoneySuperMarket? We compare bridging loans from across the market from a range of lenders, to find the right deal for your needs.
How long will it take me to receive a bridge loan?
How long it will take for you to receive the money after you’ve applied for a bridge loan will depend on your lender and their lending criteria. You may receive the money from your bridging loan within 72 hours, or it could take a couple of weeks for you to be approved and get the funds. As bridging loans are a type of secured loan, they’re likely to take longer to complete than a personal loan. This is because there will be additional checks and paperwork to secure a loan against your property. If you’d like to have a better idea of what to expect, you could ask your lender for an estimated time to completion when you apply.
What are the pros and cons of bridge loans?
Here are some of the advantages and disadvantages of taking out a bridge loan:
Pros
Speed: You can borrow money quickly. This could be a lifeline for cashflow issues or help you buy your dream property
Flexible: Bridge loans tend to offer flexible repayment plans
Deferred payment: Generally, you won't need to repay the loan until the agreed repayment date at the end of the term
Cons
High interest: Bridge loans come with very high interest rates
Fees: You might be charged admin, process, and completion fees
Could lose a valuable asset: You need to put down security for a bridge loan. If you fail to pay the loan back, you could lose a valuable asset, your home for example
How much does a bridging loan cost?
The overall cost of a bridging loan will vary. But here are some fees you may face:
Administration fee
Arrangement fee
Legal fee
Valuation fees
Broker fees – can be a flat fee or a percentage of the loan
What are the alternatives to bridge loans?
Here are some other options for you to consider:
Borrowing from family and friends: You could turn to loved ones instead of taking out a bridge loan. Borrowing from family or friends can mean a lower or even zero interest rate than the high interest rates that come with bridge loans
Guarantor loans: This is another form of borrowing that usually involves your nearest and dearest. With a guarantor loan, someone – usually a family member or friend – agrees to pay off a loan if you can’t
Gifted deposits: This is when someone – usually a relative –gives you money to use as a down payment for a house
Other useful guides
Here at MoneySuperMarket, we have a range of guides you can read about loans:
Compare bridging loans with MoneySuperMarket
Applying for a loan can feel like a guessing game – it’s hard to know whether you’ll be accepted and what deal you’ll be offered. But by comparing bridging loans with MoneySuperMarket, it’s a quicker and easier process. We’ll compare bridge loans from a wide range of lenders using a soft search, meaning your credit score won’t be affected.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.