Sometimes getting a mortgage takes time. If you need to buy quickly or fund a short-term plan, a bridging loan can help. It’s a different kind of borrowing with different rules.

You need to understand what bridging loans are, how they work, and when they make sense over a standard mortgage or remortgage. This guide gives you all the information you need but is only guidance. Always speak to a qualified adviser before you act.

What is a bridging loan?

A bridging loan is a short-term loan. It’s used to cover a gap between buying one thing and selling or refinancing another.

The most common use is property. You might want to buy a new home before your old one sells. Or you might want to buy a property at auction, where you only have 28 days to complete. A mortgage can’t be set up that quickly. A bridging loan can.

Bridging loans are not cheap. They’re a short-term fix, not a long-term plan.

How do bridging loans work?

You borrow a lump sum secured against a property. The loan runs for a set term, usually between one month and 18 months.

Interest is charged monthly, not annually. You can pay it each month or roll it up, so it’s added to the loan and paid at the end. Most people choose to roll it up.

At the end of the term, you repay the full loan. This is called the exit. Your exit plan must be clear before you take the loan. Common exit routes are selling the property or switching to a standard mortgage.

Who are bridging loans for?

Bridging loans are used by a range of borrowers. Most are buying or selling property. Some are developers or investors. Others are homeowners who need to move fast.

Lenders look at your exit plan above all else. They want to know how and when you will repay the loan. Your credit history and income matter less than with a standard mortgage, but they’re still checked.

What can bridging loans be used for?

  • Buying before you sell. You can buy a new home before your current one is sold. The loan is repaid when your old home sells.
  • Auction purchases. Auctions need fast completion. A bridging loan can be ready in days.
  • Renovation projects. Some properties can’t get a standard mortgage because they’re in poor condition. A bridging loan can fund the buy and the work. You then switch to a mortgage once the work is done.
  • Breaking a chain. If a sale falls through in a chain, a bridging loan can keep your purchase moving while you find a new buyer.
  • Land or commercial property. Standard mortgages don’t lways cover land or mixed-use sites. A bridging loan can fill that gap.

 

Types of bridging loans

There are two main types:

Open bridging loans have no fixed end date. You repay when you’re ready, within the lender’s limit. These are used when the exit is less certain, such as when a property sale has been agreed but is not yet complete. Open loans usually cost more.

Closed bridging loans have a fixed end date. The exit is agreed in advance. For example, you exchange contracts on your property sale and know exactly when it will complete. Closed loans tend to have lower rates.

What are ‘first charge’ and ‘second charge’ bridging loans?

These terms refer to the lender’s priority if you can’t repay.

First charge means the bridging lender is paid first if the property is sold to clear debts. This applies when there is no existing mortgage on the property.

Second charge means there is already a mortgage on the property. The bridging lender sits behind the main lender. If you default, the main lender is paid first. Second charge loans carry more risk for the lender, so they tend to cost more.

Alternatives to bridging loans

A bridging loan isn’t always the best option. Here are some things to consider first:

  • Remortgage to release equity. If you have equity in your current home, you may be able to release cash through a remortgage. This can fund a deposit on a new property. Read our guide on how to remortgage to buy another property.
  • Let to buy. You remortgage your current home onto a buy to let deal and rent it out. This frees up cash to buy your next home.
  • Personal loan. For smaller gaps, a personal loan may work. But the amounts available are lower, and rates can be high.
  • Wait and negotiate. Sometimes sellers will accept a delayed completion. If you don’t need to act in days, you might need a bridging loan at all.

 

Pros and cons of bridging loans

Pros of a bridging loan

  • Fast. Loans can complete in days. This is the main reason people use them.
  • Flexible. They can be used for a wide range of property types and situations.
  • No monthly payments needed. You can roll interest into the loan and pay it all at the end.
  • Useful for unmortgageable property. Properties that don’t meet standard mortgage rules can still be bought with a bridging loan.

Cons of a bridging loan

  • Expensive. Monthly rates are much higher than mortgage rates. The longer you hold the loan, the more it costs.
  • Risk if the exit fails. If your sale falls through or your remortgage is delayed, you’re stuck with the loan and the cost.
  • Secured on property. If you cannot repay, the lender can repossess the property.
  • Fees add up. Beyond interest, there are several other costs to pay.

 

What does a bridging loan cost?

Interest is charged monthly. Rates typically range from 0.5% to 1.5% per month. That sounds low but adds up fast.

On a £200,000 loan at 1% per month over six months, the interest alone is £12,000. This doesn’t include fees. Always work out the total cost before you commit.

Rates depend on the loan size, the property, your exit plan, and whether it’s a first or second charge. A broker can help you find the best rate for your situation.

Are there any other fees I need to pay?

Yes. Bridging loans come with several extra costs on top of interest.

Arrangement fees

Most bridging lenders charge an arrangement fee. This is typically 1% to 2% of the loan amount. On a £200,000 loan, that is £2,000 to £4,000. Some lenders add this to the loan. Others require it upfront. Check which applies before you commit.

Valuation fees

The lender will value the property before they agree to lend. You pay for this. The cost varies by property size and type, but expect £300 to £1,500 or more.

Exit fees

Some lenders charge a fee when you repay the loan. This can be a flat fee or a percentage of the loan. Not all lenders charge this, so it is worth checking before you sign.

Legal fees

You’ll need a solicitor for the bridging loan. The lender will also have their own legal costs, which you may be asked to cover. Budget for both.

Final thoughts

A bridging loan can be the right tool in the right situation. Speed, flexibility, and the ability to buy property that a normal mortgage won’t cover are real strengths.

But the costs are high. The risk is real if your exit plan doesn’t go to plan. And there are often cheaper options worth looking at first.

Always get advice before you commit. Pepper Money works with brokers who understand short-term lending. You can find a broker through us today.