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Bridging Finance

In a nutshell, bridging loan is a short-term loan that can support the purchase of a property such as one that doesn’t match the criteria for a traditional mortgage. They can help between the sale of one property and the purchase of another or help landlords at risk of repossession.

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What is a Bridging Loan and how can it be used?

Investors might consider taking out a bridging loan to help buy and renovate an uninhabitable property that would be normally be refused a mortgage and then take a mortgage out on it once the property is fit for purpose or sell it at its new higher value.

Bridging loans has also helped a lot of investors secure properties quickly as loans are approved within weeks days and sometimes hours. At auctions, when transactions generally need to be completed within one-month bridging loans can help to secure a property at lower than the market rate within the quick time frame required.

Borrowers might want to think of a bridging loan as a short-term mortgage and they are similar in many ways. In both cases, the loan value is determined by the property value; and as in the case of every secured loan assets are at risk if borrowers are unable to repay the borrowed amount. There are good reasons to take out a bridging loan but it’s important to weigh up the bridging finance advantages and disadvantages.

The following topics are covered below:

Advantages of Commercial Bridging Finance

Disadvantages of Commercial Bridging Finance

What are first and second charge Bridging Loans?

What is the difference between open and closed Bridging Loans?

What is the criteria to procure a Bridging Loan?

How much does a Bridging Loan cost?

How quickly can Bridging Loans be processed?

How much can you borrow for a Bridging Loan to finance a Buy to Let?

Advantages of Commercial Bridging Finance

  • Bridging Loans can be obtained speedily and borrowers can often get an instant approval
  • There are rarely credit checks and personal income is not used to decide the eligibility
  • There is flexibility in both the way the loan is paid back and the way the interest is paid back

Disadvantages of Commercial Bridging Finance

  • Interest rates are higher
  • There are lots of fees to consider
  • Assets are at risk if repayments cannot be made.

What are first and second charge Bridging Loans?

Basically a first charge is a primary mortgage or loan secured against a property by the lender. Most lending is on a first charge basis and a second charge can only be secured if there is sufficient equity in the property. The first charge lender has to agree to a second charge loan being taken out. Interest rates tend to be higher on second charge loans because the risks are higher for the lender.

What is the difference between open and closed Bridging Loans?

Put simply a borrower taking out an open bridging loan will not have an exit strategy in place or the exit strategy will have no fixed end date. The risks are higher and as you might expect the rates are higher. Open loans are more often than not declined because the lender will need to know how the finance will be returned. One example of an open loan will be when there is equity tied up in a property but it is not yet on the market.

To secure a closed loan there must be a clear exit strategy planned out so the lender will have a clear idea of when and how the loan will get repaid. It’s in the investor’s interest to have a well thought out exit strategy as the penalties for getting it wrong can be high. Some lenders will place borrowers in default if they are unable to pay back loans which will affect credit ratings some may even start the process of repossession and some will allow the loan to extended – but will charge hefty fees for the privilege.

What is the criteria to procure a Bridging Loan?

Typically bridging lender can lend 75% gross loan to value, what this means is they will lend 75% included the interest rolled up, in sum instances if you can demonstrate serviceability of the loan then you can get 75% net loan to value.

Below is an illustration of £100,000:

Interest Deducted Bridging Finance
Interest Serviced Bridging Loan
Interest Deducted Bridging Finance Interest Serviced Bridging Loan

Use our residential and commercial briding finance calculator for your bridging finance needs.

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How much does a Bridging Loan cost?

Fees will vary from lender to lender but commonly incurred costs include broker fees a valuation fee legal costs and arrangement fees, also known as facility fees. There is also the exit fee to consider. If the loan amount required isn’t that much and the project is less risky, the lender is likely to offer better rates and fees. But if the project needs lots of money fast fees can be higher. All fees aside from exit fees are usually deducted before the loan amount is paid.

There will also be solicitor’s fees both the lender’s and the borrower’s. The lender’s solicitor will double-check all the information sent over by the borrower’s solicitor and approve the loan once they are satisfied.

Interest can be paid back in a variety of ways. It can be paid at the beginning along with the fees or it can be paid in one lump sum at the end often popular with borrowers without a regular cash flow. To retained interest which is a mix between the two. These are monthly repayments negotiable depending on the terms of the loan.

How quickly can Bridging Loans be processed?

As well as factoring in the speed at which it takes the lender’s solicitor to double-check everything it will depend on other factors such the time it takes for the valuation to come back whether a primary lender needs to approve a second charge loan and how long that takes and depending on the lender how much information they need on the borrower themselves. Although it varies and it should take no longer than a month: bridging loans are designed to be speedy.

How much can you borrow for a Bridging Loan to finance a Buy to Let?

Unlike a mortgage, your income and rental income don’t factor into it. The bridging loan is calculated on the property value alone but different lenders work out values in different ways.

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Whereas the value of a mortgage will be whichever is lower its current value or its buying price some bridging lenders will use the market value rather than the amount to sell.

And some lenders will also calculate loans based on what it will sell for known as the Gross Development Value (GDV). In this case, they will provide an initial loan based on the purchase price (i.e. before refurbishment) and offer a second stage of the loan once the property had been refurbished and its value has increased.

Investors who want to borrow more money for big restoration projects will need to consider how lenders calculate valuations. Lenders can take legal action as a result of any money lost as a result of an inaccurate valuation. So they will have the property independently valued by an RICS surveyor.

Lenders will also want to ascertain a few things before agreeing to a loan. They might ask questions about the experience as a property investor how the loan will be paid back what other assets are owned and any income that the investor gets.

Taking out a bridging loan can be a fruitful investment if everything is considered before and the pros and cons are weighed up. It goes without saying that the borrower needs to be honest. If when and how the loan will be repaid to prevent penalties. Having a clear exit strategy with contingency plans will prevent grief later down the line.

By calculating fees and interest with different bridging lenders borrowers can have a rough idea of costs which should help to weigh up whether the investment will be worth it or not.

The right solicitor can ensure the transaction runs smoothly. Some solicitors specialise in bridging loans to finance buy to lets and are accustomed to the legalities surrounding them as well.

A bridging loan expert will be able to tell within a few days whether they think a loan will be accepted and will offer advice on how to proceed but with all big financial decisions it’s best not to keep your head in the sand and be armed with the knowledge to make the right decision in the first place.

Why not try out our Bridging Loan Calculator to see how much you could borrow.

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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