Bridging loans on the rise: how do they work, and should you get one?

The number of people using bridging loans to cover the cost of buying a house has rocketed in the past year, statistics show.

The high interest emergency loans - seen by many as a last resort - are used by those needing to borrow money for a short period.

Data from mortgage experts Revolution Finance Brokers reveals how bridge lending has increased by almost 50% since the Bank of England began raising the base rate at the end of 2021. 

Here, Which? examines why these kinds of loans are once again proving popular, and how you go about securing one.

What is a bridging loan?

As suggested in its name, a bridging loan can help to 'bridge the gap' in your funds in order to make a payment.

They are especially handy if you want to buy a new home before selling your old one, providing a quick fix for those short of the required cash. 

A bridging loan is a secured loan, meaning there must be an asset to set it against. That asset will usually be a property, or multiple properties. Note that if you find you cannot repay the loan, you risk losing the asset secured against it.

It is possible to borrow varying sums of money, ranging from £25,000 to £30m. 

The loans can also be used if you buy a property at auction, where you'll need the money immediately but may not have sold your current property yet.

The number of people, however, using bridging loans for property investments has fallen amid the uncertain economic climate and the cost of living crisis.

How does a bridging loan work?

The idea is that the investor can use the loaned money to complete a deal and buy a house before refinancing onto a mortgage. 

Or, for those who aren't planning on moving in - investors who've bought a rundown house at auction, for example - they can sell the property on for a profit having made the original purchase with the help of a bridging loan.

But beware, bridging is specialist finance and the loans are high-risk; you could end up losing assets, such as your home, if you cannot repay the loan, and interest rates and fees tend to be high as you're paying for the convenience.

• Find out more: Bridging loans explained

A quick method to 'bridge the gap'

Rather than taking months to secure, like traditional bank loans, they can be obtained within days - giving borrowers access to cash fast.

The entire cost of a house purchase won't be covered by the loan. Normally it is limited to 75% loan to value (LTV), meaning £225,000 would be granted for a £300,000 property.

The borrower is required to pay a set-up fee, which is usually around 2% of the loan you want to take out, as well as property valuation fees.

You're normally expected to pay off the loan, and its interest rates, within one year. While bridging loans can be classed as open loans with no fixed repayment date, 12 or 24 month periods are the traditional cut-off points set by lenders.

It's a good idea to have a back-up plan in place in case your repayment strategy fails - otherwise you could lose the property.

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What are the interest rates on bridging loans?

As they are short-term solution, interest rates on bridging loans tend to be high; much more than normal mortgages. They are priced monthly rather than annually.

Bridging finance can be offered at either fixed or variable rates - opting for a variable rate means what you pay could fluctuate month to month.

Rates are expensive, with monthly fees ranging from 0.45% to 1.6%. That means you could be forking out the equivalent annual percentage rate (APR) of around 20% to cover the loan.

Therefore, you could stand to save a lot of money if you repay the loan as quickly as possible - especially as there aren't usually any early repayment fees.

Interest is charged monthly, but 'rolled up' and repaid in a lump sum at the end, along with the initial loan price and any fees and changes.

• Find out more: Mortgage interest rates explained

Why are bridging loans becoming more popular?

In the third quarter of this year, bridging loans in the UK totalled £215m. That's a 20.3% quarterly increase and huge 47.6% rise since last winter when the base rate began climbing.

The Bank of England sets and changes its base rate in order to try and keep a handle on inflation. At the end of 2021 it had crept up to 0.25%, but it now stands at the much higher figure of 3%.

As a result of the increase, borrowing money has become more expensive and swathes of mortgages were withdrawn by brokers following September's mini-budget.

The breakdown of multiple deals left borrowers needing to source a short-term funding solution - bridging loans - to ensure their purchase could still go ahead.

New statistics have revealed the most common reason for a homebuyer taking out a bridging loan is a chain break - ie when the buyer for someone's property falls through, leaving them unable to pay for the property they want to buy. More than a fifth of bridging loans in the third quarter of 2022 were being taken out for this reason.

Since mortgage repayments have become more expensive in recent months - along with rising prices for energy, food and other household outgoings - we could see broken chains become an increasingly common issue.

A fall in loans for property investments

While investment properties are currently the second-most common reason for taking out a bridging loan, the 16% of all loans they account for marks a 13% drop compared to the fourth quarter of 2021.

This suggests that, in the midst of economic uncertainty and cost of living increases, people are choosing to avoid spending money on investment properties.

Which banks offer bridging loans?

Prior to 2008 financial crash, many high street banks used to offer bridging finance, but now the loans are mainly offered by alternative lenders.

Precise Mortgages, MT Finance, United Trust Bank and LendInvest are now among those to offer the loans.

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How to apply for a bridging loan

As bridging loans aren’t available from high street banks, you might want to consider a specialist broker who can lay out your options. 

The lender will want to know your exit plan and the timeframe for paying back the loan - so you'll need to provide evidence of a clear repayment and exit strategy, such as using equity from a property sale, or taking out a mortgage.

For those aiming to eventually take out a traditional mortgage on the property, they will need to show the lender proof that the mortgage will be forthcoming. 

Affordability checks will be carried out and the property will be valued by the broker before a loan is either approved or rejected.

If approved, solicitors will handle the conveyancing and the loan will be released.

Will you have a first-charge or second-charge bridging loan?

Due to a bridging loan having to be secured in case you default on repayments, a charge will be placed against your existing property when the loan is taken out.

Depending on whether you already own the property outright will determine whether you will have a first or second-charge loan.

If you have a mortgage or existing loan on the property prior to taking out the bridge, the new loan will be classed as second-charge - meaning the mortgage repayment takes priority. If you fail to meet repayments and your home is sold to pay off your debts, your mortgage would be paid off first before the bridging loan.

However, if you own the property or are taking out a bridging loan to repay your mortgage in full, you would take out a first charge bridging loan. This means the bridging loan would be repaid first if you fell behind with repayments. 

What are the alternatives to bridging loans?

If you want to move but can't sell, you could also consider a let-to-buy mortgage arrangement.

You can do this by remortgaging your current home onto a buy-to-let mortgage and using the equity released to buy a new property.