What is a Bridging Loan?
A bridging loan is a short-term loan secured against property, designed to provide funds quickly when timing is critical. The "bridge" refers to the gap between needing funds (to buy a new property) and receiving them (from selling an existing property or arranging long-term finance).
Bridging loans are not a substitute for a mortgage — they are an expensive, temporary measure for specific situations where speed matters more than cost.
Open vs Closed Bridging Loans
| Type | Repayment Date | Interest Rate | Risk Level |
|---|---|---|---|
| Closed | Fixed date (completion date known) | Lower (0.4–0.8% per month) | Lower |
| Open | No fixed date (max 12–18 months) | Higher (0.6–1.5% per month) | Higher |
Costs & Fee Structure
- Interest: 0.4–1.5% per month (charged monthly or rolled up into the loan)
- Arrangement fee: 1–2% of the loan amount
- Valuation fee: £500–£1,500 depending on property value
- Legal fees: Both your and the lender's solicitor fees (£1,000–£3,000 total)
- Exit fee: Some lenders charge 1–1.5% on repayment
Example: A £300,000 bridging loan for 6 months at 0.8% monthly with 2% arrangement fee costs approximately £20,400 in interest and fees. The equivalent cost on a standard mortgage would be approximately £6,000. Bridging loans are roughly 3–4× more expensive than traditional borrowing.
When to Use a Bridging Loan
- Auction purchases: Auctions require completion within 28 days — too fast for a standard mortgage
- Chain breaks: Your buyer pulls out but you need to complete on your purchase
- Renovation projects: Property is unmortgageable in current condition
- Speed advantage: Bridging can complete in 1–3 weeks vs 8–12 weeks for a mortgage
Risks & Warnings
- Repossession: If you cannot repay, the lender can seize the secured property — this is the primary risk
- Cost escalation: If the exit strategy fails (your property doesn't sell), rolled-up interest compounds rapidly
- Double borrowing: You may be servicing both a bridging loan and a mortgage simultaneously
- Market risk: If property values fall during the bridge period, you may face a shortfall