A bridging loan is a short-term finance solution designed to “bridge” a gap between two financial transactions. In London’s fast-moving property market, they are used regularly by buyers, developers, and investors who need to move quickly or manage a temporary cash shortfall.
Understanding how bridging loans work, and when they are appropriate can give you a significant advantage in time-sensitive situations.
How Does a Bridging Loan Work?
A bridging loan is secured against a property and designed to be repaid within a short period typically 12 months, though some lenders extend to 24 months. They are arranged quickly, often within days, which is their primary advantage over traditional mortgage products.
Interest is usually charged monthly and can be “rolled up” into the loan rather than paid each month, which helps with cash flow during the bridging period.
Common Reasons to Use a Bridging Loan in London
The most frequent uses include:
- Breaking a property chain: Buying a new property before the sale of your current one completes
- Auction purchases: Auction completions typically require full payment within 28 days, which bridging finance can accommodate
- Property development: Funding renovation or conversion projects before refinancing onto a standard mortgage
- Unmortgageable properties: Buying a property in poor condition that a standard lender will not finance until works are completed
- Business cash flow: Using a commercial property as security to release short-term capital
What Are the Costs Involved?
Bridging loans are not cheap. Typical costs include:
- Monthly interest rates: Usually between 0.5 and 1.5 percent per month
- Arrangement fees: Typically one to two percent of the loan value
- Valuation fees
- Legal fees: For both your solicitor and the lender’s solicitor
- Exit fees: Some lenders charge these when the loan is repaid
Because the costs accumulate quickly, bridging loans are only suitable as short-term solutions where there is a clear and credible exit strategy.
What is an Exit Strategy?
Every bridging loan application requires a clear exit strategy, the plan for how the loan will be repaid. Common exit strategies include:
- Sale of the bridged property or another property
- Refinancing onto a standard residential or buy to let mortgage once works are complete
- Business revenue or a scheduled incoming payment
Lenders will not approve a bridging loan without being satisfied that the exit strategy is credible and achievable within the loan term.
Is a Bridging Loan Right for You?
Bridging finance is a powerful tool when used correctly, but it carries real risk if the exit strategy is delayed or fails. The interest costs on a large London property can amount to thousands of pounds per month.
Speaking to a specialist bridging loan advisor before proceeding is strongly recommended. They can assess whether bridging finance is genuinely the best option for your situation, or whether an alternative approach is available.
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