Bridging loans are specially designed to help people buy a new property before selling their existing property by offering short-term access to funds. These loans usually come with a higher rate of interest than most would expect from a typical loan.

Bridge loans are used by people moving home to manage the gap between the sale and the actual completion date. They are also helpful to those who intend to sell-on quickly after renovating a home or people looking to buy a property at auction.

As with any short-term loan, the rates you can expect from bridge loans tend to be higher than conventional loans or a mortgage. It’s always important to compare your options to ensure you get the best rates possible for your individual circumstance and receive a loan that’s perfectly affordable for you.

Who are bridging loans for and when should you use them?

Typically, bridging loans are aimed largely at landlords and property developers. They are also very popular with buyers looking to purchase at auction or asset-rich borrowers looking for a straightforward loan option on residential properties.

Due to their accessibility and short-term conditions, bridging loans can be used to solve a range of pressing financial circumstances as well as property investment, buy-to-let and property development projects.

Many high street banks offer bridge loan solutions. There’s also a healthy range of loan brokers offering bridge loan deals online. The Financial Conduct Authority (FCA) regulates the most trustworthy lenders, so it’s always important to make sure you seek loans from an FCA approved vendor. With all the expanse of competition in the market, it has become more important than ever before for borrowers to compare offers diligently to find the best deals.

Bridging loans are not designed to be an alternative to conventional personal loans. They are primarily a means to help property owners navigate the restrictions that can be experienced in financing new property projects.

What are the typical costs involved with a bridge loan?

Let’s say you own a house worth £300,000 and you have a mortgage of £150,000. If you then want to buy a house on sale for £500,000, and the seller will only accept your offer on the condition that you’ll exchange contracts and complete the purchase within two months, you’re options are limited. It would be incredibly hard to sell your current house within this very pressing timeframe. Most people will find it takes several months to sell a livable house in today’s market and that’s if everything goes exactly to plan throughout the many stages of the selling process.

You might have enough money saved up to pay for stamp duty and the other expenses that would come with the new purchase, but you’d still need to borrow £500,000 to be able to buy that particular house. If you can’t secure a long-term loan for the full value of the house because you’re income isn’t high enough, this is where a short-term bridge loan becomes a viable option and makes the purchase possible.

Short-term finance products like bridging loans always come with a higher interest rate. Bridge loans typically come with a fee of around 1% of the sum advanced and an interest rate of 1% per month. If we apply these terms to the situation above, that would mean £10,000 in fees plus interest within the first month. It’s also common for there to be an exit fee of 1%.

With this short-term solution, you have the option of buying property that would otherwise be impossible with a conventional mortgage. It’s always vital for borrowers to compare the rates of lenders to ensure you land the best deal possible!