In an ideal world, everything would be timed just right every time. Of course, timings are often off, which means in the world of property, you could lose out on your next dream home.

What can you do, then, if you need to put forward the funds fast but don’t have the mortgage application through yet? What can you do if you already own a property but haven’t sold it yet?

The answer is a bridging loan.

What is a bridging loan in the UK?

So, what’s a bridging loan? A bridging loan is a short-term loan used to cover the cost of a big purchase until another funding source comes through. It is a high-value, short-term loan. It comes with higher interest rates, yes, but since it should be paid off relatively quickly, it is usually more affordable than you’d think.

How does a bridging loan work?

If you’re curious more about how a bridging loan works rather than what it is, we’ve put together a more in-depth guide on how bridging loans work. For now, know that a bridging loan is a type of secured loan that’s paid off either with your house sale or with a standard mortgage.

How is a bridging loan different from other types of loans?

What bridging loan differences are there? Bridging loans can cover the cost of your property purchase, yes, but they are different than a standard residential or commercial mortgage in these key ways:

1. Bridging loans last between 12 to 18 months, maximum
2. Bridging loans have higher repayment interest rates
3. Bridging loans are only available if you have another source of funds coming in

Types of bridging loans

You may have heard the terms open or closed in regards to a bridging loan. What are bridging loans in these cases? Let’s get into it:

What is a bridging loan if it’s open?

An open bridging loan means there’s no fixed date for when you need to repay your loan. There is a loan cap, yes. If your bridging loan is for a period of 12 months, this means you can repay it at any point within those 12 months.

Open bridging loans are used specifically if you don’t have a seller already for your current property. Similarly, you can use an open bridging loan if you don’t have a solid timeframe for when your mortgage will be approved.

What’s a closed bridging loan?

What are bridging loans if they are closed? Closed simply means that there is a firm end date to the loan. This happens if you already have a seller offer and are just waiting for their mortgage to be approved. Do be careful as if your buyer backs out or their mortgage application fails, this can put you in a tight spot.

When would you need a bridging loan?

What is a bridging loan used for exactly? Bridging loans can be used in many different instances, but the most common reasons homeowners and business owners use a bridging loan are to:

• Secure a property before their existing one is sold, and they can’t afford a second residential mortgage.
• Buy a property at auction, where you need to pay it off quickly.
• Buy a commercial property quickly while it’s available.
• Buy a property you intend to quickly flip and then sell.

A bridging loan can usually be secured much more quickly than a traditional mortgage, which is why people use it to secure both residential and commercial properties. A bridging loan isn’t right for everyone, however. Sometimes, the better option is to simply let that property go.

How much is a bridging loan?

What is a bridge loan going to set you back? There are many factors that affect the cost of your bridge loan, including:

• The higher interest rate: Bridging loans typically have much higher interest rates than residential properties, so expect it to cost more than the loan.
• Arrangement fees: There will likely be an arrangement fee between 1 to 2% of the loan’s amount.
• Valuation fees: Just like a traditional mortgage, lenders will want to value the property (or properties) themselves to confirm the LTV.
• Exit fees: If you have a closed bridging loan, then you may need to pay an extra exit fee if you want to pay it off earlier.
• Legal fees: Conveyancing and other legal fees will need to be covered for the bridging fee and again for your next mortgage (if applicable).

Despite all these fees, the bridging loan can be less than you expect simply because it needs to be paid off so quickly. To really know how much it would cost you, however, you will need to speak to a mortgage broker to find your options.

What do you need to qualify for a bridging loan?

What’s a bridge loan’s lending criteria? There are a few different qualifications that will determine whether you can even get a bridging loan:

1. Loan-to-Value (LTV) ratio: Lenders usually only offer bridging loans if the LTV of the property you want to buy is between 60 and 80%. This means lenders will only cover between 60 and 80% of the property’s costs. You’ll need to cover the rest in a deposit.
2. Assets: You need to be able to cover the loan with another income source. This can be your existing property, for example, which you intend to sell.
3. Affordability: You will need to prove you can afford the repayments for both your existing mortgage and your bridging loan.