How Do Bridging Loans Work?
Bridging loans are a popular form of short term loans which are used in the UK to purchase a property under a tight deadline or bridge the gap between the purchase of a new property and sale of an existing one.
With fast access to funds, bridging loans are usually processed in days or weeks, helping homeowners who need to move home fast and property developers who wish to expand their portfolios whilst avoiding property chains and lengthy mortgage applications which could take months.
By comparison, a bridging loan can be funded in 2 to 4 weeks, helping borrowers to become cash buyers and move fast on property purchases and other opportunities. The average loan term is 12-24 months and loans are always secured against the property in question.
A bridging loan is secured against property or land and the interest rates are usually around 1% per month and higher than traditional mortgages due to their short term nature. But bridging comes with flexible loan conditions, usually repaid in one lump sum or through monthly interest repayments.
About The Industry
The UK bridging industry is made up of banks, private firms and peer-to-peer platforms. The focus is to offer short term finance for borrowers with flexible needs, typically for property transactions including land purchases and assets that require light and heavy refurbs.
Bridging is popular in industries with time-sensitive capital needs and a diversification of use classes.
The bridging industry is less regulated than traditional property loans or mortgages, leading to higher risk for borrowers and higher interest rates. The eligibility criteria is based around security and the property’s potential value, rather than credit scoring.
When Would You Use a Bridging Loan?
Move house – Bridging loans make you a cash buyer and help you purchase a property very quickly. If you are in a position where you have found the ideal house to move to but have not or cannot sell your own, using a bridging loan can help you to act fast and move on the new property immediately. You have the loan duration of 12-24 months to sell your existing home and this will pay off the bridging loan.
Break a chain – Long property chains can be a real headache for homeowners and property developers and with some buyers pulling out from time-to-time, it really slows a purchase down. A bridging loan makes someone a cash buyer, which can help break a chain and not rely on the purchase of properties lower down the chain.
Expand portfolio – For property developers, bridging finance gives them a practical and scalable way to purchase new properties, both residential and commercial. Whether it is for flipping them, refurbishing them or renting them out to tenants, it is possible to accept up to 75% LTV and move quickly on opportunities.
Urgent property purchases – Bridging loans are all about speed. The ability to get indicative terms in 24 hours and get funding in 2-4 weeks plays a key role when buying investment opportunities, purchasing properties under tight deadlines or buying property at an auction.
Finance property renovations – Bridging is used for light and heavy refurbishments of both residential and commercial properties. This could be used to flip the property or rent out and eventually convert the bridging loan to buy-to-let.
Secure land purchases – Bridging offers capital to purchase a site, obtain planning permission and finalise development details before moving onto the construction phase.
Assets with no income – It is possible to purchase assets such as properties or facilities with no regular income, however a deposit and professional business plan is required.
Vacant asset – If a property is distressed or unoccupied, this can be an opportunity to purchase the property through bridging and move quickly.
Business opportunity – Whilst bridging is often associated with property purchases, they can be used for other business opportunities when you need capital quickly and have access to good security and collateral. Bridging finance is often used by hotels, airlines and other industries to help growth periods and fill important gaps in finance.
What Are The Terms of Bridging Loans?
TERM | DETAILS |
---|---|
Loan Amount | Typically £50,000 to £50 million+, depending on the lender and property value |
Loan Term | Usually 1 to 24 months, extendable up to 36 months on occasions |
Interest Rate | 0.70% to 1.25% per month (depending on asset class, lender, borrower profile, and risk) |
Loan-to-Value (LTV) | Up to 75% of the property’s value (higher LTV possible with additional security) |
Repayment Options | Monthly interest (serviced), rolled-up interest (paid at the end), or retained interest |
Purpose | Assist acquiring an asset quickly and/or with plans to renovate/stabilise |
Fees | Arrangement fees (2% of loan amount), exit fees (n/a) valuation fees, legal fees |
Exit Strategy | Required; typically sale of the property, refinancing, or other clear repayment method |
Regulation | KP Finance only work in the unregulated market (residential or commercial investment) |
Speed of Approval | Fast, often within 2-3 hours for initial decision, with funds typically available in 10-20 days (depending on val/legals) |
Security | Secured against property, either residential, commercial, or mixed-use |
What Are The Interest Rates For Bridging Loans?
The interest rates for bridging loans range from c0.70% – c.1.20% per month dependent on asset class, risk, borrower background & leverage. Other factors may include:
- The lender (regulated or unregulated)
- The borrower’s credit score
- The property’s value and opportunity
- The loan-to-value (LTV) and deposit amount
- The type of property and its location
How Long Do Bridging Loans Last For?
Bridging loans have a minimum loan term of 3 months and a maximum loan term of 12 months (for regulated) and 24 months (for unregulated). The loan will accrue interest each month and therefore the longer the loan term, the more interest is charged overall.
Depending on the lender and the project, the loan term may be extended.
The minimum loan term is around 3 months and early exit fees may apply depending on the grace period.
How Do Repayments Work For Bridging Loans?
Monthly interest payments: Borrowers pay the interest on the loan monthly, while the principal is repaid at the end of the loan term. This approach helps manage costs over the loan period, though it requires consistent cash flow to cover monthly payments and a borrower will need to demonstrate affordability.
Rolled-up interest (most popular): The interest is added to the loan balance and repaid in full at the end of the term. This option is useful for borrowers who prefer not to make regular payments but results in a larger repayment amount due to the accumulation of interest. This option will result in obtaining a higher day 1 loan.
Retained interest: The interest for the entire loan term is deducted upfront from the loan amount.
This means the borrower receives a smaller net loan but does not need to make any interest payments during the term. Should you exit the loan early, a pro rata rebate is due on the interest not utilised i.e 12 month term and repaid at month 6 will result in 6 months interest being refunded.
What Are The Typical Exit Strategies For Bridging Loans?
Borrowers are required to have a clear exit strategy when they apply for a bridging loan. The most common exit is the selling of the property and any proceeds are used to pay off the loan in full.
Property developers will purchase a property, make renovations and upgrades to increase its value and then flip it. Once the property is sold, the bridging loan is repaid in full, in one lump sum.
Some developers may be looking to refurb a property and then rent it out to tenants, both residential and commercial such as offices.
Borrowers will commonly refinance their loan under a buy-to-let mortgage to rent out the property to tenants or opt for a longer term mortgage if they prefer.
If the business is cash generating, any revenue or profits can be used to pay off the loan in full.
What Are The Risks and What Happens If You Cannot Repay?
If your project is nearing completion, the lender may work with you and allow you to complete and charge a default interest rate and additional fees.
If the lender insists on being repaid and unwilling to remain in the deal, they could repossess the property.
Therefore, as a property developer or homeowner, you have to be very clear with your exit strategy and have a firm understanding of your costs and timelines to maximise the use of a bridging loan.