Bridging Loan

A short-term, secured loan used to finance property purchases quickly before longer-term finance is arranged, typically priced at 0.75-1.2% per month.

A bridging loan is a short-term loan secured against property, used to "bridge" a gap between needing money now and a longer-term funding solution becoming available. Terms typically range from 1 to 24 months.

Bridging finance is commonly used by property investors for: auction purchases requiring 28-day completion; BRRR projects where the property is not in a mortgageable condition; chain breaks; and refinancing where the standard mortgage market is not accessible due to property condition or speed requirements.

Unlike standard mortgages which are priced annually, bridging loans are priced monthly. A rate of 0.9% per month equates to approximately 10.8% per year before fees. Arrangement fees of 1-2% and exit fees add to the effective cost. The total cost of a 6-month bridge on £100,000 including all fees typically runs to £8,000-£12,000.

A bridging loan must always have a defined exit strategy - the mechanism by which it will be repaid. The most common exits for investors are refinancing onto a BTL mortgage or selling the property. Failing to exit cleanly results in extension fees, higher default interest rates, and ultimately enforcement action if the debt cannot be serviced.

Worked example

An investor buys a property at auction for £95,000, requiring completion in 28 days. They use a bridging loan at 0.95%/month on £95,000. After 5 months of refurbishment, the property is tenanted and refinanced onto a BTL mortgage at 75% LTV against a new valuation of £155,000, giving a mortgage of £116,250. The bridge is fully repaid and the investor has recycled their original capital plus extracted £21,250 in equity.

Referenced in

The BRRR strategy: buy, refurbish, refinance, rent Bridging loans for property investors