Bridging Loans

What Is a Bridging Loan?

A bridging loan is a short-term secured loan used to bridge a funding gap — typically while a longer-term finance solution is arranged or a property is sold. Bridging loans are generally available for terms of one month to twenty-four months, and can be arranged more quickly than conventional mortgages.

Because of their short-term nature and speed of arrangement, bridging loans typically carry higher interest rates than long-term mortgage products. They are therefore most suited to situations where the short-term cost is justified by the transaction or opportunity.

Uses for Bridging Loans

Auction Purchases

Property purchased at auction must typically complete within 28 days. Conventional mortgage lenders cannot usually act within this timescale. A bridging loan can provide the funds to complete the purchase quickly, with a longer-term mortgage or sale arranged as the exit strategy.

Broken Chains and Chain Breaks

When a property chain collapses or delays arise between buying and selling, a bridging loan can allow a buyer to proceed with their purchase before their existing property has sold. The bridging loan is then repaid when the sale completes.

Refurbishment Finance

Properties that require significant refurbishment may not be mortgageable in their current condition. A bridging loan can fund the purchase and refurbishment costs, with the intention of refinancing onto a standard mortgage or selling once the works are complete.

Development Exits

Developers who have completed a project may need to refinance away from expensive development finance onto a lower-rate bridging loan while they sell units or arrange longer-term finance. This can reduce monthly interest costs during the sales period.

Short-Term Property Finance

Bridging loans can also be used in other short-term property finance scenarios where speed, flexibility or the nature of the asset makes a conventional mortgage unavailable or impractical.

Exit Strategy

Lenders require a clear and credible exit strategy before agreeing a bridging loan. The most common exit routes are:

• ✓ Sale of the property being financed
• ✓ Sale of another property
• ✓ Refinancing onto a residential or commercial mortgage
• ✓ Refinancing onto a buy-to-let mortgage
• ✓ Receipt of funds from another source (estate, investment, etc.)

The strength and credibility of the exit strategy is one of the most important factors in bridging loan approval.

Costs and Risks

Bridging loans carry higher monthly interest rates than standard mortgages — typically charged monthly rather than annually. Additional costs can include arrangement fees, valuation fees, legal fees and exit fees. It is important to factor in the full cost of the bridging loan when assessing whether it is the right solution for a particular transaction.

If the exit strategy does not materialise as planned — for example, if a property does not sell or a planned refinance falls through — there is a risk that the bridging loan term may need to be extended or alternative funding found. Borrowers should consider this risk carefully before proceeding.

Lender Criteria

Bridging loan lenders assess applications differently to conventional mortgage lenders. Key factors typically include:

• ✓ The property type and its current condition or value
• ✓ The loan-to-value (LTV) being requested
• ✓ The exit strategy and its credibility
• ✓ The borrower's experience and background
• ✓ Credit history (some lenders will consider adverse credit)
• ✓ The proposed loan term

How NexGen Finance Can Help

NexGen Finance helps help clients access bridging loan options suited to their circumstances and transaction. We can help connect you with specialist bridging lenders based on the property type, LTV required, exit strategy and borrower profile.