A bridging loan is a short-term borrowing solution, typically lasting from a few weeks to 12 or 18 months. It is designed to "bridge" a financial gap — most commonly when you need to purchase a new property before you have sold your existing one, or when you need to complete a purchase quickly, such as at auction.
Bridging loans are secured against property and come in two types: closed bridge (where you have a confirmed exit strategy with a set date, such as a completion date on a property sale) and open bridge (where the exit is planned but not yet confirmed). Closed bridges typically offer lower rates because they carry less risk for the lender.
Interest is usually charged monthly at rates of 0.4% to 1.5% per month (roughly 5-18% per year), and can be "rolled up" (added to the loan balance) rather than paid monthly. There is also typically an arrangement fee of 1-2% of the loan amount. Because of the high costs, bridging loans are intended to be short-term solutions with a clear exit strategy.
You find your dream home for £400,000 but your current property has not yet sold. You take out a bridging loan for £400,000 at 0.7% per month with a 1.5% arrangement fee (£6,000). Monthly interest is £2,800, rolled up into the loan. Three months later your old house sells for £350,000, and you repay the bridging loan (now £414,400 including fees and rolled-up interest) and arrange a standard mortgage for the remainder.
Key Points
- Short-term secured finance, typically lasting weeks to 18 months
- Used to bridge the gap between buying and selling property
- Interest rates are significantly higher than standard mortgages
- Available as closed bridge (set exit date) or open bridge (planned exit)
- A clear exit strategy is essential before taking out a bridging loan