What is a bridging loan and how does it work?

When you require funds quickly, a bridging loan can be the perfect solution. This type of short-term finance can provide the speed and flexibility that traditional lending often cannot offer. Whether you’re purchasing a property at auction, financing a renovation, or capitalising on a time-sensitive investment opportunity, bridging finance can help you act fast when time is critical.

What is a bridging loan?

Bridging finance, also known as a bridge loan or bridging loan, is a short-term borrowing solution that typically runs from a few weeks up to 12 months, though some facilities can extend to 3 years. Its purpose is to “bridge the gap” between an immediate funding need and a longer-term or more permanent source of finance.

The gap could be the period between buying a new property and selling your existing one, or between purchasing a development site and obtaining a long-term mortgage. Since these loans are short-term, they are not meant to be a permanent financing solution, but rather a temporary stepping stone.

How does a bridging loan work?

A bridging loan is always secured, meaning the lender takes security against an asset, usually property or land. Because the lender’s risk is higher compared to a standard mortgage, interest rates are typically higher.

One key feature of a bridging loan is that lenders require a clear exit strategy—a plan for how you will repay the loan in full by the end of the agreed term. Common exit strategies include:

• Sale of property
• Refinancing with a longer-term mortgage or loan
• Proceeds from another maturing investment

Bridging loan interest

Interest on a bridging loan can be handled in different ways:

• Serviced loan: You pay the interest each month as you go.
• Rolled-up interest: The interest is added to the loan balance and paid in full at the end.
• Retained interest: The total interest for the loan term is calculated upfront and deducted from the amount you receive.

The appropriate structure for interest depends on your cash flow circumstances and project requirements.

Common uses of bridging finance

Bridging finance is highly flexible and can be used in a variety of situations:

1. Property purchases before a sale

If you’ve found the ideal property but need to sell another property to afford it, a bridging loan can provide the funds you require immediately. It enables you to buy without delay. Once your old property is sold, you can use the proceeds to settle the loan.

2. Property development

Developers often use bridging loans to cover build costs before selling units or arranging long-term financing. For example, you might buy a run-down property, carry out renovations, and then refinance once the value has increased.

3. Auction purchases

When buying at auction, you usually need to pay the full purchase price within 28 days. Bridging finance can provide the funds quickly, helping you secure the property before arranging more permanent funding.

4. Renovations and refurbishments

If a property is uninhabitable or unmortgageable in its current state (for example, without a working kitchen or bathroom), traditional lenders may refuse to finance it. A bridging loan can cover the cost of making the property habitable, after which you can refinance with a standard mortgage.

5. Fast-moving investment opportunities

Some opportunities, such as distressed sales or limited-time deals, require quick action. Bridging finance can give you the speed to move ahead before your competitors.

6. Business cash flow needs

Companies sometimes use bridging finance to cover short-term operational expenses while awaiting a large payment, contract completion, or other capital inflows.

7. Breaking a property chain

In a property chain, delays can stall multiple transactions. Bridging loans can allow you to complete your purchase even if your buyer is delayed.

Advantages of a bridging loan

Bridging loans offer several advantages over other types of finance. These include the following:

• Speed: Funds can often be released in days, not weeks or months.
• Flexibility: Can be used for a variety of purposes beyond just property purchases.
• Short-Term commitment: Useful if you only need finance for a limited time.
• Access to otherwise unavailable properties: Can fund properties that mainstream lenders won’t finance until renovated.

Disadvantages and risks

While bridging loans offer significant benefits, they also have some drawbacks:

• Higher costs: Interest rates are generally higher than standard mortgages.
• Arrangement and exit fees: These can add to the total cost.
• Risk of repossession: If you can’t repay the loan on time, the lender may repossess the secured property.
• Strict exit strategy requirements: Without a clear and realistic repayment plan, you won’t get loan approval.

How to apply for a bridging loan

Getting a bridging loan isn’t just about finding a lender. It’s about presenting a strong case that you’re a low-risk borrower with a solid repayment plan. Here’s what you’ll need to do:

• Define your purpose: Be clear about why you need the loan and how long you’ll need it.
• Prepare an exit strategy: Lenders will want to see exactly how you plan to repay the loan.
• Gather financial documents: Proof of income, bank statements, proof of ownership for the secured asset, and details of the property purchase or project will be required.
• Have a valuation ready: The lender will typically require an independent valuation of the property being used as security.
• Work with a specialist broker: A commercial finance broker can match you with the right lender, negotiate better terms, and help avoid costly mistakes.

Costs to consider

When calculating whether a bridging loan is right for you, consider all potential costs:

• Interest rates
• Arrangement fees
• Exit fees (sometimes charged when repaying early)
• Valuation fees
• Legal fees
• Broker fees (if applicable)

Because these loans are short-term, the total cost can be high, even if the monthly interest rate seems reasonable.

Is a bridging loan right for you?

A bridging loan can be a powerful tool for investors, developers, and homebuyers who need fast access to capital. But they aren’t for everyone. If your exit strategy isn’t rock solid, or if the cost outweighs the potential benefit, it may be worth exploring other financing options.

How ASC can help

At ASC, we specialise in arranging bridging finance tailored to your situation. We’ll assess your project, review your repayment strategy, and apply to lenders who will understand your project. Whether you are buying at auction or funding a complex development, we’ll assist you through the process, handle negotiations, and secure you competitive terms.

With the right guidance and structure in place, a bridging loan can be the stepping stone that helps you secure a property, complete a development, or seize a time-sensitive opportunity, without the stress and uncertainty of waiting for traditional finance.

If you’d like help securing a bridging loan, please get in touch.