Are Bridging Loans a Good Idea?

It caught me off guard, because he had phoned me about a bridge. So I asked him what he had heard.

The rates are higher than a mortgage. The arrangement fees are steep. You need two sets of solicitors. And you have to pay the whole thing back inside twelve months.

I told him all four were true.

So are the bad things people say about bridging true?

Yes, broadly. There is no point pretending otherwise.

Interest is higher than you would pay on a residential or buy to let mortgage, and it is charged by the month rather than the year. There is an arrangement fee. There is a valuation. There are usually two sets of legal costs, yours and the lender’s, although some lenders will let one firm act for both, which brings the cost and the time down. And the term is short, which means there is a date by which the money has to be repaid.

All of that is real. None of it tells you whether a bridge is a good idea, because the question is not whether it costs money. It is what the money buys you, and what the alternative was.

Are bridging arrangement fees actually high?

This is the objection I hear most, and it is the one that survives least contact with the facts.

A bridging arrangement fee is typically around 2 per cent of the loan. People hear that and wince, because set against a residential mortgage with a flat product fee it sounds enormous.

Set it against the market these loans actually compete with and it looks different. Any buy to let investor will tell you that lender arrangement fees on specialist buy to let products run from around 2 per cent up to about 7 per cent, and nobody describes that as scandalous. Against that, 2 per cent on a loan that completes in days rather than months is not expensive. It is one of the cheaper fees in specialist lending.

The fees that are worth asking about are the ones nobody advertises. Whether there is an exit fee. Whether the lender will let one firm of solicitors act for both sides, which can take real money and real time out of the deal. And whether the arrangement fee is deducted from the loan at drawdown, because if it is, it comes out of the money you were planning to spend.

What does bridging actually buy you?

Speed, and access to property a mainstream lender will not touch.

That is the whole proposition. A high street lender is assessing your income over twenty five years. A bridging lender is assessing the property and how you intend to repay them. That is a much faster question to answer, and it has a different answer for properties in poor condition, unusual construction or anything else that falls outside a standard lending box.

Two deals from this year make the point better than I can in the abstract.

Ten days to complete, or lose the deposit

A client had reserved a new build flat off plan, two years before it was due to be finished, and exchanged contracts at that point as you have to. The flat was worth around £200,000, up north, in a converted office block. Eight storeys, in a commercial area, investor led, non standard construction. If you have looked at new build flats you will know the type.

He had been working with another broker, who had been trying mainstream lenders. No mainstream lender was ever going to lend on that building.

Then the developer issued a ten day notice. If you have never seen one, it is exactly what it sounds like: complete within ten days or the contract is terminated and the deposit is gone. He had put down twenty per cent. That is £40,000 about to disappear, along with the flat.

That is when he came to me, convinced the property was unmortgageable. It was not. There are lenders who do investor led high rise and non standard construction perfectly happily. What there was not, was a lender who could do it in ten days.

So we bridged it. He completed inside the ten days, with room to spare, on a twelve month term, and then refinanced onto a proper mortgage once he owned it.

The bridge cost him several thousand pounds in interest and fees. He did not lose £40,000 and he did not lose the flat. He has never once mentioned the rate to me since.

An auction lot with Japanese knotweed in the garden

The second one is an investor who bought at auction for £128,000. The house next door had sold for £280,000.

Some of that gap was condition. The neighbouring house had carpets, paint and a finished kitchen, and this one did not. But that is not what put most buyers off. What put them off was the Japanese knotweed in the back garden.

Knotweed is the reason a lot of good lots go cheap. It is extremely difficult to get rid of, it will work its way through concrete, and crucially a mainstream lender will usually not touch a property that has it until there is a proper plan in place.

Can you get a mortgage on a property with Japanese knotweed?

Yes, and sooner than most people think, but not from a high street lender on auction day.

Mainstream lenders generally want a management plan from a qualified specialist, backed by an insurance backed guarantee, commonly ten years, with the work carried out by a firm belonging to a recognised trade body. Distance matters too: knotweed well away from the boundary is treated very differently from knotweed up against the house. There are two routes to dealing with it, a herbicide programme run over several years or full excavation, and the cost between those two is an order of magnitude apart depending on how much of it there is.

What most people do not know is that there are also specialist lenders who will lend on a property with knotweed present. Fewer of them, and you will not find them on a comparison site, but they exist. That changes the whole shape of a deal like this, because it means the long term finance does not have to wait for a ten year treatment programme to finish.

What it does mean is that on auction day, with twenty eight days to complete, the property is not mortgageable by anybody at that speed. A bridge is the only realistic way to buy it. We cover how that works in more detail in our guide to auction bridging finance, and there is a wider overview of bridging loans for property auctions if you are new to buying this way.

On this deal the lender funded the purchase and then funded the works in arrears, releasing the money in stages as the work was actually done. And the exit was not a sale. We refinanced him onto a lender that accepts knotweed, so he kept the property rather than having to sell it to get out of the bridge.

That is the part worth taking away. He bought at £128,000 next door to a house that sold for £280,000, on a lot most buyers would not go near, and he now holds it on long term finance. None of that was available from a high street lender at any point in the process.

When is a bridging loan a bad idea?

When you cannot get out of it. That is the only answer that matters, and it is the reason I turn deals away.

I had a client who wanted a bridge on the basis that we would sort the rest out later. What is your exit, I asked. Refinance, he said.

Except when I looked at his circumstances properly, there were missed mortgage payments, no meaningful income and nothing to refinance onto. The refinance did not exist. So the bridge would have run for twelve months, cost him every fee going, and ended with him either selling under pressure or losing the property.

So no. In that situation a bridging loan is a bad idea, and saying so is the job. If that sounds like your position, it is worth reading about the alternatives to a bridging loan first.

The same goes for a property somewhere with almost no demand. You do not want to bridge a house that has two serious buyers a year and rely on it selling inside twelve months. The loan does not care how nice the house is.

Can you have the best rate and the most money?

No, and this is the conversation I have most often. People want the maximum loan at the best price on the market. Those pull in opposite directions.

A small number of lenders will go to 80 per cent net on the right deal, which is unusual and priced accordingly. Be careful with that figure, because most of the 80 per cent you see advertised is gross, not net. Gross is what the lender approves. Net is what actually arrives, after the interest for the term and the arrangement fee have come out of it, and the gap between the two is wider than most people expect. We explain that properly in gross vs net: why 75 per cent is not 75 per cent.

What happens if you cannot repay at the end of the term?

This is the question almost nobody asks, and it is the one that decides whether a bridge was a good idea or a bad one.

Everybody plans for the best case. Some people think about the middle case. Hardly anyone asks what happens in month thirteen if the sale has not completed or the refinance has not landed.

You default, and what that costs varies enormously between lenders. Some put the rate up sharply and apply default charges, and they will get their money. Others take a practical view, push the term back a couple of months, charge you something for it and work with you, because a sale that completes is better for them than a repossession.

Same headline rate, completely different outcome if the plan slips. That difference does not appear on a comparison table, and it is one of the main things I am actually choosing between when I place a case.

Does bad credit rule you out?

Usually not. Because the lending is secured and assessed on the exit, your credit file carries far less weight than it would on a mortgage application. It is considered. It is rarely the thing that decides it. There is more on that in our page on bridging loans with bad credit.

What does decide it is whether the exit stands up, which is the same answer as everything else on this page.

Are bridging loans a good idea? Common questions

Are bridging loans risky?

They carry real risk, because they are secured on property and they have a hard end date. The risk sits almost entirely in the exit, so a bridge with a credible, evidenced repayment plan is a very different proposition from one without.

Are bridging loans expensive?

They cost more than a mortgage, which is the trade for speed and a short term. Whether that is expensive depends on what missing the deadline would have cost you. For the client with ten days to complete, it was the cheapest money he has ever borrowed.

Why do you need two solicitors on a bridging loan?

Because the lender instructs its own firm as well as you instructing yours. Some lenders allow one firm to act for both, which reduces the cost and usually the timescale, so it is worth asking.

Do you have to repay a bridging loan in 12 months?

Terms are short, and twelve months is common. The term should be set around how long the exit realistically takes, with some room in it, rather than squeezed to look cheaper.

Can I get a bridging loan on a property with Japanese knotweed?

Yes. A bridge will fund the purchase where a mainstream lender will not, and for the longer term there are specialist lenders who will lend with knotweed present rather than making you wait for a treatment programme to finish. Mainstream lenders will usually want a management plan with an insurance backed guarantee first.

Is a bridging loan better than a mortgage?

For speed, and for property a mainstream lender will not touch, yes. For anything else, no, and a term mortgage will usually be cheaper.

So, are they a good idea?

If you asked the investor who bought at £128,000 next door to a house that sold for £280,000 and now holds it on a long term mortgage, or the client who kept his flat and his £40,000 deposit, you would get a very enthusiastic yes.

If you asked the man I turned down, you would get a different answer, and he would be right too, because for him it would have been a disaster.

A bridging loan is a tool. Used properly it does things no mainstream lender will do, and it has made clients of mine a great deal of money. Used to put off a problem for twelve months, it makes the problem considerably worse.

So do not take your view on bridging from somebody who has only ever heard about it. Talk to someone who has used one, or talk to us. We arrange buy to let, residential and second charge mortgages as well, and if a bridge is not the right answer for you, you will hear that from me rather than a sales pitch.

Call 0330 133 4442 or book a call. Twenty minutes, no credit check.

Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

This is general information, not a quotation, an offer of finance or personalised advice. No lender is named. Rates, fees, timescales and lender criteria vary by lender and by deal, and the terms available to you may be different. Bridging finance is short-term secured borrowing and it can be expensive. If a secured loan is not repaid in line with its terms, the lender may take enforcement action against the property or any other security provided.