The Beginner’s Guide to Bridging Finance

First Charge and Second Charge Bridging Loans

Bridging loans are categorised by the lender’s legal charge position.

First Charge Bridging Loans

A first charge bridging loan is secured where no other lending exists on the property, or where the bridging lender repays and replaces any existing finance. The lender holds the primary legal charge over the asset.

Second Charge Bridging Loans

A second charge bridging loan is secured behind an existing mortgage or loan. The original lender remains in first charge, and the bridging lender takes a secondary position. This usually requires consent from the first charge lender.

First charge bridging loans are generally lower risk for lenders and may offer more favourable pricing than second charge facilities.

Open and Closed Bridging Loans Bridging loans are also classified by whether the exit is defined at the outset.

Closed Bridging Loans

A closed bridge has a fixed repayment date and a clearly evidenced exit, such as a confirmed property sale or mortgage offer because the exit is known, closed bridges often attract lower interest rates.

Open Bridging Loans

An open bridge has no fixed repayment date, although most lenders still expect repayment within 12 months. These are used where the exit is realistic but not yet contractually confirmed, such as a property sale without an exchanged contract.

When is Bridging Finance Used?

Bridging finance is used where speed, flexibility, or property condition prevents the use of a standard mortgage.

Common scenarios include:

• Purchasing property at auction
• Buying property before selling an existing one
• Acquiring unmortgage able or uninhabitable property
• Purchasing land without planning or income
• Funding refurbishment or conversion works
• Short-term funding ahead of refinance or development finance
• Bridging loans are not designed as long-term borrowing and are generally unsuitable where no clear exit strategy exists.

Bridging Loans for Homeowners Homeowners often use bridging finance to buy a new property before their existing home has sold. The loan is secured against one or both properties and repaid once the sale completes.

This approach allows transactions to proceed without delays but carries higher costs than a standard mortgage. Affordability is usually assessed on the exit rather than monthly income.

Bridging Loans for Businesses and Investors Businesses and property investors use bridging finance to secure assets quickly or to fund properties that are not yet suitable for long-term lending.

For investors, bridging loans are commonly used for:

• Pre-planning land purchases
• Renovation or refurbishment projects
• Short-term holds prior to refinance
• Portfolio restructuring

Lenders assess these loans based on asset value, loan-to-value ratios, and the credibility of the exit strategy rather than standard income multiples.

How Much Does a Bridging Loan Cost?

The total cost of a bridging loan is made up of several components:

• Arrangement or lender fee (often a percentage of the loan)
• Valuation fee
• Legal fees (borrower and lender)
• Broker fee (if applicable)
• Interest (charged monthly)
• Exit or administration fees (in some cases)

Interest rates are usually quoted monthly rather than annually and typically range higher than mortgage rates due to the short-term and higher-risk nature of the lending.

The overall cost depends on loan size, loan-to-value, property type, lender risk appetite, and loan duration.

Key Considerations Before Using Bridging Finance Before taking a bridging loan, borrowers should clearly understand:

• The total cost over the loan term
• The realism and timing of the exit strategy
• The risks of delays or failed exits
• The impact of rolling interest if the loan is extended

Bridging finance can be an effective tool when used correctly, but it requires careful planning and a defined route to repayment.