What a bridging loan is
A bridging loan is a short-term loan, usually for 3 to 18 months, secured on the property you are buying. Lenders decide quickly because they look mostly at the property and how you will repay, rather than at your income. That speed is why it suits auctions.
Bridging for an investment (to let, sell or develop) is not regulated by the Financial Conduct Authority. Borrowing to buy a home you or your family will live in is a regulated mortgage, and must be arranged through an authorised firm.
How much you can borrow
On a straightforward purchase, specialist lenders typically lend up to 75% of the purchase price or the valuation, whichever is lower. Commercial property is usually nearer 65%, and land without planning about 50%.
If the property needs work, a refurbishment loan can add up to 100% of the works, released in stages as they are done, within a cap on the value after works (often about 70%).
Many lenders have a minimum loan, often around £75,000. Below that, the choice of lender narrows.
What it costs
Bridging is priced by the month. Example rates in today's market are 0.75% to 0.95% a month on a purchase bridge, and 0.9% to 1.15% a month on heavier refurbishment. Expect an arrangement fee of about 2% of the loan, plus the lender's valuation and legal costs.
- Retained interest: the interest for the term is held back from the loan on day one. Nothing to pay monthly, but you receive less.
- Serviced interest: you pay it each month, so more of the loan reaches the purchase.
- Rolled-up interest: it builds up and is repaid with the loan at the end.
Some lenders also charge an exit fee. Ask for every fee in writing before you bid.
How you repay it: the exit
Every bridging lender wants to know how the loan will be repaid. The two usual exits are a sale, or a refinance onto a longer-term mortgage.
For a refinance onto buy-to-let, lenders test the rent: typically it must cover the mortgage interest by 125% at a stress rate of about 5.5% (limited companies; personal borrowers are often tested harder). Each lot's finance view runs that test from a typical local rent.
What lenders ask for
- Photo ID and proof of address
- Proof of your deposit and where it came from
- The legal pack, reviewed by your solicitor
- Your exit plan, with evidence
- For works: a schedule of works and quotes
- A valuation, which the lender instructs
Have these ready before the auction. The most common reason a purchase runs late is a lender waiting on documents.
See it on a real lot
Every lot on Auction Watch has a finance view and a calculator that opens on the loan that fits it, with indicative terms on screen in a minute.
This guide is general information about how auction finance usually works in the UK. It is not financial, legal or tax advice, and rates and limits change. Your property may be repossessed if you do not keep up repayments on a loan secured on it. Auction Watch is not a lender and does not give financial advice. If you ask for terms, we pass your details to lenders and brokers we work with, who may pay us a fee for the introduction; they make their own decisions and offers. If you are buying a home to live in yourself or for your family, that is a regulated mortgage: we only introduce you to a firm authorised by the Financial Conduct Authority.