What is a Bridging Loan?

Loans for bridging gaps in savings to finance a business or home.

Updated: May 21, 2024
Matt Crabtree

Written By

Matt Crabtree

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The first thing to understand about bridging loans is that it operates inside of the assumption that debt is good according to the context. As the economy crunches and money is harder to come by, you should think carefully before committing to more debt. It’s a very serious decision.

A bridge loan is a kind of short-term loan that might be helpful in certain situations. Read on to learn more about bridge loans and see whether one is a good fit for your situation.

If you need money quickly so that you may purchase a new house before selling your old one, a “bridge loan” may be the best option for you. But before you apply, it's important to get the whole story and weigh the benefits and drawbacks.

At a Glance, Pros and Cons

There are many reasons why you might consider getting a bridging loan.

But is it the right choice for you? If you’re looking for a clear-cut summary of the advantages and disadvantages of getting a bridging loan, this is the section for you.

Pros

✔️ Bridges personal financial gaps. When a person is unable to secure financial assets, like a house, through savings, a mortgage can help, and not liable then a bridging loan can bridge the gap.

✔️ Also offered to businesses. People seem to think of bridging loans as housing-related. But these loans can also be offered to businesses according to circumstance.

✔️ Some flexibility. Particularly for business investments, there is some flexibility with what the bridging loan can be used for.

Cons

❌️ More expensive than a mortgage. If you’re unable to secure a mortgage, bridging loans usually cost a lot more. 

❌️ Typically short in length. Rather than getting a multi-decade mortgage, bridging loans often last for just a year.

❌️ Deeper debt. Getting into debt is linked with depression and mental illness. Saving is much harder but usually healthier.

What is a Bridging Loan – Explained

A bridge loan, sometimes called a “bridging loan”, is a short-term loan used to bridge the gap between the purchase price of a new house and the sale price of an existing one. Bridge loans, like other secured loans, require collateral in the form of the borrower's property in the event that loan payments are defaulted upon.

This fills the gap for people who do not have enough cash savings, which is commonplace, as real-estate is often considered a good type of debt for things like tax breaks.

Loans are generally used to help people bridge periods of financial need. So in some sense, bridging loans are no different to any other loan fundamentally speaking. In the history section of this article, we going to some more big-picture detail. 

For instance, you probably think that all loans accrue interest. But some loans exist that are interest-free, such as Islamic loans used in Islamic communities.

According to your personal financial circumstances, a bridging loan may seem attractive for assisting your business. Perhaps you want to increase your liquidity, seize an opportunity such as buying land or fund investment in a business. Either way, loans are common way people that people bridge their finances. 

Bridging loans operate in a specific niche in the loans market. They offer individuals and businesses shorter-term financial provisions typically at higher rates in order to help them to secure a specific asset, such as a home. Which itself is used as a security for the loan.

Top Alternatives 

All businesses need resources to operate. And there are specific essentials that people need to have security for themselves and their families. Loans appear to be a fast way to fix the need for extra money in order to achieve one of these goals.

While the immediate upside is very high, the secondary consequences can be extreme, particularly today in Britain when long-lived businesses are closing by the second. 

Secondary consequences are things that happened after an event. For example, the secondary consequence of purchasing a massive television screen for your living room is that you now need to spend time watching that television. This means hundreds of hours put into entertainment and not on other things.

So the alternative the loans is anything that has the secondary consequence of bringing you into credit rather than debt. 

Let’s give examples: a very ancient form of resource is food. This is why hunting and farming are two of the oldest careers. So growing a plot of land where you have chickens or vegetables can allow you to feed yourself and make extra money on the side. But it will take a long time in the beginning to develop the skills and connections.

Other top alternatives to loans: downsizing, living a minimalistic life, travelling to a cheaper country such as Thailand or the Philippines, doubling your income by teaming up with friends or spouse, working overtime, spending a couple of months learning a new valuable skill after work, living in your car or van for a while, or operating your business using the MVP model.

How Bridge Loans Work… 

Bridging loans may be broken down into subcategories.

Among them are: 

First/Secondary Charge

A ‘charge' is a legal arrangement that specifies the sequence in which lenders will be reimbursed if you default on your bridging loan payments. For instance, if you already have a mortgage, the bridge loan will function as a second charge. The bridge loan is a second lien if you already have a mortgage. 

Variable/Fixed Interest

The interest rate on a bridging loan may be fixed or variable. A fixed interest rate guarantees that your monthly payment won't change throughout the course of the loan's term. The interest rate, and therefore your regular payment, may alter with a variable rate. It's probable that fixed rates will cost a little extra every month. 

Open Bridging Loans

Although there is no hard and fast deadline for repaying an open bridge loan, most lenders want you to do so within a year. If you've located a property you'd like to purchase but haven't yet sold your existing residence, this sort of financing may be right for you in the meantime. 

Closed Bridging Loans

With a closed loan, the date on which you must begin making payments is set in stone. If you're closing on the sale of a house but still need money for your down payment on a new place, a closed bridge loan might be a good option. Borrowing money is usually only necessary for a brief period of time.

📕 Business borrowing terms explained

History of Bridging Loans

Bridging loans really are a mark of the times. All loans are designed to bridge gaps in finance. But when we talk about bridging loans, were referring to the rise of lending that specifically flooded in during and after the credit crunch of 2008 (which arguably has remained with us and explains why we’re now in a massive living squeeze in Britain).

In Britain, short-term financing has been available and relatively accessible since the early 1960s. However, the 2008 collapse incentivised a large number of high street banks and building societies to refrain from lending for housing-related situations.

The likes of Barclays, HSBC, Lloyds TSB and RBS, as well as NatWest, closed their services more which opened up more unmet demand in this market.

So today, new lenders entered the market offering to bridge this gap, also incentivising venture capitalists to gain market returns of a per cent up to eighteen per cent or even higher. Bridging loans certainly had a lot of criticism. 

Indeed, the FSA encouraged customers to avoid using bridging loans in lieu of home mortgages. This type of financing was seen as high risk. The market has since grown (it was roughly £57 million in 2013 which rose to £730 million in 2019).

Bridging Loans – Personal Types 

The two double common types of bridging loans are as follows: 

🏡 Home Equity Line of Credit (HELOC): this is perhaps the most popular type of bridging loan. It is used when people want to borrow relatively small amounts of cash for short time periods. This lets them fund a range of expenses. 

🧱 Home Improvement: home improvement loans are also shorter term, between 3 and 12 months typically. Users may want to renovate some part of the house. And is also used while waiting for a gap in the finances to be bridged by a bigger loan. 

For personal bridging loans, as you can see the most common examples of use are to buy a home or improve it. Can also be used for a person who wants to place a larger down payment, when they don’t quite have enough saved to afford it outright qualify for a bigger mortgage. 

Before the 2008 crunch, these loans may have been issued by various banks and building societies. Today, a swath of other lenders exist, offering ways to cover the costs of buying real estate.

The home itself is used as a form of security for the loan. People who might use these two types of loans are first-time real estate investors or homebuyers who do not have a solid credit history.

Bridge Loans vs. Conventional Loans

In comparison to more conventional loans, the application, approval, and financing phases of a bridge loan are often much shorter. However, these loans often feature high interest rates and origination costs in return for their ease of use.

In most cases, borrowers agree to these conditions because they need quick, easy access to their loan cash. They expect to soon pay off the debt using low-interest, long-term financing, thus they are ready to pay high interest rates. In addition, there are often no prepayment fees associated with bridge loans.

Bridging Loans for Businesses

Here are a few business bridging loans that may exist in the British market. Each of these is tailor-made for businesses if you are seeking alternatives to traditional long-term, fixed-rate loans. These can target businesses that need to overcome a temporary cash crunch until the next payment comes in. 

Businesses may use these loans as a way to maintain operations until cash flow increases. In terms of calculations, elements that will affect the loan size and interest rates include the credit rating, revenue, and the percentage of the sales or profits of the business. 

When a bridging loan is not secured, then the interest rate will be higher – this is because there isn’t any collateral backing it up. The different kinds of bridging loans rely on metrics like the goal and time window for which the loan is needed. Use cases:

Equipment: a business may need a bridging loan in order to purchase key items such as vehicles, machinery and more.

Crowdfunding: this is to do with funding that uses small streams of capital from many sources in order to fund a big product. Today, many different ways for businesses to crowdfund exist. A few of the most common include reward campaigns, equity campaigns and debt campaigns.

Debt refinancing: small businesses may need a bridging loan in order to do debt financing. 

Credit: loans that are used as lines of credit

Bridging Loans and Borrowing Caps

The borrowing limit placed on your bridging loan will differ according to the specific type of loan you choose, its objective and your specific context – as well as the lender you’ve chosen. Because these are usually secured by some form of property, the value of your home may impact greatly the nature of your bridging loan.

For instance, by taking out a home equity line of credit (HELOC), you are essentially being given a line of credit that can be used in a particular proportion. As an example, this may mean that you can personally use 10% of your total credit line. Which would leave the remaining 90% as something that you directly spend on your property. 

Regarding bridging loans for home improvement or equipment, you can probably expect the nature of your bridging loan to be calculated based on the total market value of your current assets. This actually means that technically speaking, if your assets were large enough to outsize the actual loan, you could borrow enough to pay for the assets in full. 

Bridging Loans – Repayment Schedules 

Suppose you were to take out a mortgage on a property as a first-time homebuyer.

You might be given a mortgage that you have to pay back over a decade, two decades or even longer. A bridging loan, by comparison, is much shorter term – typically between three months up to a year.

This goes some way to illustrating why they are called bridging loans. They are designed to get you where you need to get, rather than to sustain you for a long period of time. A famous example of this is, to some degree, Elon Musk purchasing Twitter by borrowing funds for the purchase from a variety of lenders.

The asset, the social media platform Twitter, was the security these lenders used to gauge their offering. 

10 Excuses People Give for Taking on Debt

Supposedly, the economic system that allows companies to operate and nations to trade with each other is based on crediting and debts. So theoretically, debt is needed for trade at this level to work.

However, we’re not going to discuss debt at this level as it becomes incredibly complicated. Let’s instead talk about common myths people believe when it comes to getting rid of personal debt or excuses they make for taking on.

This section should be handy if you want some perspective before committing to a loan.

It’s Normal to be in Debt (or Even Useful)

Above, we gave the example of how nations are able to facilitate trade by working inside of a system that is credit and debt-based. Thankfully, we don’t need to be responsible for geopolitical and inflationary pressures that govern the relations between the world’s nations and alliances.

Today, perhaps the majority of British people are in some form of debt. So in practice, is considered normal (one study showed it was 77% for Americans, which is about 8 out of 10 people).

Reasons for being in debt include that you need to have a good credit score. Or that some debt is good and gives you certain tax benefits, which is debatable at best. And that it’s useful to have a car lease or student loans.

These days, with tight market conditions in Britain and poor prospects for many university degrees, this is seeming less and less valid. People assume it’s easy to stay on top of their debt, however, according to Finder in 2020:

  • 280 people were declared bankrupt each day
  • Interest on the debt alone was £865 each year
  • It would take 25 years and four months to repay credit card debt with average interest if you used minimum repayments each month
  • 14 properties were repossessed each day, with one a day possessed

1. Myth: Money is too difficult to understand 

Only if you’re the governor of the Bank of England, in which case you’re probably underestimating the amount of inflation that brings about to be crushed underneath the wheels of in 2023 and beyond.

But for individuals or those at the head of a family household, you don’t need to be a mathematical genius or wizard to handle money well. All you need is common sense and a clear pathway. If you’re not sure where to start, the Seven Baby Steps is a good roadmap to clearing your debt head-on without relying on using more debt.

The basic step to clearing your debt is to first build up an emergency fund of £1,000. There’s no use in clearing your debts if you don’t have the money to handle unforeseen things that can knock you off your momentum. After this, you can start to eat up your debt by attacking the smallest debt. Click the link for more.

2. Myth: You’re not rich enough to not be in debt

You don’t need to be rich to be debt-free. It may take you a half-year or six years, but paying off your debt is entirely possible regardless of your income. Of course, earning more helps you to pay off your debt faster. But the good news is that you can increase your income without needing to ask for a promotion.

There are many different ways to bring in extra cash, including getting a part-time job. You can drive for Uber, for instance. Or be a delivery driver for Deliveroo. If your time is too restricted, you can clear out your spare room and rent it on Airbnb. And while you’re clearing out the clutter, why not sell some of it on Facebook Marketplace?

Bolder steps include asking for a raise or enhancing your resume to look for a better-paying job. Trust that there is a path to freedom from debt.

3. Myth: It’s not worth the sacrifice

Freedom comes from discipline and sacrifice. Although the benefits of this may seem to outweigh the pain, over time, you start to love the journey. There’s so much temptation to eat out at the restaurant, get a cheeky drive-through takeaway or go on holiday. But just remember, the ‘secondary consequencesof sacrificing the present moment paid long dividends.

Secondary consequences: one we think of this is that when you are sacrificing now, time will begin to freeze and become very dense. The seconds will tick by like minutes and your body will feel pain. This period of sacrifice is building up a future that is free of being indebted and having to live so frugally. Months or even years from now, when you have many more opportunities, you may not even remember this period of time that is responsible for the freedom you currently have.

Start small. Perhaps you can reduce how many times you be out, consider a life without cable, figure out free camping trips there can be an adventure, and so on.

4. Myth: Budgets reduce your freedom

This is a misunderstanding of freedom at a technical level. Whenever you say freedom, you have to ask, “freedom from what?” Pure freedom is no different from being in pure chaos, like free diving into the ocean. But when you know what kind of life you want to commit to, then you can sacrifice things that take you away from that vision and focus on everything that brings you up that mountain.

So start to get some focus by knowing how much debt you have. This lets you use your energy in a realistic way so that you can do more things you want. Use a budget-cutting app to make it much more straightforward and streamlined. Most of the digital-only banks offer some form of budgeting, like Monzo and Starling.

5. Myth: You need to “keep up with the Joneses”

The next neighbours down the street just renovated the kitchen, so now you think yours needs to be updated too. An old friend from college just posted a social media of his new Tesla on Instagram, so now you think you need a snazzy new whip. All of these will keep you trapped in debt.

This comparison game is based on fake wealth – a mindset where you need to keep up appearances. Everything seems shiny, but that new car has been released and your next neighbour took out a big loan for that kitchen renovation.

The point here is, that the grass may seem greener on the other side, but the reality is that there is usually debt and the people are actually broke. If you fall into this trap, you will also become bankrupt. To truly stop being in debt, you need to let those who aren’t in debt be your role model.

6. Myth: Buy now, pay later

Those in debt tend to be materialists. The more worldly things they have, the more confident and assertive they feel – but there is never enough. And it’s not real. Why? Because if your personal bank account says you can’t pay for it now, then you just can’t afford it. And your debt will die down deeper into the cycle of trappings.

British and global culture has become hollowed out by ‘buy now, pay later’ and credit card scheme. While it lets you be flashy in the short term, there is a long buyer’s remorse afterwards. Protect your energy early and spend it sensibly so that it lasts, because life is not a sprint, it’s a marathon. 

7. Myth: Getting out of debt isn’t a priority

The British economy is going to see a severe winter crisis that goes deep into 2023 and beyond. Being in debt is going to severely restrict your ability to weather the storm. Jobs are affected, with their potentially being a weaker living wage as inflation becomes more and more unforgiving.

The real benefit of getting out of debt is mental or even spiritual. You develop the fortitude that we needed to weather the storm. Gets you into the mindset of taking responsibility in dealing with reality in a forward-facing way.

It may be difficult to get rid of that car payment or credit card, as it seems so natural to the way you live, but in fact, debit cards work exactly the same as credit cards. But to get out of debt, you can’t rely on minimum payments each month. The longer you take to get out of debt, the more expensive it is to get out of debt!

Remember, your personal loan and credit card have hidden fees and interest. Your student loan grows each day. And the car you’ve leased is diminishing in value by the second. This extra money could be put into a business, opportunity or investment.

8. Myth: You don’t need support from your spouse

Money plays a mysterious and sometimes extreme role in relationships. It’s enough of a tricky subject that people fear a relationship ending based on financial differences. 

Maybe only one of you is fully committed to growing debt free while the other doesn’t think is important. Read carefully – you don’t want to be divided on this topic. If you really want to escape debt, you and your spouse need to be united.

The money belongs to both of you. Once you wed, you need to start thinking as one rather than two on issues like this. You’re partnered on a team and getting success means that all of your debt needs to be addressed as one. So you need to tackle it as a team.

9. Myth: Credit cards are needed in emergencies

Being debt free is incredible but if you keep your credit card lying around…just in case, you surely find that some emergency pops up. Everything begins to look like an emergency.

Phone dead? Emergency.

Car not starting up? Emergency.

Christmas gifts? Emergency.

… Before you know it, you’re right back where you started. Emergencies can happen, which is why creating an emergency fund is step number one of getting out of debt. Let a big tower of cash be your emergency fund – not some piece of plastic that you’ve got to pay for just to own.

10. Myth: It’s just too difficult

To be honest, becoming debt-free isn’t easy. Getting there requires sacrifice, discipline and hard work to deal with the slippery world of money. But this is actually its own reward. By the end of this journey, you will be a stronger more resilient person. And it certainly isn’t impossible. So that is not overwhelming, begin with the seven baby steps – do the following:

  • Simply write down all of your debts ranked from the smallest to the biggest (ignore the interest rates).
  • Continue paying the minimum repayments for each debt. But we’re now going to focus on the smallest debt – this is our big focus.
  • Throw everything you have at that debt until it’s completely gone. Work another job any time you’re not me in the target you set, and for any extra cash at this thing. Get rid of it as quickly as possible!
  • Once a small estate is obliterated permanently, move that fine line onto the next smallest debt.
  • Keep this up until you paid off every single debt you have. Congratulations! You’re debt-free.

Bridging Loans – Conclusion

In Britain, short-term financing was accessible from about 1962. Homebuyers and the like could expect to generally stand a good chance of getting financing (mortgage) on the condition that they had good enough credit.

After the credit crunch of 2008, which many economists say truly marked the true shift into a recession for the collective West, these banks and building societies like HSBC and NatWest grew more reluctant to give mortgages under the same conditions that they used to. This increased the number of lenders offering what became known as “bridging loans”.

Bridging loans have had a lot of criticism for being a high-risk form of financing.

So this should never be entered into without taking them very seriously. Understand the serious risks of getting into deeper debt. And particularly keep in mind that bridging loans will have a shorter time window than mortgages, as well as harsher interest rates.

Because bridging loans aren't offered by traditional financial institutions, you may wish to consult with a broker that specialises in this kind of financing. 

You'll need to show the lender that you have a clear plan for paying back the bridging loan and getting out of the situation. This may include getting a mortgage or tapping into the equity in your home.

You'll need to convince the lender to give you a conventional mortgage if you want to buy the house in the long run. Before deciding whether or not to grant a loan, the broker will do an affordability analysis and an appraisal of the property.

If everything checks out, the loan will be disbursed and the conveyancing will be handled by lawyers.

FAQs

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