Bridging loans are sometimes called "bridge loans" and span a gap in your finances. This is usually when you need to pay for something but are still waiting for funds to become available from the sale of something else.

Typically, they're used by people buying a new property while waiting for the sale of their existing home to go through. A mortgage bridging loan allows them to borrow the money required for a short time.

Like mortgages, most bridge loans are a form of secured borrowing. This means you have to have a high-value asset to get one, such as property or land.

Bridge loan financing can be used in lots of ways. These include:

• Buying a property

• Property development

A mortgage bridging loan is an example of a closed bridging loan. It can be used if you have exchanged contracts on a property but are waiting for your property sale to complete.

Open bridging loans are usually more expensive than closed bridging loans because they're more flexible. Whichever kind you choose, you need to find a way to repay your bridging finance.

Compare bridging loans for house purchases

Residential bridge loans

Bridging loans can be used when people are moving house as they're useful when you need a mortgage to buy a new property, but are waiting for the sale of your previous home to go through.

They are also used by property developers at auction. This is because developers often need to pay a deposit to secure their purchase at short notice.

If you have a business and need financing to move to a new office location, you might be interested in business bridging loans.

The following steps guide you through the process of tracking down the best rates for bridging loans and the application process. 

1. Determine the amount you wish to borrow, and for how long

2. Work out the value of your property and the amount of equity you have in it

3. Compare bridge loans using the comparison table above

4. Choose between applying online or speaking to a broker

5. Apply for the bridge loan deal you’ve chosen. Be sure to understand all the fees and additional costs by reading the small print

Bridging loans interest rates tend to be high  – often between 0.5% to 2%, and 0.84% on average – and are typically calculated on a monthly rather than an annual basis. This makes bridging loans an expensive way to borrow money.

What's more, because bridge loans typically charge monthly interest, a small change in the interest rate can have a significant impact on your overall cost of borrowing.

That said, interest is not always charged monthly. There are three different ways interest may be charged:

1. Monthly: you pay the interest monthly; it's not added to the original sum borrowed

2. Deferred or rolled-up: you pay the interest at the end of the loan; there are no monthly interest payments

3. Retained: you borrow the interest for an agreed period, and pay it all back at the end

Some lenders let you combine these options. For example, you could choose retained interest for the first six months and then switch to monthly interest.

Don't forget there are lots of other fees and charges that you have to pay on top of the interest. Check the costs carefully before you go ahead.

Bridging finance comes with several additional fees on top of the interest you’ll have to pay.

These are:

• Set-up fee: This is typically 1 to 2% of the bridge loan amount and covers the costs of setting it up. It’s also known as a facility or arrangement fee. 

• Exit fees: If you pay back the bridge loan early, you may have to pay an exit fee – typically around 1% to 2% of the bridging finance total. Many lenders may waive this charge.

A bridge loan is a special type of credit that enables you to borrow a large amount of money for a short period of time. They can be useful in the right circumstances, but it's also worth considering whether another type of financing might better serve your needs. Alternatives to bridge loans include:

• Second-home mortgage: You could look into getting a second-home mortgage.

• Remortgage: You could remortgage your current home to free up some money.

• Secured loan: Here's how secured loans work.

• Personal loan: You could check if a personal loan could work for your needs.

• Let to buy: If you want to buy a property and the sale of your first property falls through, a let to buy mortgage could be worth considering.

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