Looking into bridging loans can feel like you need to learn a new language.
Terms like “LTV,” “rolled-up interest,” and “first and second charges” get thrown around, and suddenly what seemed straightforward becomes confusing.
By getting to grips with these terms, you’ll feel more confident and in control when arranging short-term property finance, ultimately securing better outcomes for your property or business needs.
Why all the Jargon?
Bridging loans occupy a unique space in the property finance market.
They’re designed to be quick to arrange, short in duration, and flexible enough to handle situations where standard mortgages won’t work.
Most bridge loan applications are underwritten manually, by a real person! While lenders have a basic template to work to, these loans are assessed on an individual basis.
Because of these special characteristics, the language of bridging finance differs from standard mortgage terminology in several ways.
While mortgages talk about annual interest rates, bridging loans quote monthly rates. Where standard lenders focus on your income and credit score, bridging lenders put more emphasis on the property itself and your exit strategy.
What makes things trickier is that terms can vary slightly between lenders.
What one calls an “arrangement fee,” another might call a “facility fee.” The fundamentals remain the same, but the labels can change, making it even more valuable to understand the core concepts.
Core Bridging Loan Terms Every Borrower Should Know
Loan Structure
At its heart, a bridging loan is a short-term secured loan. But what does that actually mean?
Term
The “term” refers to how long you’ll have the loan, usually between 3 and 24 months, though some lenders offer up to 36 months.
Secured
“Secured” means the loan is backed by a property or asset. If you can’t repay, the lender has the right to take and sell this asset to recover their money. Most commonly, bridging loans are secured against property, but some lenders accept other valuable assets.
Loan to Value
Loan-to-Value (LTV) is simply the percentage of the property’s value you can borrow. For example, with a property worth £500,000 and a maximum LTV of 70%, you could borrow up to £350,000. Bridging lenders usually offer LTVs between 65-75%, though this can vary based on the property type and your circumstances.
Charges
Many people believe bridging loans must be secured against your home, but that’s not true. You can use investment properties, commercial buildings, or even land as security.
When a lender takes security over your property, they register what’s called a “charge.”
A “first charge” means they’re first in line to be repaid if the property is sold. This happens when there’s no existing mortgage, or if the bridging loan is being used to repay it. A “second charge” means another lender (usually your mortgage provider) has priority. Second charge loans generally have higher interest rates because they’re riskier for the lender.
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Interest and Payment
The interest rates on bridging loans are quoted per month, and this can give the impression that they are cheaper than they really are.
But a 0.75% monthly rate works out to 9% over a year.
There are three main ways that interest can be structured, and your choices will be governed by the lender:
Serviced interest means you make monthly interest payments, similar to an interest-only mortgage. This reduces the overall cost but requires regular cash flow, and a provable income.
Rolled-up interest is added to your loan balance and paid at the end of the term. For example, if you borrow £200,000 at 1% monthly interest on a 12-month term, you’d repay around £224,000 at the end. This avoids monthly payments but increases the total amount you’ll repay.
Retained interest is calculated upfront and effectively borrowed as part of your loan. If you’re borrowing £200,000 with interest retained for 12 months at 1% per month, the lender would retain £24,000, giving you £176,000 but charging interest on the full £200,000. You’d still repay £224,000 at the end.
Let’s talk bridging loans!
Types of Bridging Loans
Open vs Closed Bridging Loans
Bridging loans come in two main flavours: open and closed. The difference is simpler than it sounds but has big implications for your finance options.
Open
An open bridging loan has no fixed repayment date, though lenders will still set a maximum term, usually 12-24 months. This type works well when you’re not sure exactly when you’ll be able to repay. For example, if you’re buying a new home before selling your current one, but don’t have a buyer lined up yet, an open bridge gives you flexibility.
Imagine you’ve found your dream home in London but haven’t sold your current house in Manchester. With an open bridging loan, you can complete the purchase and then take the time needed to sell your Manchester property without rushing and potentially accepting a lower price.
Closed
Closed bridging loans have a fixed repayment date tied to a specific event, such as the completion date on a property you’re selling. Since the lender has more certainty about when they’ll get their money back, closed bridging loans usually offer lower interest rates than open ones.
The UK property market, with its complex chains and frequent delays, makes open bridging loans particularly useful, though you’ll pay extra for that flexibility with slightly higher rates.
Regulated vs Unregulated
The terms “regulated” and “unregulated” refer to whether a bridging loan falls under Financial Conduct Authority (FCA) rules, which affects the protections you have as a borrower.
Regulated
A regulated bridging loan is one secured against a property where you or a close family member lives or intends to live. These loans offer additional consumer protections, including a 14-day cooling-off period and requirements for lenders to treat customers fairly. They’re limited to a maximum term of 12 months.
Unregulated
Unregulated bridging loans are for investment properties, business use, commercial buildings, or any property where neither you nor your family will live. Most buy-to-let and commercial property loans fall into this category.
While these loans don’t have the same FCA protections, they offer more flexibility, potentially longer terms, and a faster application process.
The distinction matters because it affects everything from the paperwork involved to the speed of completion and the choice of lender.
If you’re buying a house to live in, you’ll need a regulated loan. For property investments or business purposes, an unregulated loan is more common and more suitable.
Understanding Fees and Costs
Bridging loans come with various fees that can significantly impact the total cost of borrowing.
Being clear about these charges helps avoid nasty surprises.
Types of Fees
Arrangement fees (sometimes called facility or setup fees) are charged for setting up the loan. These are normally 2% of the loan amount. On a £250,000 loan, that means £5,000. Some lenders allow you to add this to the loan balance rather than paying upfront.
Valuation fees cover the cost of assessing the property’s value. These vary based on the property value and type, ranging from a few hundred pounds for simple residential properties to several thousand for complex commercial sites. Some lenders offer free valuations, while others require full physical inspections.
Legal fees include costs for both your solicitor and the lender’s legal team. Bridging lenders require you to pay for both. Using dual representation, where one law firm acts for both parties, can reduce costs and speed up the process, though it’s not always possible.
If you use a broker to find your bridging loan, you’ll likely pay broker fees. These might be a percentage of the loan or a flat fee. Good brokers earn their keep by finding better rates and terms than you could access yourself, saving you money overall.
Some lenders charge exit fees when you repay the loan, either as a percentage or fixed sum. Others advertise “no exit fees” as a selling point. Early repayment charges are less common with bridging loans than with mortgages, as lenders expect early repayment, but some might require a minimum interest period of three months.
Example Cost Breakdown
Let’s look at how these fees add up on a £200,000 bridging loan:
Arrangement fee (2%): £4,000
Valuation fee: £800
Legal fees: £1,500
Broker fee: £499
Exit fee (1%): £2,000
That’s £8,800 in fees alone, before any interest. Understanding these costs helps you compare different loans properly, beyond just the headline interest rate.
The Bridging Loan Application Process
The journey from enquiry to receiving your bridging loan funds has its own set of terms you’ll encounter along the way.
Key Application Stages
It all starts with getting a Decision in Principle (DIP), also called an Agreement in Principle.
This is the lender’s initial thumbs-up that they’re willing to lend to you, based on preliminary information and a quick credit check. A DIP is arranged by your broker and outlines the loan amount, interest rate, and key conditions, giving you confidence to move forward with your plans.
Once you’ve got a DIP, you can make a full application and the loan enters the underwriting stage. This is where the lender thoroughly assesses the application, looking at the property, your financial situation, and your exit strategy.
Think of underwriting as the lender’s due diligence process.
During underwriting, the lender will arrange a valuation of the property. This might be an Automated Valuation Model (AVM) that uses algorithms and property data to quickly estimate value at low cost, a desktop valuation (done by a surveyor remotely using data) for straightforward cases, or a full physical valuation for higher-value loans or unusual properties.
Lenders choose the valuation type based on risk level, loan size, and property type. In the UK, the valuation process usually takes 1-5 working days, with AVMs being fastest and physical valuations taking longest.
If you’re buying a property, especially at auction, you might hear about the legal pack. This contains important documents like title deeds, property information forms, and search results. Reviewing this thoroughly before committing is essential.
The final stage is drawdown or completion, when the funds are released to you. The time from application to drawdown can be as quick as 5-7 days for simple cases, though 2-3 weeks is more common.
Throughout this process, lenders will conduct Know Your Client (KYC) checks to confirm your identity and address, in line with anti-money laundering regulations. Having your ID, proof of address, and information about the source of your funds ready can speed things up considerably.
The Exit Strategy
One term you’ll hear constantly with bridging loans is “exit strategy.”
This simply means your plan for repaying the loan at the end of the term. Lenders place huge importance on this because bridging loans aren’t designed for long-term borrowing.
Common Exit Methods
Common exit strategies include selling the property, refinancing to a long-term mortgage, or using expected funds from another source (like a business sale or inheritance).
The redemption process is how you formally end the loan.
This involves repaying the full amount owed, including the original loan, interest, and any exit fees. Your solicitor will handle the legal work to remove the lender’s charge from your property.
What If Things Go Wrong?
What happens if your exit strategy falls through or gets delayed?
You might seek an extension, which lenders may grant if you have a good reason and a revised plan. However, extensions come with additional fees and possibly higher rates.
In the current UK property market, with house sales taking an average of 4-5 months in many areas, it’s wise to build extra time into your exit strategy if it relies on selling a property. Similarly, if refinancing is your plan, remember that standard mortgage applications can take 6-8 weeks to complete.
If you can’t repay the loan and don’t agree an extension, you’ll be in default.
At this point the lender will be charging you their ‘default’ interest rate (ouch) and the process can ultimately lead to the lender taking possession of your property. While repossession is the last resort, it’s a real risk that underscores why having a solid, realistic exit strategy is so important.
Who Uses Bridging Loans and Why?
Bridging loans serve various people in different situations.
Typical Bridging Loan Users
Property investors and developers use bridging finance on a regular basis to buy properties quickly and conveniently, often to refurbish and sell at a profit. They’re particularly focused on terms around development exits and refurbishment provisions.
Homebuyers sometimes need bridging loans to break a property chain. If you’ve found your perfect home but haven’t sold your current one, a bridge can help you secure the new property without losing it to another buyer. Chain-breakers need to understand the differences between regulated and unregulated loans.
Auction buyers face tight timeframes—usually just 28 days to complete after the hammer falls. They primarily need a fast bridging loan.
Business owners might use bridging loans for quick cash flow or to initially purchase a commercial premises. They’ll need to grasp terms around commercial property valuation and business exit strategies.
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How a Specialist Broker Can Help
Working with an experienced broker can make a huge difference when arranging bridging finance.
A good broker doesn’t just find you a loan—they translate complex terms into plain English and match the right product to your specific needs.
Specialist brokers like Bridging Finance London have relationships with over 250 lenders, including private banks and individuals who lend their own money. This means access to options you simply wouldn’t find on your own.
They understand the subtle differences in how different lenders interpret terms and can explain these to you in clear language.
Brokers can be particularly valuable if your situation is unusual or complex. Perhaps you need a higher LTV than commonly advertised, or you have a unique exit strategy. An experienced broker knows which lenders might be flexible on specific points and how to present your case effectively.
Beyond just explaining terminology, brokers handle much of the paperwork and communication, saving you considerable time and stress. Their expertise often leads to faster approvals and completions, which can be essential when you’re working to tight deadlines.
If you’re considering a bridging loan, speaking with a specialist broker is often the best first step.
At Bridging Finance London, we offer free initial consultations to discuss your needs and explain how bridging finance might work for your specific situation.
With our experience in helping high-net-worth individuals, business owners, and property professionals, we can guide you through both the terminology and the practical aspects of securing the right bridging loan.
To speak with a specialist broker, please call us on 020 3951 2828.
FAQ
Loan-to-Value (LTV) is the percentage of the property’s value you can borrow. For example, with a 70% LTV on a £500,000 property, you could borrow up to £350,000. Most UK bridging lenders offer LTVs between 75-80%, though this varies based on property type and circumstances.
Read more: How to Work Out your Loan to Value (LTV)
A regulated bridging loan is secured against a property where you or a close family member lives or will live. These loans fall under Financial Conduct Authority (FCA) rules, providing additional consumer protections. Unregulated loans (for investment properties) offer more flexibility but fewer protections.
Read more: Regulated vs Unregulated Bridging Loans
An exit strategy is your plan for repaying the bridging loan at the end of the term. Common strategies include selling the property, refinancing to a longer-term mortgage, or using funds from another source. Lenders place enormous importance on this because bridging loans aren’t designed for long-term borrowing.
Read more: Winning Exit Strategies for Bridging Loans
A first charge means the bridging lender has priority claim on the property if you default. A second charge means another lender (usually your mortgage provider) has priority. Second charge loans typically have higher interest rates due to the increased risk for the lender.
Read more: Legal Charges: Your Guide to Bridging Loan Security
A Decision in Principle, sometimes called an Agreement in Principle, is the lender’s initial indication that they’re willing to lend to you. It outlines the potential loan amount, interest rate, and key conditions based on preliminary information, giving you confidence to move forward with your plans.
A desktop valuation is conducted remotely using property data and comparable sales without physically visiting the property. They’re faster and cheaper than physical valuations but generally only used for straightforward properties with lower LTVs. Physical valuations involve an in-person inspection and are required for higher-value loans or unusual properties.
While bridging loans provide a lump sum upfront and are generally for shorter terms (3-24 months), development finance releases funds in stages as construction progresses and is designed specifically for property development projects. Development finance often includes terms like “drawdown schedule” and involves monitoring surveyors to check construction progress.
Read more: Are Property Development Finance and Bridging Loans the Same?
Redemption refers to the process of formally ending the bridging loan by repaying the full amount owed, including the original loan, accrued interest, and any exit fees. Your solicitor will handle the legal work to remove the lender’s charge from your property, completing the process.
Residential bridging loans are for properties where people live, while commercial bridging loans are for business premises like offices, shops, or industrial units. Commercial loans often have different terms, sometimes lower LTVs, and might require additional documentation about the business using the property. Commercial bridging loans are almost always unregulated.
With serviced interest, you make monthly interest payments throughout the loan term, similar to an interest-only mortgage. This reduces the overall cost but requires regular cash flow. With rolled-up interest, no monthly payments are made; instead, the interest accumulates and is added to your loan balance, to be paid in full at the end of the term.
An Automated Valuation Model (AVM) is a computer-generated property valuation using algorithms and existing property data, offering near-instant results at minimal cost. A desktop valuation is conducted remotely by a qualified surveyor using property data and comparable sales without physically visiting the property. Both are faster and cheaper than physical valuations but generally only used for straightforward properties with lower LTVs. Physical valuations involve an in-person inspection and are required for higher-value loans or unusual properties.
