There are two kinds of bridging loan, each used for a distinct purpose.

Open bridging loans, UK

Buyers take out an open bridging loan when they’ve found the house they want to buy, but haven’t exchanged contracts. You can usually only apply for this type of bridging loan if you have a healthy amount of equity in your home. Bear in mind that the loan provider will want a lot of details from you before they’ll agree it. So be prepared in case you have to act fast. Your bridging loan provider will want to check:

•    The mortgage offer on your new property

•    The details of the property you’re buying

•    Proof that your own home is being marketed actively

•    Details about how you will manage your loan repayments

•    Your plans if your sale falls through

Most providers insist on a 12 month ceiling for open bridge loans, after which they’ll probably be keen to renegotiate the deal.

Closed bridging loans, UK

Homeowners can only take out a closed bridging loan if they’ve exchanged contracts on their home. Because the risk is less with this kind of UK bridging loan, with very few sales collapsing after exchange, providers are much happier to offer closed loans.

Bridging loans UK – where and how

Bridging loans are offered by:

•    banks

•    specialist lenders Specialist lenders can usually act much faster than banks, often getting everything sorted online within a week. But you pay through the nose with even higher interest rates.

•    Once you agree to the loan deal, your lender will arrange a valuation for the property on which the loan will be secured. They’ll usually be with you within 72 hours of your fee being paid

•    Valuation costs vary but £200 is about average

•    You get your solicitor to move immediately on the conveyancing; local authority searches, checking the deeds etcetera

•    You should get the money within 7-10 days, but this can be speeded up provided everything goes smoothly

•    For bridging loans, UK providers will charge a special interest rate, a ‘percentage per month’. Here’s an example: you’ve borrowed £200,000 at 1.5% a month. Your  loan will cost 1.5% of £200,000 every month, that’s a monthly repayment of £3000.

Always seek advice before making life-changing financial decisions. To find an independent adviser go to Searchifa.co.uk or UnBiased.co.uk.

A bridging loan is a short term loan with a high interest rate. Traditionally, they’re used by people who want to fill the mortgage gap between buying a new home and selling their existing one. In short, UK bridging loans provide a mortgage on a new property plus a second mortgage on the property you’re selling.

Bridging loans are expensive. But sometimes they are the only way to keep your house purchase on track. Here’s an example. You’re buying a new home, but you can’t sell your current house quickly enough and the entire deal is at risk of falling through. So you take out a bridging loan to avoid losing the cash you’ve already spent on the deal, and to give you the extra time needed to push it through.

Bridging loan UK – a way to avoid repossession?

When the property market is healthy, with homes selling fast, bridging loans aren’t needed very often. But in a difficult housing market, when property is moving slowly or not at all, people are often forced to apply for a bridging loan as a last resort.

A bridging loan can make the difference between having your home repossessed and selling it yourself, so the expense can be worthwhile.

Bridging loan UK – high interest rates and hefty arrangement fees

•    Bridging loans in the UK involve an arrangement fee of between half and one and a half percent of the total loan. Providers usually charge the Bank of England interest rate plus at least another 2 percent, often as much as two and a half percent extra. Some deals offer a higher interest rate but a smaller arrangement fee. Others promise accelerated cash in hand, but the interest rates for these deals tend to be even higher.

•    Bear in mind that if you have a poor credit history, you will probably have to pay even higher rates

•    If you’re certain your sale will go through soon, the intelligent option would probably be a low arrangement fee. But if you fear your bridging loan might be running for several months, the fee gets spread over a longer time so represents less of the total cost.

There’s a good guide to bridging loans at: thisismoney.co.uk/bridging-loans

There are plenty of bridging loan providers online, including:

•    Best bridging loans: bestbridgingloans.co.uk

•    Easy Bridging: easybridging.co.uk

•    Easy Bridging Loans: easybridgingloans.co.uk

•    Bridging Loan Finance: bridgingloanfinance.co.uk

Bear in mind that the current economic climate means deals are becoming rarer.

Please share your thoughts on bridging loans.