Bridging finance: the legal work, costs and risks

What bridging finance is

A bridging loan is a short-term loan secured on property, used to bridge a gap until longer-term money arrives. Common uses include buying a new home before your current one sells, completing an auction purchase by a tight deadline, or buying a property that needs work before a mainstream lender will accept it. For example, you might borrow £250,000 to buy your next home and repay it when your current home sells three months later.

Bridging loans usually last months rather than years. Interest is usually charged monthly and is often rolled up (added to the loan and repaid at the end) or retained (deducted from the advance at the start), so you may make no monthly payments. Rates and fees are usually higher than for a standard mortgage.

The loan is arranged with a lender, often through a specialist broker, while solicitors do the legal work. Your solicitor acts for you, the lender usually has its own solicitor, and both must be satisfied before any money is released.

Regulated and unregulated bridging

A bridging loan is regulated by the Financial Conduct Authority (FCA) if it is made to an individual or trustees and secured on property that is, or will be, at least 40% used as a home by the borrower or a close family member, such as a spouse, partner, parent, child or sibling. Regulated loans must be arranged and provided by FCA-authorised firms and carry the consumer protections that apply to mortgages.

Loans for investment property, development or commercial premises, and loans to limited companies, are usually unregulated. These can be quicker and more flexible, but you have fewer protections, so read the facility letter (the loan agreement) closely and take independent financial advice if you are unsure. Your broker should tell you which type you are being offered.

Who the solicitors act for

In most bridging deals there are two legal teams. Your solicitor advises you, investigates the title and reports to the lender. The lender's solicitor protects the lender: it reviews that report, prepares the loan and security documents and sets the conditions for releasing funds. This is called separate representation, and no money is released until the lender's solicitor confirms that its conditions are met.

Some lenders allow dual representation, where one firm acts for both you and the lender. It can save time and cost, but only if the lender agrees, the firm meets the lender's requirements and there is no conflict between your interests and the lender's. With two firms, how quickly they answer each other often decides how fast the loan completes.

Valuation and the report on title

The lender instructs a valuer, and the loan is usually capped at a percentage of the value. If the valuation is lower than expected, the lender may cut the loan and you would need to make up the difference.

Your solicitor prepares a report on title (sometimes called a certificate of title) for the lender. It covers who owns the property, existing mortgages, rights and restrictions, search results or an insurance policy used instead of searches, and anything unusual, such as a short lease or missing planning consent. The lender's solicitor raises questions on it, and every condition must be met before drawdown, the release of the loan money.

Your exit strategy

Because the loan is short, the lender will want to know exactly how you will repay it. This is your exit strategy, and the usual exits are selling a property or refinancing onto a longer-term mortgage.

For example, if you borrow £300,000 for 12 months to buy a house at auction and plan to refinance once it is renovated, the lender may ask for a schedule of works, builders' quotes and evidence that a mortgage is likely to be available. If you plan to sell your old home, it may want evidence that it is on the market or under offer. Build in a margin: sales fall through and works overrun, and extending a bridge usually costs more.

Speed and certainty

Bridging can often complete faster than a standard mortgage, but only if the legal work is ready. Common causes of delay include missing title documents, leasehold information from a managing agent, slow replies between solicitors, identity and source of funds checks, and consent from an existing lender where the bridge will be a second charge (a second mortgage ranking behind the first).

You can help by gathering documents before you apply, answering questions the same day and telling your solicitor at the outset about any deadline, such as an auction completion date. A quick quote or a lender's indicative terms are not a promise of a completion date.

Legal costs you pay

Expect to pay for both legal teams. The usual costs are:

• Your own solicitor's legal fee, plus VAT
• The lender's solicitor's fee, plus VAT, which you normally pay even though it acts for the lender
• Disbursements (payments to third parties), such as searches or an indemnity policy and HM Land Registry fees, plus each firm's own charge for sending money
• The lender's valuation and arrangement fees, and any broker fee
• Any exit or redemption fee when the loan is repaid, if the facility letter includes one

The lender's solicitor may ask for an undertaking (a binding promise) that its costs will be paid even if the loan does not go ahead. Ask for all of these costs in writing at the start, so that you can compare the true cost of each option.

Risks to weigh up

Bridging is useful, but it is short term and costs more than a mortgage. Before you commit, think about:

• What happens if your sale or refinance takes longer than the loan term
• How much rolled up interest will reduce the equity left when you repay
• Default interest and charges if you miss the repayment date
• Whether you are giving a personal guarantee, which puts your own assets at risk
• The lender's right to take possession and sell the property if the loan is not repaid

Your solicitor will explain the legal documents, but whether the loan is right for you financially is a question for an FCA-authorised broker or financial adviser.

What to have ready

To keep things moving, gather these before you apply:

• Photo ID and proof of address for every borrower and guarantor
• The lender's offer or facility letter, and your broker's details
• The property address, title number if known, and details of any existing mortgage
• For leasehold property, the lease and the managing agent's details
• Evidence of your exit, such as a sale agreement or refinance terms
• Proof of where any deposit or other contribution is coming from
• Company documents, if a company is borrowing

Next steps

Bridging work is quoted individually. Request a tailored residential bridging quote, or read about commercial bridging. Tailored quotes are usually prepared within one working day, and the law firm you are introduced to confirms its fees in writing before you instruct it.

If the bridge is for an auction purchase, see our guide to buying at auction.