Bridging finance for auction purchases: costs and risks
Bridging finance is the tool that lets you buy at auction without cash. It is also the most expensive money most investors will ever borrow.
Auction contracts require completion in 28 days, sometimes 14. No high-street mortgage can be arranged in that window, which is why auction is dominated by cash buyers. Bridging finance is the exception: a short-term loan, secured on the property, arranged in days rather than weeks.
The cost is high and the structure is unforgiving. Bridging loans are priced at a monthly rate, typically 0.6% to 1.2% of the loan per month, with an arrangement fee of 1% to 2% and an exit fee on some products. On a six-month bridge at 0.9% per month with a 2% arrangement fee, the total cost approaches 7.5% of the amount borrowed — before legal fees.
When a bridge makes sense
The case for bridging is that the property cannot be bought any other way and the discount justifies the cost. That is a real case, particularly for property that is unmortgageable in its current state and will be refinanced onto a standard buy-to-let mortgage once the work is done.
- Property bought at auction with a discount that exceeds the bridging cost
- Property that will be mortgageable after refurbishment, allowing a refinance onto cheaper debt
- A purchase that must complete faster than a mortgage can be arranged
- A property bought below market value with a clear, near-term exit
The exit is the risk
Every bridging loan has an exit, and the exit is where the trouble is. If you intend to refinance onto a buy-to-let mortgage, that refinance depends on the property being mortgageable, the valuation supporting the loan, and the lender approving you. Any of those can fail.
If the exit fails, the bridge extends at a higher rate, or the lender enforces. The second outcome is the one that destroys the investment, and it is why the exit should be assessed as carefully as the purchase. Get an agreement in principle for the refinance before you draw down the bridge, and confirm the property will satisfy the lender's criteria once the work is complete.
What lenders will require
Bridging lenders lend against the property's value at a relatively low loan-to-value, commonly 70% to 75%, and often against the lower of the purchase price and the valuation. They will require a clear exit strategy, evidence of how it will be achieved, and usually a first charge.
They will also charge for the valuation, the legal work and the arrangement, and those costs are payable whether or not the loan completes. On a small bridge, the fixed costs can be a meaningful proportion of the total.
Common questions
- How much does bridging finance cost?
- Typically 0.6% to 1.2% of the loan per month, plus an arrangement fee of 1% to 2%, plus legal and valuation costs. On a six-month bridge the total is often 7% to 10% of the amount borrowed. That cost has to be covered by the discount you are getting on the purchase, or the deal does not work.
- Can I get a mortgage on a property I bought with bridging finance?
- Yes, and that is the standard exit. But the refinance depends on the property meeting the lender's criteria — including construction type, condition and lease length — and on the valuation supporting the loan. Get an agreement in principle before drawing down the bridge, because a failed exit is what turns an expensive loan into a very expensive one.