Bridging Loans: Costs, Exit Strategies and Tax Treatment 2026/27
How bridging loans work, typical arrangement, interest and exit fees, and the tax treatment of bridging finance for property investors and developers in 2026/27.
What Is a Bridging Loan?
A bridging loan is short-term finance, secured against property, designed to cover a temporary gap between needing funds now and receiving longer-term finance or sale proceeds later. Terms typically run from a few weeks to 12-24 months, in contrast to a standard mortgage's 20-35 year term.
Common uses include:
- Buying a new home before an existing property has sold (a "chain break")
- Buying at auction, where completion is required within 28 days -- far faster than a standard mortgage can typically complete
- Funding a property purchase or refurbishment that a standard mortgage lender will not lend against (for example, a property without a working kitchen or bathroom, which many residential lenders will not touch)
- Raising quick capital against an existing property to fund a business opportunity or another purchase
Because bridging finance is fast and flexible, lenders charge a premium for it compared with standard mortgage products.
Typical Bridging Loan Costs
Bridging loans are considerably more expensive than mainstream mortgages, reflecting the short term, higher risk and faster underwriting involved.
| Cost element | Typical range |
|---|---|
| Arrangement fee | Around 1-2% of the loan amount |
| Monthly interest | Roughly 0.4% to 1.5% per month (broadly 5-18% annualised) |
| Exit fee | 0-1% of the loan amount, depending on lender |
| Valuation fee | Varies by property value and lender |
| Legal fees | Borrower's own solicitor, plus often a contribution to the lender's solicitor |
| Broker fee | Often charged where a broker arranges the loan |
Interest can usually be paid monthly, "rolled up" (added to the loan balance and paid off at the end), or "retained" (deducted from the loan advance upfront to cover a set number of months). Rolled-up and retained interest options are popular with developers and investors who do not want ongoing monthly interest payments eating into cash flow during a refurbishment project.
Tax Treatment of Bridging Loan Interest
Whether bridging loan interest and fees are tax deductible depends entirely on the purpose of the borrowing, not the type of loan itself.
Personal, non-business use: if a bridging loan is used to cover a personal house move (bridging the gap between selling one home and buying another), the interest is a personal cost and is not tax deductible against any income.
Buy-to-let and rental property (individual landlords): since April 2020, the Section 24 finance cost restriction means individual (non-corporate) landlords cannot deduct mortgage or bridging loan interest directly from rental income when calculating taxable profit. Instead, landlords receive a tax reducer worth 20% of the finance costs, applied after tax has been calculated on rental profit computed without deducting the interest. This applies to bridging interest used to acquire or refurbish a rental property in the same way as it applies to standard buy-to-let mortgage interest.
Property development (trading, not investment): where an individual, partnership or company is running a genuine trade of buying, developing and selling property, bridging loan interest and associated costs are typically treated as a normal cost of the trade, deductible in full against trading profit for Income Tax (sole traders/partnerships) or Corporation Tax (companies). This is a materially better tax position than the Section 24-restricted treatment landlords face, and reflects the different tax rules for trading versus investment property income.
Limited company landlords: companies holding rental property are not subject to the Section 24 restriction at all -- they can deduct loan and bridging interest as a normal expense against rental profit before Corporation Tax is calculated at 19% (profits under £50,000), 25% (profits over £250,000), or the marginal rate in between.
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Compare buy-to-let profitabilityCommon Bridging Loan Exit Strategies
Lenders require a credible "exit" -- the plan for how the loan will be repaid -- before approving a bridging loan. The most common exit routes are:
- Sale of the property: particularly common for refurbishment/"flip" projects, where the bridging loan funds the purchase and works, and the sale proceeds repay the loan
- Refinance onto a standard mortgage: once a property is renovated to a lettable or mortgageable standard, the borrower refinances onto a conventional buy-to-let or residential mortgage and uses the funds to clear the bridging loan
- Sale of another property: where the bridging loan covered a chain break, the sale proceeds of the borrower's previous home repay the bridge
- Receipt of other funds: for example, an inheritance, a maturing investment, or a business transaction completing
When Exit Plans Go Wrong
If the intended exit does not happen on time -- a sale falls through, a refinance is declined, or a development runs over schedule -- the borrower's options narrow quickly given the short-term nature of bridging finance. Lenders may agree an extension (usually at additional cost), the borrower may seek to refinance the bridge itself with another lender, or, in the worst case, the lender can enforce its security and take possession of the property to recover the debt.
This is why bridging finance is generally considered higher risk than standard mortgage lending, and why lenders scrutinise the exit strategy carefully at application stage rather than simply lending against the security value alone.
Stamp Duty and Bridging-Financed Purchases
Stamp Duty Land Tax is calculated on the property transaction itself and is not affected by how the purchase is financed. Using a bridging loan instead of a mortgage does not change the SDLT due.
However, if a bridging loan is used to complete a purchase before an existing main residence is sold, the purchase can be treated as an "additional property" for SDLT purposes, triggering the higher-rate surcharge. Where the previous main residence is then sold within the applicable time window, the surcharge portion can usually be reclaimed from HMRC.
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Frequently asked questions
What is a bridging loan?
A bridging loan is a short-term loan, typically running from a few weeks up to 12-24 months, secured against property. It is designed to 'bridge' a gap in finance -- for example, buying a new property before selling an existing one, or funding a purchase quickly at auction before longer-term finance is arranged.
How much does a bridging loan cost?
Bridging loans are more expensive than standard mortgages. Typical costs include an arrangement fee of around 1-2% of the loan amount, monthly interest of roughly 0.4% to 1.5% (broadly 5-18% a year depending on the lender, loan-to-value and risk), an exit fee in some cases, valuation fees, and legal costs for both the borrower and the lender.
Is bridging loan interest tax deductible?
It depends on the purpose. For a property investor or developer using a bridging loan to acquire or refurbish a property held for rental or resale as part of a genuine business or trade, the interest is generally an allowable cost against rental income or trading/development profit. For a bridging loan used to fund a personal house move or a private residence purchase, the interest is not tax deductible, because it is a personal cost rather than a business expense.
Does Section 24 mortgage interest restriction apply to bridging loans?
Yes, for individual landlords. Since April 2020, individual (non-corporate) landlords can no longer deduct mortgage or bridging loan interest directly from rental income -- instead they get a basic rate (20%) tax credit on finance costs, including bridging interest used to acquire or improve a rental property. This restriction does not apply to companies, which can still deduct loan interest as a normal expense against Corporation Tax.
How do property developers treat bridging finance for tax?
Developers running a trade of buying, developing and selling property (rather than holding it for rental) generally treat bridging loan interest as a cost of the development, deductible against trading profit when calculating Income Tax (if a sole trader or partnership) or Corporation Tax (if a limited company). This is different from the Section 24 restriction that applies to buy-to-let landlords.
What are common exit strategies for a bridging loan?
The most common exit routes are: selling the property once refurbished or once the chain completes, refinancing onto a standard buy-to-let or residential mortgage once the property is lettable or mortgageable, or receiving funds from the sale of another property that was delayed. Lenders will ask for a credible exit strategy before approving the loan.
What happens if I cannot repay a bridging loan at the end of the term?
If the agreed exit route falls through, the lender may agree to extend the term (often at a higher rate or with an extension fee), the borrower may need to refinance elsewhere, or in the worst case the lender can take possession of the secured property to recover the debt. Bridging loans carry higher risk than standard mortgages precisely because the short timeframe leaves less room to recover from delays.
Do I pay Stamp Duty when using a bridging loan to buy a property?
Stamp Duty Land Tax is based on the property purchase itself, not on how it is financed, so using a bridging loan does not change the SDLT due. However, if the bridging-financed purchase is an additional property (for example, buying before selling an existing home), the higher-rate SDLT surcharge for additional properties may apply, potentially refundable later if the previous main residence is sold within the applicable window.
Are bridging loan arrangement and exit fees tax deductible?
For property businesses (rental or development), arrangement fees and exit fees are generally treated in the same way as the interest itself -- deductible against trading profit for developers, or subject to the same finance-cost tax credit rules as interest for individual buy-to-let landlords under Section 24. For personal, non-business borrowing, these fees are not deductible.
Is a bridging loan regulated by the Financial Conduct Authority?
Some bridging loans are FCA regulated and some are not, depending on the use of the loan. A bridging loan secured on a property that is, or will be, the borrower's own home is typically regulated. Loans for pure investment or commercial property purposes, where the borrower will not live in the property, are usually unregulated business lending, which carries fewer consumer protections.
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