A bridging loan (or bridge loan) is a short-term loan that “bridges” the gap until longer-term financing or asset sales come through. For example, a developer might use a bridging loan to buy a new property before selling an existing one, or to fund a quick renovation.
These loans are typically secured against property (or other valuable collateral), arranged quickly, and meant to be repaid within weeks or months. Because they carry a higher risk, bridging loans usually have higher interest rates and fees than standard mortgages. In short, bridging loans give fast, flexible cash for a short term, but the borrower must plan how to repay them, usually quickly by an asset sale.
What is a bridging loan deposit?
In the context of a bridging loan, the word “deposit” can mean a couple of things. First, some lenders ask for a commitment fee upfront to lock in the loan terms (interest rate, loan amount, etc.) while the paperwork is drawn up. This fee – sometimes called a “deposit” or “reservation fee” – essentially holds the loan in place. It is a promise that the loan deal will go ahead; often it is refunded once the loan completes.
Secondly (and more commonly), the deposit refers to the part of the purchase price not covered by the loan – in other words, the borrower’s own money or equity paid upfront. If you’re buying a £200,000 property and the lender will lend 75% of its value, you must pay the remaining 25% (£50,000) as a deposit. In practice, this deposit is the cash (or equivalent security) that makes the numbers work for the lender.
Loan-to-Value (LTV) and deposit requirements
Bridging lenders set a maximum loan-to-value (LTV) ratio to control risk. LTV is simply the loan amount divided by the property’s value (expressed as a percentage). For example, a 75% LTV means the lender provides 75% of the property’s value in the loan, and the borrower must cover the other 25% with a deposit. Because bridging loans are risky and short-term, lenders often cap LTV at 60–75% (meaning 25–40% deposit) rather than the higher LTVs seen in regular mortgages.
In fact, brokers note that bridging deposit requirements typically fall in the 20% to 40% range of the property’s value. (Some specialist lenders might push to 80–85% LTV in very strong cases, but this is rare.) The exact LTV and deposit will depend on factors like the property type, the borrower’s credit and exit plan, and how quickly the loan must be arranged. In general, higher risk means lower LTV – so a lender might require a larger deposit if the project seems uncertain or the borrower has weaker finances.
Why is a deposit needed?
The deposit (or equity portion) is crucial because it shows the borrower has “skin in the game” and gives the lender a buffer. In a worst-case scenario, a lender could seize and sell the property to recover the loan. A higher deposit means the lender is more likely to recoup their money even if the market dips or costs overrun. For borrowers, the deposit also signals that they are serious and have the financial capacity to complete the deal. Without a sufficient deposit, most bridging lenders will decline the loan or ask for personal guarantees or co-signers.
How much deposit is typically required?
While every lender has its own rules, the broad expectation is that borrowers will cover at least 20–40% of the property’s value, or sometimes more, with their own funds. For example, you’ll usually need a 20–40% deposit for a bridging loan, although requirements can vary. Financing advisers similarly say that deposit amounts typically range from 20% to 40% of the property value. As a concrete example, one lender might fund up to 75% LTV, meaning the borrower needs to provide the remaining 25% as a deposit. In some cases (for very low-risk deals or with extra security offered), a lender might go up to 80% LTV or slightly beyond, but usually at a higher interest rate. Conversely, if a property needs heavy refurbishment or the borrower’s credit profile is weak, lenders often stick to lower LTVs (e.g. 50–60%) and higher deposits. Each lender’s criteria differ, so the deposit can vary depending on the lender, property and borrower’s situation. If you have strong equity in other assets or an experienced track record, you might negotiate a smaller cash deposit, but generally expect to put down a significant sum.
Funding your bridging loan deposit
Coming up with a large deposit can be challenging, but borrowers have several options besides tapping savings. The simplest approach is using personal cash or the proceeds from another property sale. If that’s not available, lenders may accept other forms of security in lieu of cash. For example, a borrower might offer a second charge (a loan secured on another owned property) to stand in for the deposit. In practice, some people take out a second-charge bridging loan on their existing home to raise funds for the deposit on a new purchase. This keeps their primary mortgage in place while unlocking equity as a lump sum. Likewise, some lenders will accept a second charge on land or another building as a “cashless” deposit, meaning the asset’s value replaces cash.
Mezzanine finance
Mezzanine finance sits behind the first mortgage or bridging loan in the capital stack. It is effectively a second loan on the same project, usually at a higher interest rate, that bridges the gap between the senior debt and the borrower’s equity. For property developers, mezzanine funding can significantly reduce upfront equity needs: it can help reduce the amount of deposit that a developer has to raise on a project. In simple terms, if a development needs £1 million and a bank will lend £600k (60% LTV), the developer normally needs £400k. But with a mezzanine lender contributing, say, £200k behind the bank’s loan, the developer now needs only £200k of cash. Mezzanine finance usually involves giving the lender a share of profits or extra fees, reflecting its higher risk.
Equity partnerships or private investors
An individual might partner with a friend, family member or investment fund that provides some of the deposit in exchange for a share of profit. This is essentially an equity injection that lowers your cash deposit requirement. Or you could pledge other assets: for example, some borrowers use a second-charge mortgage on a buy-to-let property or release equity from business assets. In each case, the lender must feel confident their total security (first charge plus any additional charges) covers the loan if sold. Importantly, one cannot simply use one bridging loan to pay the deposit on another bridging loan – lenders will not allow that circular funding. Crucially, you cannot use a bridging loan to raise funds for another bridging loan down payment.
Loan-to-Value (LTV) and risk profile
Remember that all these strategies will affect your LTV. The more security or equity you provide, the higher the LTV you can achieve and the smaller your cash deposit. Conversely, if you offer less security, lenders may insist on a larger cash deposit. As we’ve noted, deposit requirements vary with risk: borrowers with poor credit or projects needing heavy work will face stricter terms, often higher deposit and interest. On the other hand, experienced developers with good track records and solid exit plans can sometimes negotiate more favourable LTVs. In every case, covering the deposit (either in cash or equivalent security) is critical – it protects both borrower and lender by ensuring the loan remains secure.
Conclusion
In summary, a bridging loan deposit is the money (or equivalent security) you must contribute to secure a bridging loan. It often ranges between a fifth and two-fifths of the property’s value, depending on the lender’s LTV limit and the deal’s risk. Understanding LTV is key: higher LTV means less deposit, but usually at greater cost or risk. Borrowers can fund the deposit through personal funds or by using other security, such as a second-charge mortgage or mezzanine debt. In any case, being able to show a solid deposit (or additional collateral) is essential, as it reassures the lender and often determines whether the bridging loan can be approved.
If you are looking for a bridging loan, Rise Funding can help find the best option for you. Whether it’s a construction loan or others, we’re here to help you make a decision with confidence.
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