The property market is so hot that in many parts of the country you need to be able to make an offer at lightning speed if you want to secure your dream home – or any home for that matter.

Estate agents in hot spots often put a property on the market in the morning, and see their client accept an offer above the asking price in the afternoon. Some properties are so popular that they go to sealed bids – an auction process in which you do not know how much other people are bidding.

You may also need to be quick on the draw if you want to buy a new property. Many developers are only willing to accept an offer from a buyer who can exchange contracts within 28 days.

All this puts you at a big disadvantage if you already own a property and are looking to trade up. Putting in an offer for your next property without having a buyer lined up for your existing one can be a big gamble because some vendors will entertain an offer only if the property you are selling is already under offer. This is a particular problem if you are under pressure to exchange contracts on your new property as soon as possible.

So how does a bridging loan help?

It enables you to buy a new place before you have sold your existing home. During the transition period, you will own two properties, and the chances are you will be heavily in debt as a result. A bridging loan could be the only way to borrow enough to tide you over.

How does it work?

Take the example of a couple owning a £300,000 flat, on which they have an outstanding mortgage of £150,000. They have fallen in love with a house selling for £500,000, but the seller will only accept their offer on condition that they exchange contracts within four weeks and complete the purchase within six weeks. The trouble is that they cannot sell their flat in that time frame. Their savings can cover the £20,000 stamp duty, conveyancing fees and other expenses, but they need to borrow £500,000 to pay for the house. They cannot persuade a bank to lend them 100 per cent of the house’s value because their combined income is not high enough, so they need a bridging loan.

What are the terms of a bridging loan?

In the above example, the couple’s bridging loan would be £500,000. They would have to pay an arrangement fee, which on a typical bridging loan is 1 per cent of the loan – £5,000 in this case. The interest rate would be about 1 per cent a month, or £5,000 monthly. They might also face an exit fee of 1 per cent. So even if the bridging loan only lasts for two months, it could cost them a total of £20,000.

That’s a lot of money – is there any way to defer payment?

You can “roll up” the interest payments and fees, and add them to your new mortgage after you have sold your old place. In the above example, the couple could sell their old home and take £150,000 proceeds from the sale, after paying off their old mortgage. They would set this £150,000 against the £500,000 bridging loan and £20,000 in rolled-up costs, leaving them with a debt of £370,000 that they should be able to cover with a standard mortgage.

Should a bridging loan be the first option I consider?

No, according to Ray Boulger, senior technical manager at John Charcol, the mortgage consultants. “People should not assume they need a bridging loan,” he says. “In most cases it would be cheaper to take out a 100 per cent mortgage.”

If you can do this (that is, you have sufficient income to secure a conventional mortgage), he advocates a deal with a short tie-in period, or otherwise a mortgage that allows you to make a big extra repayment without incurring a penalty when you receive the proceeds from the sale of your original property. Boulger adds that although bridging loans are popular in a hot property market, they can leave you in the lurch if the market slows and you have trouble selling your original property.

So why would someone take out a bridging loan?

Not everyone can take on a 100 per cent mortgage – you need a strong credit rating and a high income relative to the amount you are borrowing. Boulger says that for sums of £500,000 or more, Scottish Widows is the only lender that will consider a 100 per cent mortgage.

What is the best deal out there?

Boulger highlights an offering from the Royal Bank of Scotland, with a 1 per cent arrangement fee for loans of up to £500,000, and 0.8 per cent for larger loans. The annual interest rate is 2.25 per cent above the Bank of England base rate, which works out at 0.6 per cent a month. There is no exit fee.

That’s still pretty expensive. Is there a better option?

Lloyds TSB offers a “closed” bridging loan, where you agree in advance when you will repay the full amount. This could be suitable if you have agreed the completion date for the sale of your original property. The arrangement fee is 0.5 per cent, and the annual interest rate is 1 per cent above the Bank of England base rate.

How big is the market for bridging loans?

Fairly small – the total value of outstanding bridging loans is £200m, according to the British Bankers Association. But that figure is deceptive, because a bridging loan only lasts for a few weeks or months – so the value of bridging loans made every year is probably about £1bn.