Bridging Loan
Looking for short-term, flexible finance to fund a new property or investment purchase? Bridging finance can be a good solution for many people, but it doesn’t come without questions. In this article we’ve pulled together some of the most common questions we get asked about bridging loans, so you’ve got lots of useful information in one place.
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What is bridging finance?
Bridging finance is a popular form of short-term borrowing, designed to bridge the gap between two financial points, often the sale of an existing property and the purchase of a new one.
What is a bridging loan?
A bridging loan is a short-term financing option designed to bridge the gap between the purchase of a new property and the sale of an existing one. It serves as a temporary solution to cover the financial void that arises when there's a delay in selling your current property or accessing long-term funding.
Key Characteristics:
- Short-Term Nature: Bridging loans typically have a duration ranging from a few weeks to up to 12 months. They serve as interim financing until a long-term funding option, such as a mortgage, becomes available or until the sale of the existing property is finalized.
- Secured Loan: Bridging loans are secured against property assets, either the property being purchased or an existing property owned by the borrower. This means that if the borrower fails to repay the loan, the lender has the right to take possession of the property used as collateral.
- Quick Access to Funds: Unlike traditional mortgage applications that can take weeks or even months to process, bridging loans offer rapid access to funds. In many cases, borrowers can receive the loan amount within days of application approval, making them an attractive option for time-sensitive property transactions.
- High-Interest Rates: Due to their short-term nature and the associated risks, bridging loans typically come with higher interest rates compared to long-term financing options like mortgages. However, borrowers are often willing to accept these higher rates in exchange for the speed and flexibility offered by bridging loans.
Common Uses:
- Property Purchases: Bridging loans are commonly used by homebuyers who have found their dream property but have not yet sold their existing home. The loan enables them to proceed with the purchase without waiting for the sale proceeds from their current property.
- Property Auctions: Property auctions often require immediate payment upon winning a bid. Bridging loans allow buyers to secure funding quickly, giving them the advantage in competitive auction environments.
- Property Development: Property developers frequently utilize bridging loans to fund construction projects or refurbishments. These loans provide the necessary capital to cover expenses during the development phase, with the intention of refinancing or selling the property once the project is completed.
- Investment Opportunities: Investors may use bridging loans to capitalize on time-sensitive investment opportunities, such as purchasing undervalued properties or acquiring assets at auction, where quick financing is essential to secure favorable deals.
How do Bridging Loans Work?
Unlike traditional mortgages, bridging loans typically have a quicker application and approval process. They provide borrowers with the flexibility to secure funds swiftly, often within days, enabling them to proceed with their property transactions without waiting for the sale of their current property.
Bridging loans are secured against property assets, which means the property being purchased or an existing property acts as collateral. The loan amount, interest rates, and repayment terms are determined based on the value of the collateral property and the borrower's financial circumstances.
Types of Bridging Loans:
- Closed Bridging Loans: Ideal for borrowers with a definite exit strategy, closed bridging loans have a fixed repayment date. They are typically used when the sale of the existing property is already underway, with a predetermined completion date.
- Open Bridging Loans: Offering more flexibility, open bridging loans are suitable for borrowers who haven't finalized the sale of their existing property. These loans don't have a set repayment date, but they generally have higher interest rates due to the increased risk.
When to Consider a Bridging Loan:
- You need quick access to funds for a property purchase but are awaiting the sale of your current property.
- You're looking to secure a property at auction, where immediate funding is required.
- You want to take advantage of a time-sensitive investment opportunity.
- You're involved in property development and require short-term financing to bridge construction costs.
Benefits of Bridging Loans:
- Speed: Bridging loans offer rapid access to funds, allowing borrowers to seize opportunities without delays.
- Flexibility: With various repayment options and terms, bridging loans cater to different financial needs and circumstances.
- Bridging Financial Gaps: They help smooth the transition between property transactions, preventing delays and missed opportunities.
- Accessibility: Bridging loans are available to a wide range of borrowers, including individuals, businesses, and property investors.
Conclusion: In essence, bridging loans provide a lifeline for individuals and businesses navigating property transactions amidst financial uncertainties. Whether you're a homeowner, property developer, or investor, understanding the intricacies of bridging loans can empower you to make informed decisions and seize opportunities with confidence. If you're in need of swift and flexible financing to bridge the gap in your property transactions, a bridging loan might be the perfect solution for you.
What’s the difference between a bridging loan and a bridging mortgage?
There isn’t one. There are a few different terms that are used for bridging finance that are interchangeable, so if you hear or read about bridging loans, bridging finance and bridging mortgages it’s all referring to the same type of short-term borrowing.
What would I use it for?
There are all kinds of different situations where bridging finance could be a useful form of borrowing, both for individuals and for companies.
These could include:
Buying a new property
Before the sale has gone through on an existing one. This could be a residential home or a business premises - bridging finance is available for both personal and commercial purposes.
To avoid the collapse of a chain
There’s nothing worse than having your chain all set up and ready to go only to be let down by your purchaser. Bridging loans can be a handy way to plug the gap to make sure you can go ahead and buy your new home while you look for a new buyer.
Buying commercial property
You often need to act fast in the business world, but commercial mortgages can be complex and take a long time to arrange, so a commercial bridging loan is a good option if you need to move fast.
Buying an uninhabitable property
Most lenders won’t give you a mortgage on a property that’s not livable, which includes having a kitchen and bathroom, good drainage and generally being weatherproof. You can use bridging finance to fund the purchase while you get the property up to scratch and eligible for a mortgage.
How much can I borrow?
The amount you’re eligible to borrow will depend on your personal circumstances but there are lenders able to offer small loans from around £25,000, up to huge loans of tens of millions of pounds or more.
How do I apply?
Applying for a bridging loan is more straightforward than a traditional mortgage but there will still be plenty of hoops to jump through. A lender will want to carry out credit checks, see evidence of your financial circumstances and also carry out a valuation of the property you’re securing the loan against. They’ll also need to see a strong exit strategy in place.
What’s an exit strategy?
An exit strategy is a plan for how you’re going to repay the loan at the end of the term. For example if you’re getting a bridging loan to buy a house while you wait for the sale of your existing home, the exit strategy would be to repay the loan with the proceeds of the sale when it goes through.
Do I have to make monthly repayments?
No, bridging loans are always on an interest-only basis, which means that you only pay back the capital at the end of the term. Interest payments can be made on a monthly basis if you have the available cash flow, but there are other ways to structure interest repayments if you don’t want to have a monthly commitment.
Can I get bridging finance with bad credit?
Potentially, but it will make it more difficult. Lenders will want to carry out credit checks to assess your reliability and ability to repay your loan, and if you have a history of defaults or missed or late payments then you’ll be viewed as higher risk. That’s not to say that a bad credit credit will mean a definite no, it might just mean approaching a more specialist lender or accepting slightly higher rates or lower LTV limits to offset the perceived risk.
How long can I have bridging finance for?
Bridging finance is designed to be a short-term funding solution so it isn’t offered on the same terms as a regular residential or commercial mortgage. You can find loans available for periods as short as three months, or up to three years, but around 12 months is typical.
Is bridging finance expensive?
It’s not necessarily the cheapest option, but you’re paying a premium for the ability to borrow large amounts of money quickly and flexibly. Interest is normally charged monthly, so if you are able to repay sooner, you could save significant amounts of money.
How quickly can I get a bridging loan?
Speed is one of the main advantages of a bridging loan, so expect things to move more quickly than with a standard mortgage. Rather than weeks, most bridging finance can be approved within days, sometimes it could even be hours in the right circumstances.
Do I need a broker?
Yes, if you want to get the best interest rates it’s always a good idea to get some support from a bridging loan broker. They’ll have access to the whole of the market and have relationships with lenders. They’ll be able to negotiate on your behalf and guide you through the whole process, saving you money, time and stress.
Will I need to pay charges to repay the loan early?
Not usually. Most bridging loan lenders don’t impose early repayment charges (ERCs) so if you pay off the loan earlier than originally planned it won’t cost you anything extra. You will need to factor in other fees though. Most lenders will have an arrangement fee as a percentage of the capital loan amount.
Conclusion
If you have more questions about bridging finance that haven’t been answered here then do get in touch. We’ve got a wealth of expertise and experience that we’re happy to share.
Ready to talk? Speak to an expert today: 0800 077 8980
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