Why Choose A Bridging Loan?
Bridging finance comes with a number of benefits – find out the reasons to choose one for your funding needs
Bridging finance comes with a number of benefits – find out the reasons to choose one for your funding needs
Why do people take out bridging loans?
There are many reasons why people take out a bridging loan, although the main benefits all centre on two major features, speed of application – they can be arranged very quickly – and the second is flexibility.
Bridging finance lenders tend to be very flexible, allowing you to borrow in unusual circumstances, or against unusual security. Some of the major uses are as follows:
- Buying property at auction
- Complete a property purchase before your current property has sold
- To prevent repossession
- To raise funds needed to complete a major refurbishment or extension to a property
- To complete a below market value purchase
- Raise capital quickly
What is a bridging loan?
A bridging loan is a short term type of property finance, which is secured against either property or land. They are designed to fund a gap between 2 events taking place such as buying a property before selling another one or carrying out a refurbishment before taking out a mortgage.
Breaking down the reasons for taking out a bridging loan
In this section, we break down the main reasons why bridging finance could be the right option for you if you’re in need of a short-term lending solution.
Buying a property at auction
When buying a property at auction, short-term bridging finance, also known as auction finance, is the natural choice. This is due to the time-sensitive nature of auction purchases. Once a property is won at auction, the transaction must usually be completed within 28 days.
As they can be completed quickly, they are generally more suitable for auction purchases than mortgages.
Buying a property before your current property has sold
Maintaining a place in a chain is a common reason for taking out bridge finance. When your current property is yet to sell and your purchase must be completed, this can lead to a chain collapsing.
A chain break bridging loan can be used to bridge the gap between the purchase and sale. Once your current property is sold, the finance can be repaid from the proceeds.
To prevent repossession
When the threat of repossession is imminent, bad credit bridging loans can be used to repay arrears and allow you to take back control of the property. Where interest is rolled up, the pressure of monthly payments on a mortgage can be taken off you. Usually, the property will then be sold by the borrower at full value, or even refinanced to a new lender to repay the loan.
Funding major refurbishment or extending a property
Mortgages are designed to enable you to purchase and live in, or let a property. Where heavy refurbishment or building works are to be undertaken, you may be breaking your mortgage terms and conditions.
This is where refurbishment bridging loans can be used, and the lender may even be happy to lend you the funds needed to carry out your refurbishment. When raising funds to undertake a refurbishment, property refurbishment finance is usually the best product.
To complete a below market value purchase
When purchasing a property below market value (BMV), some lenders are happy to lend up to 100% of the purchase price of the property. These products, known as open market value bridging loans, enable investors to purchase a property without putting down a deposit.
This would not be possible using a mortgage, as the maximum LTV is usually based on the lower of the purchase price, or open market value.
To raise capital quickly
When looking to raise capital quickly, say to purchase a property or raise money to start a small business, a short term bridge is often a very good option. As they are secured against property, you are often more likely to be approved than you would be for a personal loan.
Also, it is far quicker to arrange than other longer-term lending alternatives. This makes bridging finance the ideal choice for those looking to raise capital quickly.
Downsizing
When looking to downsize your home, bridging finance can be a good option when looking to purchase before selling. This means that you can carry out a refurbishment of the new property before moving in or be in a position to buy before your property is sold.
Development exit
Development exit finance is a great tool when looking to refinance away from more expensive development finance, to raise capital while achieving a sale or to buy more time to sell.
The key to any project is maximising profit, a development exit bridge can be a useful option.
Planning gain
Planning gain finance is used when you require time to obtain, or amend planning permission. This can be secured against a property you are looking to extend or develop, or a pure parcel of land.
This product allows you time to obtain the planning permission and either sell the site for profit or refinance onto development finance.
No monthly payments
As most forms of bridging finance have no monthly payments, due to interest being added, they can be a great option when looking to reduce monthly outgoings.
A common example is when looking to clear a mortgage and debts while selling.
Equity release
Before taking out an equity release mortgage, it can be advantageous to use bridging to maximise the property value to enable you to borrow more when refinancing onto equity release.
This may not be possible with a standard mortgage, especially for older clients where affordability may be an issue. In this instance, a bridge lender wouldn’t take affordability into account.
Business purposes
A business bridging loan can be used to inject cash into a business, purchase premises, buy assets or machinery and to fund expansion.
In this case, affordability isn’t taken into account meaning you can buy time to submit new trading accounts before applying for a commercial mortgage at a lower interest rate.
What is the difference between a standard mortgage and a bridging loan?
The there are several differences between mortgages and bridging loans. Firstly, mortgages are designed to be taken for the long term and generally arranged for between 5-35 years.
Although bridging finance is also secured against property, the term is much shorter. Usually, bridging loan terms are between 1-18 months.
As mortgage terms are so long, with between 60-420 monthly repayments required to repay it in full, a detailed affordability assessment is compulsory to ensure that missed payments and defaults are kept to a minimum. This is a time-consuming process, meaning they often takes 6 weeks or more to complete.
The underwriting of a mortgage is focussed on the ability to maintain the monthly payments over the long-term. This differs greatly from the underwriting of a bridging loan.
The monthly interest on bridging finance is usually rolled into, or deducted from the loan. As there are often no monthly payments to make, the underwriting process is much simpler, focussing only on how it will be repaid. This is known as your exit strategy.
If the property is to be sold, and the interest rolled up, then the underwriting can be very light touch and based on the sale of the property.
Where this is to be exited through a refinance, the lender will be satisfied if it can be proven that a refinance is realistically available.
How do I know if I qualify for a bridging loan?
To check if you’re eligible for a, you should check that you meet the lenders criteria. Most people are eligible for bridging finance, as lenders tend to be very flexible. The application is largely based around your intended exit route and the equity available in your property. The whole process can be made simple with the help of a specialist broker.
By talking to one of our bridging loan advisors, we will be able to give you an idea of your eligibility over the phone, and a written agreement in principle within 2 hours.
Does it matter which bridging loan you choose?
Yes, the type of product that you choose will have a big impact on the outcome you receive. For example, so lenders charge high fees should you default on the loan, whereas others take a very fair approach.
Equally, choosing the right type of bridge loan is important, for example, a regulated product when borrowing against your own home, auction finance when buying a property at auction and property refurbishment finance for refurbishment products.
Choosing a lender who is experienced in handling these types of transactions will make the process smoother and reduce the risk of difficulties if you run into trouble.
Are there other options available if a bridging loan isn’t the right choice?
Yes, there are various alternatives available. Where a bridging product isn’t the right choice, but a loan secured against property is required, you should consider both secured loans and mortgages.
