- Bridging loans can be arranged quickly
- They are a short-term solution that allows you to borrow in unusual circumstances or against unusual security
- Your choice of lender is key to avoiding problems further down the line.
Why do people take out bridging loans?
There are numerous reasons why people choose to take out a bridging loan. The main benefits all centre around two major features, the speed of application – bridging loans 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 of bridging loans 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 type of short-term loan, which is secured against either property or land. These loans are arranged as a short-term product, which is used to fund a gap between 2 events taking place.
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 essentially loans secured against property and are designed to be taken for the long term. They are generally arranged for between 5-35 years.
Although bridging loans are also loans 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, detailed underwriting is required to ensure that 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 loans 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 the loan 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 the loan is to be exited through a refinance, the lender will be satisfied if it can be proven that a refinance is realistically available.
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 in 28 days.
As bridging loans 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 a bridging loan. When your current property is yet to sell and your purchase must be completed, this can lead to a chain collapsing.
A bridging loan can be used to bridge the gap between the purchase and sale. Once your current property is sold, the bridging loan 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.
To raise funds needed to complete a major refurbishment or extension to 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 conditions. This is where 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, some bridging loan 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 loan to value 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 bridging loan 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 a bridging loan than other longer-term lending alternatives. This makes bridging finance the ideal choice for those looking to raise capital quickly.
How do I know if I qualify for a bridging loan?
To check if you’re eligible for a bridging loan, you should check that you meet the bridging loan 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 bridging loan 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 a few bridging loan alternatives available. Where a bridging loan isn’t the right choice, but a loan secured against property is required, you should consider both secured loans and mortgages.