In the world of property and finance, sometimes the unexpected happens, and you need access to funds fast.
A bridging loan can be a lifeline, providing a quick and flexible solution to bridge the gap when you need to access capital urgently. From breaking frustrating property chains to funding exciting home renovations, bridging loans offer a range of possibilities. However, their short-term nature and higher interest rates mean they’re not suitable for everyone.
How Bridging Loans Work
Bridging loans are designed to meet short-term financial needs, usually lasting from a few weeks to a few years.
They provide temporary funding until a more permanent financial arrangement, such as a traditional mortgage, can be secured.
To obtain a bridging loan, you’ll need to provide security in the form of a property – this could be the one you’re buying or an existing property you own. The amount you can borrow is determined by the Loan-to-Value (LTV) ratio, which represents the percentage of the property’s value that the lender is willing to lend.
The most common LTV is 75%. A 75% bridging loan allows you to borrow 75% of the property value. Some lenders will go up to 90% LTV for a bridge loan, and if you have additional property or assets, 100% LTV funding could be possible.
While bridging loans offer speed and flexibility, it’s important to be aware that they come with higher interest rates than traditional mortgages. This is due to their shorter term and the increased risk they pose to lenders.
Repayment options for bridging loans are flexible. You can choose to make monthly interest payments, or you can opt to “roll up” the interest, meaning it’s added to the loan amount and repaid in full at the end of the term.
Having a clear exit strategy is paramount when considering a bridging loan. This is your plan for repaying the loan at the end of the term. Common exit strategies include selling a property, refinancing onto a longer-term mortgage, or receiving an anticipated lump sum.
10 Common Uses for Bridging Loans
Bridging loans are remarkably flexible and can be used in various scenarios where quick access to funds is needed. Let’s explore ten common situations where these versatile loans can make all the difference:
Broken Property Chain
The property market can be unpredictable, and a broken chain can put your dream home at risk. Imagine finding the perfect property, only for the sale to fall through because someone further up the chain pulls out. It’s heartbreaking, but a bridging loan can step in, allowing you to secure your new home even if your current property hasn’t sold yet. This prevents you from missing out on a golden opportunity and keeps your purchase moving forward.
Property Refurbishment
Transforming a property through renovations can significantly increase its value. However, securing traditional finance for a property in need of work can be difficult. Bridging finance provides the necessary funds to revamp a property, whether it’s a minor face-lift to modernise the kitchen or a major overhaul to create an open-plan living space. This allows you to maximise its value before selling or remortgaging.
Auction Purchases
Winning at auction is exhilarating, but the quick completion deadlines can be a struggle. When you win an auction, you usually need to pay a 10% deposit immediately and complete the purchase within 28 days. Bridging loans offer the rapid access to funds needed to secure your auction purchase. Compared to traditional mortgage applications, which can take weeks or even months, a bridging loan can often be arranged in a matter of days, ensuring you meet those critical deadlines and don’t lose your deposit.
Uninhabitable Property Purchase
Properties requiring significant work are often overlooked by buyers and can be more affordable. A bridging loan can help you unlock the potential in these ‘fixer-uppers’. By providing the funds to purchase and renovate, you can transform an uninhabitable property into a comfortable home or a profitable investment. Once the work is complete, you can refinance onto a traditional mortgage or sell the property for a higher price.
Business Purposes
Businesses face a range of financial challenges, from seasonal dips in sales to unexpected expenses, tax bills or exciting expansion opportunities. Bridging loans can offer a short-term solution, providing a quick cash injection to cover immediate needs. They can be used for various purposes, including bridging a cash flow gap, funding a VAT bill, buying another business, purchasing stock or equipment, buying out a partner or even funding a new business venture, giving your business the boost it needs to thrive.
Land Purchase
Acquiring land, whether for development or investment, can be a lucrative opportunity. However, traditional finance for land can be tricky, particularly when awaiting planning permission or longer-term funding. Bridging finance for land enables you to secure the plot while you finalise your plans or arrange more permanent financing, ensuring you don’t miss out on a prime opportunity. Planning Gain Finance enables developers to acquire promising sites and significantly increase their value through strategic planning applications.
Repossession Prevention
Facing repossession is a stressful situation, but a bridging loan can sometimes offer a way out. It can provide the funds needed to stop repossession proceedings, giving you breathing space to restructure your finances or sell your property on your terms. While it’s important to explore all options and seek professional advice, a bridging loan can potentially offer a lifeline in a difficult situation.
Downsizing
Downsizing to a smaller property can bring numerous benefits, but coordinating the sale of your existing home and the purchase of a new one can be challenging. A bridging loan can make this transition smoother, allowing you to buy your new, smaller home before selling your current one. This gives you the flexibility to move at your own pace and find the perfect property without feeling rushed.
Inherited Property
Inheriting a property can come with financial responsibilities like inheritance tax or unexpected maintenance costs. A bridging loan can help you manage these expenses before selling the property. This allows you to make informed decisions about the property’s future without the pressure of rushing into a sale.
Can You Get a Bridging Loan Without a Mortgage?Second Charge Bridging Loans
Even if you have an existing mortgage, you may still be able to access additional funds through a second charge bridging loan. This loan is secured against your property but takes a ‘second charge’ position behind your existing mortgage. It can be a useful option if you need quick access to capital without affecting your current mortgage arrangements. Second charge bridging loans offer flexibility for various needs, from home improvements and debt consolidation to investment opportunities.
Bridging loans offer fast access to funds in a variety of situations.
Their speed, flexibility, and diverse applications make them an appealing option for many.
However, it’s important to remember that bridging loans are a short-term solution and have higher interest rates than traditional mortgages. Before proceeding, seek expert advice from an independent broker.
They can assess your financial situation, explore your options, and guide you on whether a bridging loan is the right choice for you.
If you’re considering a bridging loan and would like personalised advice tailored to your situation, feel free to get in touch.
FAQ
Bridging loans are known for their speed and can often be arranged within days or weeks.
Read more: Fast Bridging Loans: Rapid Financing for Property Investors
The amount you can borrow depends on the Loan-to-Value (LTV) ratio, which is the percentage of the property’s value that the lender is willing to lend. We have access to lenders offer up to 80% LTV, but this can vary.
The majority of bridge loans don’t require any monthly repayments. You pay the lender back using one lump sum, which includes the amount you borrowed, any added fees and the interest.
An exit strategy is your plan for repaying the bridging loan at the end of the term. It’s important to have a clear and realistic exit strategy in place before taking out a bridging loan to avoid financial difficulties.
This depends. If the loan is associated with your home or soon to be home, then yes it will be regulated. But if you are borrowing against a holiday let, buy to let, MUFB, commercial property etc then these will be unregulated and outside of the protection provided by the FCA.
Read more: Are bridging loans regulated by the FCA?
While a good credit score is beneficial, it’s not always essential for obtaining a bridging loan. Lenders will consider your overall financial situation, including your exit strategy and the value of the property used as security.
Yes, you can get a second charge bridging loan even if you have an existing mortgage on your property. This loan takes a second charge position behind your existing mortgage.
Yes, bridging loans can be used for both residential and commercial properties, providing flexibility for various investment and business needs. If you are buying a commercial property then there’s likely to be VAT to pay on top of the purchase price. A VAT bridging loan can provide the funds needed to cover the VAT bill, preserving your cash-flow position.
Owner-Occupied Commercial Mortgages are available for businesses that will occupy the property to be purchased.
Yes, this is widely available.
