Bridging loans are a short-term finance solution. In the UK, they are often used for short periods to fund the purchase of a new property before your current home has sold. However, in reality, bridging loan terms can be as short as a few days up to around three years.
Here are a few key points:
Swift funding: Bridging loans are typically approved and disbursed within a shorter time frame compared to conventional loans. They are especially useful for acquiring high-value assets promptly.
Flexibility: This type of loan can be tailored to suit specific situations. Whether you’re purchasing a new property before selling the old one, or investing in a high-value project, bridging loans can bridge the financial gap.
Interest rates: Due to their short-term nature, bridging loans generally have higher interest rates.
Risk: If the exit strategy fails, for instance, if a property sale falls through or if a re-mortgage is denied, the borrower faces significant risk
Professional advice: Given the risks involved, it is prudent to seek advice from a financial advisor or a broker experienced in bridging loans before proceeding.
Sourcing a bridging loan via a broker is often the most advisable choice. Brokers have access to a vast array of lenders and can source a bridging loan that best suits your requirements and circumstances. They bring industry expertise, negotiating prowess, and an understanding of the current market rates and trends.
How can a bridging loan be used?
We mention helping to avoid breaking a property chain. However, bridging finance is also commonly used to renovate a property before its sale, which is why there is scope for terms of around 36 months. A bridging loan can also be suitable when downsizing to a smaller property to provide capital for the purchase before the sale proceeds of the larger property are received, avoiding lengthier borrowing application processes. Lenders generally place no limit on how the money raised on a bridging loan is used. Their interest lies in understanding how and when the loan will be repaid. Your exit plan needs to be solid.
Bridging loans also provide opportunities to finance a property purchase at auctions, where the tight settling deadline does not allow for standard mortgage arrangement timescales.
Exit plan
The key to securing a bridging loan of any length is your exit strategy, which plays a more significant role in the lending decision, than how you plan to spend the money borrowed.
You will typically have two options:
Closed bridging loan – in this instance, you will know the exact date funds to repay the loan will become available, maybe through the sale of an asset, a bonus, inheritance or another liquidity event that will give you definable means to repay the loan at the end of the agreed term. Lenders will want to see that your exit plan is solid and you will have the required capital to make a full settlement on the given date.
Open bridging loan – open bridging finance provides greater flexibility over the repayment date. When waiting for the sale of a property or business, where the exact timeframe for completion is not yet clear, an open bridging loan will give you the freedom to repay the lump sum at the point the funds become available rather than a specific date.
Regulated bridging loans are available and secured against your current, previous or future family residence or where the home is or intended to be the home of a family member. Unregulated bridging loans are secured against other property types, such as buy-to-let, development funding or commercial property. In all cases, you must satisfy the lender borrowing criteria and demonstrate that you have a solid plan to exit the loan. This applies however you plan to spend the money raised and whether you use a regulated or unregulated lender.
Often the most competitive bridging finance solutions extend beyond the prominent high-street lending institutions and require experience to navigate successfully in the short time frames most borrowers need. The services of a specialist high-finance broker like Enness Global can help. Particularly when it comes to multi-million-pound arrangements and complex financial structures, such brokers can ensure bridging loans and any associated longer-term borrowing is finalised both as timely and hassle-free as possible.
