At the risk of jumping straight to the conclusion, no financial product is an effective one-size-fits-all solution. The whole thing is highly circumstantial, based entirely on your requirements at the time, coupled with what you can comfortably afford.
Bridging finance is no different, which in some instances can be no less than a godsend. One of the most commonly misunderstood financial products to have hit the mainstream market as of late, bridging finance has the potential to be uniquely versatile, accessible, and even affordable.
Again, in the right instances and when taken out under the right circumstances.
How do bridging loans work?
Perhaps the simplest way to think about a bridging loan is as something like a very short-term mortgage. Bridging finance is issued in the form of a secured loan, typically against a home or commercial property. The amount you can borrow is therefore tied to the value of this security, typically up to a maximum LTV of 80%.
So, if you have built up £250,000 of equity in your home, you could borrow up to £200,000.
The key difference is that with a bridging loan, the funds can often be accessed within a few working days. After which, the loan is repaid in full no more than a few months later, in a single lump-sum payment plus borrowing costs.
Monthly interest can be as low as 0.5%, adding up to a very competitive form of borrowing when repaid promptly.
When is a bridging loan useful?
There are countless scenarios where this kind of fast-access, short-term cash injection could be hugely valuable.
Typical applications for bringing in finance include the following:
- Refurbishments: A short-term loan can be just the thing to cover the costs of renovations or repairs, prior to selling or letting out a property to maximise its value.
- Chain Break: Homebuyers can use bridging finance to ‘bridge’ the gap between buying their next home and selling their current home, avoiding potential chain break scenarios.
- Property Development: Construction companies and developers often turn to bridge finance to cover their short-term funding requirements while conducting projects.
- Auction Purchases: Bridging finance provides an affordable way to meet the 28-day payment requirements of auction houses when purchasing properties.
- Inheritance Tax (IHT): If you need to pay a large IHT bill in order to gain access to your inheritance, you could take out a bridging loan and repay it when you receive your money.
In short, anytime you need a sizeable cash injection in a hurry and can comfortably repay the loan within a few months at the most, bridging finance could be just the thing.
What are the benefits of bridging loans?
Bridging finance holds four main points of appeal when compared to the vast majority of mainstream loans and funding solutions:
- Fast: If you submit a strong application complete with all required evidence and documentation, the money you need could be in your hands within 3 days.
- Flexible: There are no limitations placed on how you can allocate the funds you receive, as is often the case with other types of loans.
- Accessible: It’s possible to qualify for bridging finance with no formal proof of income and even a poor credit history.
- Affordable: Charged at as little as 0.5% per month, a promptly repaid bridging loan can be a surprisingly cost-effective option.
Just as long as you have sufficient assets of value to offer as security and a viable exit strategy, you have a good chance of qualifying for a bridging loan.
When is bridging finance not a good idea?
As with all secured loans, risks apply when taking out bridging finance. If you are unable to repay your loan as agreed, your asset (i.e., your home or business property) could be repossessed.
In addition, bridging finance is only affordable when repaid promptly; therefore, it should never be taken out as a longer-term solution. If you have the slightest doubt as to your capacity to repay the loan in full and on time, you should not even consider applying for bridging finance.
For more information on any of the above or to discuss the pros and cons of bridging loans in more detail, contact the team at UK Property Finance anytime.