You have found your dream home and need to move fast, but you haven’t secured a sale on your current property. So, what are your options? We look at the different types of bridging financing available and examples of property purchases that bridging loans that can be used for.
Buying a property using bridging finance offers a fast and flexible solution when time is of the essence. Essentially, funds raised from a bridge loan allow borrowers to act like cash buyers.
This type of borrowing is typically flexible, as the loan is secured against property or other assets owned by the buyer. This enables customers with less-than-perfect credit histories to access much-needed funds.
Funds can be secured against various types of property, including residential, commercial, development plots, and land (even if the land has no planning permission).
Common uses for bridging finance:
- Buying a new home before your current property has sold for purposes of upsizing, downsizing, or relocating
- Stopping the collapse of a property chain
- BTL landlords may use bridging finance to take advantage of property deals when they need to move quickly to secure the opportunity.
- Buying auction property where completion is expected within 28 days
- Cash flow issues for individuals or businesses
- To renovate and upgrade properties.
- To purchase a property deemed not fit for a mortgage.
Before considering applying for a bridging loan for a home purchase, it is important to know exactly what a short-term bridging loan is and whether it is the right product for you. Before you apply, here are some facts you should be aware of:
Bridging finance is short-term
The most common way of purchasing a property is generally through a traditional mortgage. However, if this is not possible, perhaps due to a gap between selling and buying properties, funds can be raised using a short-term bridging loan instead.
Mortgages are long-term loans with typical terms of 20 to 25 years. A bridging loan is a short-term loan that is expected to be repaid in full within 12 months, although it can be extended to 24 months if necessary.
Bridging loans are quick to arrange
One of the biggest advantages of bridging finance is the speed at which funds can be accessed. Traditional mortgages take, on average, two to three months to arrange, whereas a short-term bridging loan can take as little as 48 hours to be approved.
Repayment of monthly interest can be deferred
Bridging loans come with the option to “roll up” interest, which must then be paid at the end of the loan term along with the principal amount. This helps to avoid monthly interest payments and enables you to use the loan solely for the purchase of the property.
A high LTV is available
The majority of lenders offering bridging finance will lend up to 75% LTV (loan to value), but some may go up to 85% for property development. The amount will depend on the circumstances and the amount and type of security being offered by the borrower.
You must have a viable exit strategy
For lenders to even consider an application for bridging finance, the borrower must provide a valid exit strategy. This is an achievable plan to repay the loan in full in the agreed-upon time period following the sale of a property or the arrangement of long-term finance such as a mortgage.
Having an exit plan gives both the lender and borrower reassurance that the loan can realistically be repaid on time. Typically, a few months before the end of the loan term, lenders check-in to ensure everything is going to plan. Should an extension be needed, this is the point at which it can be identified.
There are no additional fees for early repayment
Lenders of long-term loans, like mortgages, generally don’t allow early repayment without additional charges being applied. This is not the case with short-term bridging loans. Most lenders will only charge interest on the actual duration of the loan, so for example, if you have a twelve-month bridging loan but you pay in full in six months, only interest on the precise number of days the loan was outstanding will need to be paid.