How Does a Bridging Loan Work?

Bridge Loan

Contrary to popular belief, a bridging loan has the potential to be a surprisingly simple and versatile funding solution. No longer confined to commercial borrowing circles or big business, bridging finance has well and truly hit the mainstream as of late.

But how exactly does bridge finance work in practice? More importantly, who can qualify for bridging loans, and when is taking out bridging finance a good option to consider?

How bridging loans work

The best way to understand how bridging loans work is to consider a couple of everyday scenarios:

Scenario 1. Bridging loans for property chain breaks

  • A homeowner with £500,000 equity in their home applies for a bridging loan of £300,000
  • The loan is secured against their current home and the funds are released within a week
  • This enables the borrower to purchase their next home (on sale at £300,000) for cash
  • Their previous home remains on the market until it sells for its best possible price
  • When their previous home sells a few months later, they repay the loan in full
  • Interest accrues at a rate of around 0.5% in the meantime and is repaid along with the loan balance
  • By taking out a bridging loan, the borrower was able to avoid the risk of their planned property purchase falling through

Scenario 2. Bridging loans for property purchase, renovation and sale

  • A property in a poor state of repair is put on sale at auction for much lower than its potential market value
  • An investor places a bid on the property and is successful, but must come up with the full payment within 28 days
  • They take out a bridging loan against their own home or another property they own, accessing the funds promptly
  • The loan is used to purchase the property and cover the costs of all subsequent renovations
  • A few weeks or months later, the property is sold for its full market value to a new buyer
  • The investor then repays the loan in full and retains all additional profits

In both instances, the borrower benefits from rapid access to a significant sum of money, enabling them to make a purchase that would be impossible with most conventional borrowing products.

Who is eligible for bridging finance?

Along with the flexibility and affordability of the facility, accessibility is another major point of appeal with bridging finance. Eligibility criteria are comparatively relaxed, at least when held alongside a typical mortgage or personal loan application.

The main requirement is ownership of assets of value to offer as security for the loan. For example, if you own a home with a value of £500,000, you may be able to borrow up to 80% of this value (at 80% LTV), which would be £400,000. Without adequate security, you cannot take out bridging finance.

Other than this, you will need to present your lender with evidence of a workable exit strategy, for example, how and when you plan to repay the loan. For example, if you are buying a property to renovate and sell, your exit strategy would be the subsequent sale of the property.

With viable security and a convincing exit strategy, you have a high chance of qualifying for bridging finance. Even if you have imperfect credit and/or no formal proof of income, you may still be considered for a bridging loan.

However, in all instances, it is advisable to apply via an independent broker, who can help pair your requirements with an appropriate lender. The UK’s network of bridging loan specialists is growing at its fastest pace, making the input and advice of a skilled broker more valuable than ever before.

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.