Information – Bridging Finance

Bridging Loans – Key Information

A bridging loan is a type of short-term financing that can help individuals or businesses “bridge” the gap between purchasing a new property and selling their existing one. It can also be used in various other situations where quick, temporary cash is needed. Here are some key points about bridging loans:

• Short Term: Typically, bridging loans are short term, usually up to 12 months, but some lenders might offer terms up to 24 months or longer.
• Fast Funding: One of the advantages of a bridging loan is the speed of access to funds. This can be particularly useful in property transactions that require quick completion.
• Interest Rates: The interest rates on bridging loans are higher than for long-term loans or mortgages due to their short-term nature and the higher risk associated with them.
• Secured Loans: Bridging loans are secured against property. This means the lender has a claim (1st charge) on the property if the loan is not repaid.
• Flexibility: They are often more flexible in terms of the lending criteria than traditional bank financing, which can be beneficial for borrowers with unique needs or situations.

Bridging loans offer flexibility and speed, making them suitable for a variety of scenarios, especially in real estate and property development.

Here are several situations where you might consider using a bridging loan:

1. Buy-to-Let Refurbishment (BRRR – Buy, Refurbish, Refinance, Rent)

This strategy involves purchasing a property, refurbishing it to add value, refinancing it at its new higher value, and then renting it out. A bridging loan can be used to quickly purchase the property and fund the refurbishment before refinancing to a long-term mortgage.

2. Title Split

If you’re buying a property that you intend to split into multiple units (e.g., converting a house into flats), you may not be able to secure a traditional mortgage until the work is complete and the title is legally divided. A bridging loan can provide the funds to purchase the property and complete the necessary works and legal processes.

3. Development Projects

For new build projects or extensive redevelopment projects where traditional financing might not be available or sufficient, bridging loans can provide the necessary capital to start and complete the project before securing longer-term financing or selling the developed property.

4. Purchasing Unmortgageable Properties

Properties that are considered unmortgageable by traditional lenders due to their condition or other factors (e.g., structural issues, no bathroom or kitchen) can be purchased with a bridging loan. The borrower can then make the necessary repairs or modifications to make the property mortgageable.

5. Auction Purchases

Buying properties at auction often requires quick payment, typically within 28 days of the auction. Bridging loans can provide the funds to meet these deadlines, allowing buyers to capitalise on auction opportunities without having the full purchase price immediately available.

6. Chain Break Financing

To prevent a property purchase from falling through when there’s a break in the sale chain, a bridging loan can be used to finance the purchase until the original property sale can be completed.

7. Quick Completion Requirements

When a property purchase requires completion faster than a traditional mortgage can be arranged, a bridging loan offers a quicker alternative, ensuring the buyer doesn’t lose out on the purchase.

8. Short-Term Cash Flow Solutions

Businesses or individuals needing short-term cash for reasons other than property investment (e.g., covering a temporary cash shortfall) might consider a bridging loan, although this is less common and can be riskier.

9. Lease Extension

If purchasing a property with a short lease, a traditional mortgage might be difficult to obtain. A bridging loan can finance the purchase and the cost of extending the lease.

10. Planning Gain

Investors purchasing land or property with the aim of obtaining planning permission can use bridging loans to fund the purchase and planning process. Once permission is granted, the property’s value may increase, and the loan can be paid off through refinancing or selling.

In each scenario, the common thread is the need for fast, flexible, and short-term financing to bridge a gap until a more permanent financial solution is in place. Bridging loans are powerful tools but come with higher interest rates and fees, making it crucial to have a solid exit strategy before taking one out.

Contact us , our financial experts can guide you with entire process from initial consultation to exit.