You’ve likely come across the term ‘bridging loan’ while figuring out how to finance a property transaction that requires you to act fast. And, importantly, how to bridge the gap between your immediate financial needs and availability of funds. In such circumstances bridging finance offers the flexibility and speed that regular loans can’t provide. Read on to learn more about whether this is the type of loan you require.
What are bridging loans?
A bridging loan is a temporary funding solution that helps cover immediate financial needs while waiting for long-term financing to come through or an asset to be sold. They are typically secured against property and usually last from a few weeks to 24 months. The loan is repaid through the sale of an asset, replaced with long-term financing or another planned exit strategy.
How do bridging loans work?
Here are some examples of how a bridging loan works in practice:
1. Property Transactions: Homebuyers can use a bridging loan to purchase a new property before selling their existing one, ensuring they don't miss out on their dream home.
2. Property Development: Developers use bridging finance to swiftly acquire and renovate properties, aiming to sell them at a profit or refinance them into long-term mortgages.
3. Auction Purchases: Given the rapid completion times required in property auctions, bridging loans offer a quick financing solution to secure purchases.
What are the advantages of bridging finance?
There are several reasons why bridging loans are an attractive finance solution among property developers and investors including:
- Speed: Quick approval and funding, typically within days.
- Flexibility: Can be used for various purposes (property purchase, development, etc.).
- No need for a perfect credit score: Lenders may be more willing to approve applicants with non-standard circumstances.
- No early repayment penalties: Some bridging loan providers allow you to pay off the loan early without additional fees.
- Loan-to-Value: Bridging lenders often provide higher Loan-to-Value (LTV) ratios, enabling you to borrow a greater proportion of the property's value.
What are the disadvantages of bridging finance?
It's important to note that while bridging loans are flexible, they are not without risks. Some of the drawbacks include:
- Higher interest rates: Bridging loans typically come with higher interest rates than conventional mortgages.
- Short repayment terms: The pressure of repaying the loan quickly can be a challenge, especially if the sale of the property or your exit strategy doesn't go to plan.
- Risk of losing the property: If you cannot repay the loan on time, you risk losing your asset (usually property) used as collateral.
- Additional fees: These typically include arrangement fees, valuation fees, legal fees, broker fees and possibly exit fees too.
How to apply for a bridging loan
Bridging finance is typically only available via a broker and through specialist lenders, rather than high-street banks.
A broker will guide you through the process of applying for a bridging loan from start to finish, discussing factors such as:
- Eligibility criteria: What lenders will look for (creditworthiness, property valuation, etc.).
- Loan-to-value (LTV): What percentage of the property’s value you can borrow.
- Documents required: What paperwork applicants need to provide (proof of income, property documents, etc.).
- Loan terms: Typical terms and conditions involved, including interest rates and repayment schedules.
Key considerations before taking out a bridging loan
Bridging finance is not suitable for everyone, here are some factors to consider before you take out a bridging loan:
- Exit strategy: It's crucial to have a clear and viable plan for repaying the loan, such as through the sale of a property or securing long-term financing.
- Risk assessment: Due to higher interest rates and fees, borrowers should carefully assess the total cost and ensure that the benefits outweigh the expenses.
- Your financial circumstances: If you're struggling financially and uncertain about your future income or asset sales, a bridging loan might add pressure rather than help.
How Bridgemore Capital can help
At Bridgemore Capital we specialise in flexible funding solutions to bring your property projects to life. We offer a comprehensive suite of services tailored to meet specific needs. No matter if you're an experienced developer or just beginning your journey, our team blends industry expertise with a practical, approachable mindset to turn financing from a challenge into a viable solution.
Get in touch to discuss your finance requirements today.
