A bridging loan can essentially be used for any legal purpose, however, they are usually used as part of a property transaction. As the name suggests, bridging finance is used to ‘bridge’ a gap in a person’s finances before an alternative source of funds becomes available, or before a longer-term finance option can be arranged.
Using an online bridging loan calculator is the best way to understand if your project is viable and what it would cost you if you were to take out bridging finance.
This article outlines the most common uses of a bridging loan, as well as some of its benefits.
Buy before you sell
The most common way a bridging loan is used by homeowners is to purchase their next home before selling their current one. This could be because their buyer pulled out last minute and they don’t want the property chain to break, or simply because their perfect home has come onto the market and they don’t want to miss it.
The bridging loan would be secured on your current property and used to purchase the new one. The bridging loan would then be repaid from the proceeds of the current property being sold later. As the maximum term for a bridging loan is usually 12, or 18 months, this will give you ample time to sell your property, even if it isn’t on the market when you take out the loan.
Buying a property at auction
Bridging loans are ideal for purchasing properties through an auction. Once a successful bid is made at an auction, the buyer has 28 days to complete the purchase which obtaining a mortgage within that timescale may be impossible.
As bridging finance can be arranged very quickly, as little as 48 hours in some circumstances, the loan can be used to purchase the property outright (sometimes with no deposit if you have other properties which can be used as additional security). The most common method of repayment in these circumstances is through re-financing (when you have arranged a mortgage, the money will be used to repay the bridging lender). Bridging finance can also be used if your intention is to purchase the property to renovate and sell on for a profit.
Renovate your home before selling
If you are planning to sell your home, but some renovations would significantly increase the value, bridging finance can be used to fund this.
The bridging loan would be secured on the property and then repaid through the proceeds when the property is sold.
Purchasing an unmortgageable property
Banks and building societies will deem some properties as ‘unmortgageable’ which means the property is unsuitable for mortgage lending. This could be for a variety of different reasons, but common reasons include the lack of a working kitchen/bathroom, it is above a commercial property or the lease is too short.
In these situations, the property is limited to cash buyers as those requiring a mortgage to purchase the property wouldn’t be able to do so. However, as a bridging loan can be secured on any type of property, one can be used to purchase the property and fund any repair works required to make the property mortgageable. The bridging loan would be repaid through re-financing when the mortgage is granted.
Inheritance tax and probate issues
Sometimes, when dealing with inheritance tax and other probate issues, large funds are required. This could be for paying tax and other bills, releasing charges on a property or even to pay off other beneficiaries. In these situations, property is usually sold to produce the lump sum required, however, there is often a time limit put on the sale and properties may be put into a forced sale position, an auction for example, meaning it’s likely that the best price won’t be achieved.
A bridging loan can be used to sort out any problems, provided there is a property for it to be secured against, and then repaid when the property is sold.
If a property of yours is due to be repossessed by a lender, a bridging loan could be used to pay off any debts secured against it, provided you have enough equity in this property, or another, for the loan to be secured against. This will enable you to regain control of the property and sell it on your own terms to be able to repay the loan, and avoid a forced sale situation where the property is unlikely to achieve its full value.
Benefits of using a bridging loan
There are multiple benefits to using bridging finance, some of which are listed below.
- Fast to arrange — in some circumstances, the funds could be in your account within 48 hours. This is ideal for emergency situations, or times when you want to grab an opportunity.
- No monthly repayments — with a bridging loan, the interest is added to the loan facility and repaid at the end of term with the capital, this means no monthly repayments are required.
- Flexible lending criteria — as no monthly repayments are required, your income will not be assessed and most lenders won’t look at your credit history. As long as you have a viable exit strategy and you have sufficient security available, you should be able to qualify for a bridging loan.
- Any property can be used as security — a bridging loan can be secured on any type property, including; houses, flats, bungalows, shops, commercial units, mixed-use properties, hotels, farms and also land and building plots. Bridging finance can also be secured on derelict properties, or those of a non-standard construction. You can also use multiple properties as security for one loan to lower the loan to value.