Bridging loans are a type of short term secured mortgage. They can be used to borrow against almost any residential, buy to let or commercial property.
The loans are short term and temporary in nature, allowing you time before they need to be repaid. Bridging loans are available to individuals or limited companies. Usually a maximum LTV of 75% applies but a 100% bridging loan can be sourced.
They are an extremely flexible type of loan and we have listed some of the more popular reasons why people are taking out bridging finance.
Property chain break
When moving house you inevitably end up in a property chain. If the chain is stuck or potentially could break down then a bridging loan can release you to purchase your new property, along with the new mortgage.
If you have exchanged contracts to sell then a closed bridging loan could be used.
The bridging loan is repaid from the sale proceeds of your original home some time later. This puts you back in control and enables you to purchase your chosen property.
Auction property
When buying a property at an auction you need to be very organised as things move fast. If you are a successful bidder you will need to make a deposit payment of 10% the same day. You will then have 28 days before legal completion is due where the remaining money is needed.
By using auction finance you can meet these tight deadlines and avoid having to forfeit your deposit if you cannot complete in time. Fast bridging loans are a popular choice for auction properties as the lenders are fully aware that everything needs to happen quickly.
Most standard mortgage lenders would be unable to meet the short time frames needed for auction purchases.
Read more about Auction Property Finance.
Business funding
Businesses can suffer cash flow problems for a number of reasons such as unpaid invoices or seasonal factors.
A business bridging loan will enable the business to quickly access much needed funds on a flexible basis to aid cash flow or provide working capital.
They can also be used to fund company expansion or acquisitions and even to pay an urgent tax bill.
Re-Bridging
Essentially this is refinancing of a property development bridging loan where the exit has been delayed.
There can be many reasons for the delay but typically it will be a development running over time or a buyer pulling out at the last minute.
If the lender is insisting on full repayment then re-bridging to a new lender can help provide funds to clear the debt with extra time until exit.
Unexpected tax bill
This could be for either a business or an individual.
An unexpected tax bill or one larger than you were expecting would always create a stressful situation with consequences for your cashflow.
If you are unable to pay the tax before the deadline then a second charge bridging loan can be used to release funds and avoid a late payment fine.
Purchase of a new property
For speed and convenience many property buyers and investors will use bridging finance to initially purchase a property because it can be arranged quickly and efficiently.
This allows them to move on a property deal to gain a great price or acquire a property that needed a fast completion. Below market value finance can be arranged to take advantage of BMV opportunities, getting close to no money down deals.
Once owned the investor has time to renovate, refinance or resell the property.
If the intention is to refinance quickly then you need access to a lender that offers a day one remortgage as most lenders want you to have owned the property for at least six months before remortgaging. Alternatively you could look at a bridge to let mortgage, this combines a bridging loan with a long term buy to let mortgage.
Read more on Day One Remortgages.
Funding VAT on a commercial property
Most purchases of a commercial property will be liable for VAT at 20% of the agreed purchase price.
This increases the total price paid and can cause cash-flow issues. For VAT registered companies this VAT payment can be claimed back from HMRC.
But it still has to be paid on completion and the VAT component will not be included in funding from a commercial lender, who lends against the purchase price only.
A VAT bridging loan can help to fund 100% of the VAT element that relates to an opted-in commercial property.
Buying a property with a short lease
The majority of mortgage lenders will require a minimum length of time remaining on a property lease. If it falls short of this then they may class the property as unmortgageable and will not lend.
By using a bridging loan you can purchase the leasehold property and then spend time getting the lease extended and improve its value. The exit could be by sale or remortgage to a standard mortgage.
Read more on Short Lease Bridging Loans.
Meeting financial deadlines
The opportunities where bridging can help are wide ranging.
- Occasionally funds are needed unexpectedly when dealing with estates and probate
- Funds can be used to quickly settle a divorce agreement
- To temporarily replace a standard mortgage application which has been declined
By using an open ended bridging loan you can have a degree of flexibility about when the loan is repaid.
Avoiding mortgage delays
Applying for a standard mortgage takes a certain amount of time until a mortgage offer is issued but lender delays or unexpected problems can also crop up, pushing the timeline further away.
A bridging loan can be used to help avoid a deal falling through due to these delays. The bridge provides the funds needed to buy the property and the extra time needed for the main long term mortgage to be ready.
The main mortgage is then used to fully repay the bridge.
Property developments and conversions
Bridging loans are used by developers and investors of all sizes to provide money to purchase and improve properties, including conversions of houses into flats. These can then be retained or sold.
Sometimes, the condition of a property will not meet the standards of a main lender or the improvements needed have to be started very soon.
Bridging lenders will consider the potential value that the improvements will provide and lend against this uplifted figure. They are also happy to lend on land only and properties without a bathroom or kitchen which will be rejected by mortgage lenders on the basis that they are uninhabitable.
Planning gain finance provides funds to acquire a plot or building so you can then apply for planning permission.
Refurbishment Projects
There are specific types of finance available for projects that require an element of renovation before exit. They are broadly split into two types:
LIGHT
Mostly aesthetic changes rather than structural. eg decorating, new kitchen, bathroom, windows, central heating.
Read more on light refurbishment finance
HEAVY
A heavy refurbishment project would be more involved work including structural changes, anything involving change of use or where consents are needed.
Read more: What is the difference between bridging and development finance?
Pros and cons
Bridging loans can be a powerful borrowing option, but it’s essential to have a comprehensive understanding of their advantages and disadvantages before making a decision.
Enhanced Benefits
Speed and Efficiency
Swift Decisions: Bridging finance companies often make lending decisions within days, bypassing the lengthy processes of traditional banks. This speed is crucial for time-sensitive opportunities like property auctions and unexpected financial obligations.
Streamlined Refinancing: Bridging loans can be easily extended or modified, offering greater flexibility compared to traditional loans.
Flexibility
Early Repayment: Enjoy the freedom to repay your bridging loan early without incurring penalties, unlike some long-term mortgage products.
Interest Payment Options: Choose to pay interest monthly or roll it up to the end of the loan term, allowing for greater cash flow management.
Accessibility
Open to Diverse Borrowers: Bridging finance is accessible to a wider range of individuals, including those with less-than-perfect credit, complex financial situations, or limited credit history.
Property-Focused: Approval is based on the property’s value and the viability of your project, rather than solely on your income or financial status.
Non-Standard Properties: Unlike traditional lenders, bridging finance can be used for properties that may not qualify for standard mortgages, such as uninhabitable or unusual properties.
Potential Drawbacks
Cost Considerations
Higher Interest Rates: Bridging loans generally have higher interest rates than traditional mortgages, reflecting the increased risk for lenders and the shorter loan duration.
Additional Fees: Be prepared for various fees, including arrangement, administration, valuation, and legal fees, which can significantly impact the overall cost.
Financial Risk
Property as Security: Bridging loans are secured against an asset, usually a property. If you’re unable to repay the loan, you risk losing your property.
Interest Accumulation: Rolled-up interest can lead to a substantial repayment amount at the end of the term.
Tax Implications
Purchasing a second property before selling your existing home may trigger higher Stamp Duty Land Tax (SDLT) rates. However, you can often reclaim this additional tax if you sell your original property within three years.
Regulation Considerations
Unregulated bridging loans lack the protections offered by the Financial Conduct Authority (FCA). While this allows for greater flexibility, it also means borrowers must exercise caution and due diligence when selecting a lender.