What can a bridging loan be used for?
A bridging loan is a short-term secured loan that helps ‘bridge’ a gap in funding when you need quick access to capital. These loans last between 3-36 months and are secured against property or land. Unlike standard mortgages, bridging loans focus more on the property value and your exit strategy (how you’ll repay the loan) rather than just your income or credit score.
Bridging finance stands out for its speed and flexibility.
You can often receive funds within 7-21 days – much faster than traditional lending. This quick access to finance opens up various opportunities that might otherwise be impossible with slower funding methods.
Residential Property Situations
Bridging loans offer practical solutions for common challenges when buying or selling homes.
Breaking Property Chains
If you’ve found your dream home but haven’t yet sold your current property, you’re in a property chain. These chains can break down if just one buyer pulls out, causing stress and potentially losing your new home.
A bridging loan lets you buy your new property before selling your existing one. The loan provides the funds needed to complete your purchase, and you can repay it when your current home sells. This removes the time pressure of having to sell first and reduces the risk of losing your desired property.
Auction Purchases
When buying at auction, you’ll need to pay a 10% deposit immediately and complete the purchase within 28 days. Traditional mortgages rarely complete this quickly.
Bridging loans are ideal for auction buys because they can be arranged rapidly. You can bid with confidence knowing you can access the funds needed to complete within the strict timeframe. Many lenders offer auction-specific bridging products designed for these scenarios.
Unmortgageable Properties
Some properties don’t qualify for standard mortgages – they might be in poor condition, have structural issues, or be of non-standard construction. These properties often sell at discounted prices because of these issues.
A bridging loan allows you to buy these properties when mainstream lenders won’t help. You can then renovate the property to bring it up to mortgage standards, refinance with a traditional mortgage, and either live in it or rent it out.
Property Investment Opportunities
For property investors, bridging finance offers ways to act quickly on opportunities and add value to properties.
Renovation Projects
Bridging loans fund both light refurbishments (cosmetic improvements like new kitchens or bathrooms) and heavy refurbishments (structural work or complete renovations).
These loans support the popular buy-renovate-sell/refinance strategy. You can purchase a property below market value, use additional funds from the bridge to renovate it, then either sell at a profit or refinance onto a buy-to-let mortgage with the increased property value.
Below Market Value Purchases
BMV deals are properties sold under their true market value, often because the seller needs a quick sale. These opportunities require fast action to secure them before other buyers.
Bridging loans provide the speed needed to snap up these bargains. Some lenders will even consider the true market value rather than just the purchase price when calculating how much you can borrow, potentially reducing the cash deposit you need.
Land Purchase
Whether buying land with or without planning permission, bridging loans offer flexible funding options. For land without planning, lenders typically offer up to 50% of the value, while land with planning permission can attract higher loan-to-value ratios.
Bridging can help you secure the land while you obtain or enhance planning permission, significantly increasing its value. Many investors then either sell the land at a profit or move to development finance to build on it.
Business and Commercial Uses
Bridging loans aren’t just for residential property – they serve various business needs too.
Businesses use bridging loans for working capital, expansion opportunities, or when they need to act quickly. The loans can provide short-term funding while waiting for invoice payments or during seasonal cash flow gaps.
Commercial property acquisition often benefits from bridging finance, especially when properties need renovation before they can attract tenants. Bridging lets you buy the property, renovate it, secure tenants, and then refinance to a commercial mortgage.
Development projects sometimes start with bridging loans for site acquisition and planning processes before moving to dedicated development finance for the construction phase.
Other Situations
Bridging loans can help in various life situations requiring quick access to capital.
During probate, estates can face inheritance tax bills that must be paid before assets can be distributed. A bridging loan secured against the inherited property can provide funds to pay these taxes, to be repaid when the property sells.
In divorce settlements, bridging loans can help one party buy out the other’s share of a property when they don’t have immediate access to funds. This prevents forced property sales at potentially unfavourable times.
In rare cases, bridging loans can help prevent repossession by clearing mortgage arrears, buying time to sell the property in a more controlled manner rather than through a distressed sale.
How a Broker Can Help
A specialist broker brings invaluable expertise when arranging bridging finance. They have access to the whole market, including specialist lenders not available directly to the public.
Brokers understand which lenders will consider your specific situation and can find the most appropriate rates and terms. They’ll help you structure your deal and ensure your exit strategy is viable – a key factor in successful bridging.
The application process for bridging loans involves property valuation, legal work, and detailed assessment of your exit strategy. A broker guides you through this process, handling paperwork and communication with lenders.
For expert advice on whether a bridging loan suits your specific needs and to explore your options, speaking with an experienced broker is your best first step.