A bridging loan, which is also known as a short-term loan, can be used for a number of different reasons.
This type of flexible financing can provide you with the money you need to purchase a property, pay for home improvements, or cover other expenses. It’s important to understand how a bridging loan works and what its benefits are before you apply.
Bridging finance can be used for a variety of purposes, both residential and commercial.
This article will provide an overview of bridging loans, what they are used for and how to decide if they’re the right option for you. These loans are secured against a property, so it’s important that you fully understand their terms and conditions before entering into any agreement.
What are bridging loans?
Bridging loans are typically used to purchase a property before a long term financing solution is in place. This could be due to various reasons, such as the sale of an existing property not concluding in time, or a need for quick funds.
A bridging loan can help with purchasing a new property without having to wait for your existing property to be sold. The loan provides a short-term solution while you wait for other financing options, such as a mortgage or the sale of an asset.
Bridging loans are not suitable for everyone and should only be used if you’re certain that you can repay the loan within the allotted time frame.
What are first and second-charge bridging loans?
First charge bridging loans are generally used when you’re purchasing a property, and the funds will be secured against it. This means that if you can’t repay the loan, your lender has the right to repossess the property.
Second charge bridging loans are for when you already own a mortgaged property and want to borrow further funds. In this case, the loan will be secured against a second charge on your property and can still result in repossession if you’re unable to repay it or the main mortgage.
How do I get a bridging loan?
If you’ve decided that a bridging loan is the right solution for your financial situation, the next step is to find the right lender.
The best way to do this is by working with a specialist mortgage broker. They have access to a wide range of lenders and are familiar with the process. They can help you understand what type of loan is best for your needs and guide you through the application process.
The majority of these types of deals are only made available to brokers. The lenders prefer dealing with brokers rather than direct with the borrower. So if you try and apply for one by yourself, you will not be searching across all of the deals that you could qualify for.
It’s important to remember that bridging loans usually come with higher interest rates and fees, so it’s worth shopping around before committing to a loan. A broker can help you compare different options and make sure you’re getting the best deal available.
What can a bridging loan be used for?
Short term loans of this nature are not fully understood by many people. They are incredibly flexible and quick to arrange. As long as you have enough equity, the money can be used for pretty much anything.
Historically they would have been used to break a property chain, enabling you to move but without selling your current home.
Now they are widely available and it’s a competitive market. There’s one common factor that all bridging finance applications need.
An exit strategy – This is very important as your exit strategy is ‘how’ you intend paying back the loan within the agreed timeframe.
Here are some examples of what a bridging loan could be used for:
To finance the purchase of a new property before you’ve sold your old one
A bridging loan is a short-term loan that can be used to finance the purchase of a new property before you’ve sold your old one. This type of loan can be helpful if you need to move quickly to take advantage of a new opportunity.
Bridging loans are only available to borrowers with sufficient equity in their property.
The loan amount is based on the value of the property being purchased, and the loan must be repaid within 12 months. Interest rates on bridging loans are typically higher than traditional mortgages, so it’s important to shop around and compare offers before you commit.
But if you’re looking for a way to finance a new property purchase before you’ve sold your old one, a bridging loan could be the right solution for you.
Funding the purchase of commercial property or equipment
When it comes to commercial property, there are a lot of factors to consider. Not only do you need to find the right location, but you also need to have the right financing in place.
A UK bridging loan can help by providing the funds necessary to purchase a commercial property before the long term finance is in place. This type of loan can be an ideal solution for businesses that need to purchase property quickly. In addition, bridging loans can be used to finance renovations or other improvements to commercial property.
Covering tax bills
When you’re self-employed, it’s important to plan for unexpected expenses like a tax bill.
Bridging loans can help by providing the money you need to pay your bill and avoid penalties. Interest rates on bridging loans are typically higher than other types of loans, but they can be a good option if you need money quickly and can’t qualify for a traditional loan.
The key is to make sure you can repay the loan before the end of the term, as missing a payment can cause additional fees and damage your credit score. If you’re considering a bridging loan to pay a tax bill, talk to your accountant or financial adviser to make sure it’s the best option for you.
Quick access to funds in an emergency situation
In an emergency situation, quick access to funds can be vital. That’s where a bridging loan can help. A bridging loan is a short-term loan that can provide the funds you need in a matter of days. This can be helpful if you need to make an urgent repairs or purchase.
These loans are often repaid when you sell your property or take out a longer-term mortgage.
Since they are short-term loans, they usually have higher interest rates than other types of loans. However, in an emergency situation, the quick access to funds can be worth the higher interest rate. If you’re facing an unexpected repair bill or need to make a fast purchase, a UK bridging loan can help you get the funds you need quickly.
Securing finance for other investments
Bridging finance can provide the funds you need to quickly close on a property purchase or refinance an existing loan. The interest rate on a bridging loan is typically higher than a traditional mortgage, but the loan can be paid off as soon as the property is sold or refinanced.
This type of loan can be a helpful tool for investors who are looking to take advantage of a short-term opportunity.
For example, if you have found a property that is underpriced and likely to appreciate in value, a bridging loan can help you secure the financing you need to make an offer without tying up your other investments. Bridging loans can also be used to fund renovations or repairs, allowing you to add value to a property before putting it on the market.
Property auctions
When it comes to property auctions, a bridging loan can be an extremely helpful tool. Property auction finance can be an attractive option for those who are looking to purchase a property quickly and without hassle.
While most auction purchases are for cash, bridging can be secured against almost any type of property, in any condition.
If you’re considering bidding on a property at auction, speak to your broker about the possibility of securing a bridging loan. With this type of finance in place, you’ll have the confidence and peace of mind knowing that you have the funds necessary to make your bid and secure your new property.
Downsize without the fuss of a property chain
Bridging loans are an excellent way to downsize without the hassle of a property chain. A bridging loan can be used to purchase a new property before selling your existing one, meaning you can move quickly and without the need for a long chain of buyers and sellers.
This can be particularly useful if you’re looking to downsize in a hurry, as it means you won’t have to worry about finding a buyer for your current property straight away.
Avoid repossession of your home
If you’re struggling to make your mortgage payments, the last thing you want is to lose your home. Bridging loans can provide the temporary financial assistance you need to keep up with your payments and avoid repossession.
Also known as ‘bridging finance’ or ‘gap funding’, these loans can be used to prevent repossession by providing the funds needed to catch up on past-due mortgage payments.
Bridging loans are typically short-term loans, with repayment periods of 12 months or less. This can make them a more affordable option than taking out a traditional loan, as you’ll have less time to accrue interest.
If you’re facing the prospect of losing your home, a bridging loan may be able to help you keep it or have the extra time needed to sell it at a good price.
Divorce settlements
No one wants to go through a divorce, but sadly it is a reality for many people. In addition to the emotional stress of ending a marriage, there is also the matter of dividing up assets and property. This can often be a contentious process, with both sides wanting to get the best possible deal.
A bridging loan can help to ease the financial burden of a divorce settlement by providing short-term funding.
This can be used to pay for legal fees, buy out a partner’s share of the family home or simply provide some financial stability during what is likely to be a difficult and stressful time. A bridging loan can be a useful tool in helping to reach a fair and amicable divorce settlement.
Inheritance tax and probate issues
If you’re facing Inheritance Tax (IHT) and probate issues, a bridging loan can be a lifesaver. IHT is a tax that is payable on the value of a person’s estate when they die. In order to calculate the amount of IHT that is due, the estate must first be valued.
This can often be a lengthy and complicated process, particularly if there are disputes over who should inherit what. Probate is the legal process of sorting out someone’s estate after they die. It can be a time-consuming and expensive process, especially if there are complex financial arrangements to be made.
Bridging loans can help to alleviate some of the financial pressure by providing a short-term probate loan that can be used to pay for professional fees and other costs associated with IHT and probate.
The loan can then be repaid once the estate has been settled. This can provide much-needed breathing space at an already difficult time.
Starting a business
Starting your own business can be a daunting prospect, especially if you don’t have much capital to start with. A bridging loan can give you the financial boost you need to get your business off the ground.
The loans are designed to provide short-term funding for specific purposes, such as buying a property or refurbishing a commercial premises.
This type of loan is typically repaid within 12 months, making it an ideal solution for businesses that need quick access to capital. Because bridging loans are secured against an asset, they can be easier to obtain than other types of finance. So if you’re thinking of starting your own business, a bridging loan could be the answer.
Buying a business
A bridging loan can be an extremely useful tool when it comes to buying a business.
Essentially, a bridging loan is a short-term loan that can be used to cover the costs of a property purchase before longer-term funding is in place. This type of financing can be particularly helpful when buying a business, as it can provide the necessary funds to complete the purchase without delay.
In addition, a bridging loan can be useful for buyers who are looking to purchase a business with limited up-front capital.
By taking out a loan, buyers can spread the cost of the purchase over a longer period of time, making it more affordable. When used correctly, a bridging loan can be an extremely powerful tool for anyone looking to buy a business.
Buying a property with a short lease
Anyone who has tried to buy a property with a short lease will know how difficult it can be to secure financing. Mortgage lenders are often reluctant to provide loans on properties with leases of less than 60 years, and this can make it all but impossible to find the funds you need to complete a purchase.
A bridging loan can be an invaluable source of funding in these situations.
Unlike a standard mortgage, a bridging loan is designed for short-term use, and so the lenders are not so concerned with the lease.
In addition, bridging loans can be arranged quickly and easily, meaning that you can move forward with your purchase without delay. If you are struggling to secure the financing you need to buy a property with a short lease, a short lease bridging loan could be the answer you are looking for.
Buying property below market value
When you buy property below market value, it can be difficult to get a mortgage from a traditional lender. This is because the lender will only lend you an amount based on the property’s market value, not the lower purchase price.
A below market value bridging loan can help by providing the additional funding you need to complete the purchase. The loan is secured against the property and can be paid back when it is sold or refinanced. This can provide a vital source of funding for those looking to buy property below market value.
Financing an uninhabitable property
A bridging loan can be a helpful way to finance an uninhabitable property. This type of loan is typically used when someone is buying a property at auction or needs to quickly complete a repair project before moving in.
High street lenders want to see that a property is habitable before they provide any funding.
However, there are specialist lenders who may be willing to provide financing for an uninhabitable property. These lenders understand that sometimes repairs or renovations take longer than expected and are willing to take on greater risk in order to help borrowers succeed.
As a result, a specialist lender may be the best option for someone looking to finance an uninhabitable property.
Read more: What is the difference between bridging and development finance?
To recap
Bridging loans can be incredibly flexible and useful when it comes to buying a business or property.
They can provide the necessary funds to complete a purchase without delay, and can be arranged quickly and easily. In addition, bridging loans can be used for a variety of purposes, including financing a property with a short lease or buying property below market value.
You will need to find 25% for the bridging loan deposit but this can be as cash or property equity.
If you are struggling to secure the financing you need, a bridging loan could be the answer you are looking for.