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Monday, March 4, 2024

Bridging Loans: A Quick and Flexible Way to Fund Your Property Goals

Bridging loans are short-term loans used to “bridge” a financial gap when funds are required quickly. They are often used by property developers, landlords, investors, and home movers who need fast access to cash for a property transaction.

What is a Bridging Loan?

A bridging loan is a type of short-term borrowing that allows you to access a large amount of funds quickly using an asset you already own or are purchasing as security. The loan is paid back or “bridged” when you receive funds from another source such as selling a property, obtaining a mortgage, or completing a development project.

Bridging loans are typically taken out for 3 to 24 months and used for property or real estate-related purposes when fast access to cash is required. They can also be used for business purposes, paying taxes or legal fees, or other personal financial needs.

How Do Bridging Loans Work?

Bridging loans work by securing the loan against an asset you own. This is usually property but can also be land, antiques, art, luxury vehicles, or other valuable assets.

The lender advances you money based on a percentage of the asset’s value, known as the loan-to-value (LTV) ratio. This is usually around 70% but can be higher or lower.

You pay interest on the loan for the duration and repay the full amount borrowed once your prearranged exit funds become available. This might be from selling a property, remortgaging, completing a development, or receiving funds from another source.

If the loan is not repaid by the end of the term, lenders can call in the loan, charge additional fees, or seize the asset used as security. So bridging loans must have a credible repayment plan in place.

Why Choose a Bridging Loan?

There are several key reasons bridging finance is popular with developers, landlords, investors and home movers:

  • Speed – Funds can be secured in days rather than months
  • Flexibility – Loan amounts, terms and LTV ratios can be tailored
  • Accessibility – Less stringent eligibility criteria than mortgages
  • Versatility – Funds can be used for many property-related needs

This makes them useful when:

  • Quick access to property finance is needed
  • Mortgage finance is not readily available
  • Delays or problems crop up during property transactions
  • Short-term cash injections are required

Bridging loans fill an important niche in property and development finance.

What Are Bridging Loans Used For?

Typical uses of bridging finance include:

Purchasing Property

  • Buying at auction – Bridging finance allows you to compete and secure property needing quick, certain funds
  • Chain breaks – Bridging the gap when a property sale in the chain falls through
  • Quick purchases – Seizing time-sensitive property opportunities ahead of arranging mortgage finance

Property Development

  • Refurbishments and conversions – Funding works to add value to a property
  • Construction and ground works – Enabling site works to commence while longer term finance is arranged
  • Planning permissions – Unlocking potential value by funding permissions and approvals processes

Investing in Property

  • Buy-to-let – Quick access to funds for landlords and property investors
  • Short-term finance – Funding to add to or balance an investment portfolio
  • Raising capital – Injecting cash to be used as deposits for financial leverage elsewhere

Among developers and investors bridging loans are especially popular for:

  • Accessing up to 100% funding – Enabling deals with little or no deposit funds
  • Speeding up project timelines – Progressing developments without delay
  • Return on investment (ROI) – Freeing up capital to improve ROI on projects

Bridging Loan Features

Bridging loans have many useful features:

  • Loan size – From £25,000 up £5 million
  • Terms – 3 months up to 24 months
  • Rates – Typically start from 0.3-0.8% per month
  • LTV ratios – Up to 85%, or even 100% in some cases
  • Security – Can be first, second or third charge loans
  • Interest options – Retained interest, serviced payments or rolled up options
  • Drawdown options – Release in stages or lump sum
  • No early repayment charges – Full or partial repayment have no exit fees

Their flexibility and responsiveness to business needs makes them a valuable form of property and project finance.

What to Consider Before Applying

While useful in many situations, bridging loans present some risks and disadvantages to weigh up:

Exit Strategy

As bridging finance is short term, having realistic repayment plans in place is essential before taking on a loan. Define multiple options where possible should delays arise. Keep lenders closely updated on progress to avoid breaching loan agreements.

Total Costs

Combined fees and higher interest rates make bridging loans an expensive borrowing option. Calculate total costs relative to budgets before committing.

Risks

Late or missing repayments can lead to penalties, higher rates, defaulting on loans and assets being repossessed. Seek expert advice so risks are fully understood.

Alternatives

Consider if other finance options can meet needs instead, like commercial mortgages, secured business loans, crowdfunding or peer-to-peer lending.

Balancing benefits against the commitments and risks is important when assessing bridging finance suitability.

The Bridging Loan Application Process

The application process involves:

1. Seeking advice – Discuss needs with a commercial finance broker or advisor to assess if a bridging loan is the right option.

2. Finding a lender – Many specialist bridging lenders exist. Choosing an established provider helps secure loan offers.

3. Applying – The lender assesses property value, exit strategy credibility, experience and credit history.

4. Approval & offer – If approved a formal offer letter is issued detailing loan terms.

5. Legal stage – Solicitors finalize loan security details and draw up contracts.

6. Completion – Funds released upon signing contracts, with interest and fees deducted.

Reputable brokers help find deals, match to appropriate lenders and support the process.

In Summary

Bridging loans provide quick access to substantial finance using property or assets as temporary security. This enables property and land purchases, development projects and investments to proceed rapidly where urgent funding is needed.

Their versatility and speed carries risks and downsides requiring careful management. But bridging loans fill an important demand for readily available property and project capital.

Conclusion

Bridging finance is a tool allowing developers, investors, landlords and home movers respond swiftly to opportunities and challenges. Where fast capital is a priority, bridging loans can plug the gap until longer term funding solutions fall into place.

With possibilities spanning purchase finance, auction acquisitions, development projects and real estate investments, bridging loans occupy an important commercial niche.

Understanding fully how they work, managing risks diligently, and appreciating alternatives can help determine if bridging finance is the right solution when an injection of property funding is needed fast.

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