What is a bridging loan?
Updated: Dec 12, 2021
Bridging loans, also known as bridging finance, can be obtained by individuals and businesses using residential property, commercial property, or land as collateral. Bridging loans can be useful in several situations, which we discuss below. They can often be acquired much quicker than traditional mortgages and often without the complex underwriting process.
What can you use a bridging loan for?
A bridging loan is an incredibly flexible funding option that can be used for a wide range of reasons, as outlined below.
Meeting tight transaction deadlines Mortgage lenders typically take months to underwrite and complete a loan application. A bridging loan may be used if time is of the essence and this is not fast enough. A bridging loan can be completed in just a few weeks, or if the right lender is approached, in days. Capital raising Raise finance by way of a first, second or third charge against a single or multiple properties for almost all loan purposes. Chain break finance Property sales can fall through when a member of the chain withdraws. Often bridging finance is available, allowing the purchase to be completed while a new buyer is found for the existing property. Property auctions As completion needs to take place as quickly as possible, usually within 28 days of the auction, a traditional mortgage lender may not be able to complete the loan within the required time frame so the speed of a bridging loan is required. Property refurbishments Often, mainstream mortgage lenders won't lend on properties that need refurbishment, so bridging finance is the best option. Once the refurbishment works are completed, the bridging loan can be repaid either by selling the property or refinancing it. Usually, a development loan is preferred for heavy works or ground up building projects. Property conversions The conversion of office space or barns into residential units, or single family homes into apartments, or vice versa. Cash flow A short-term cash flow solution for personal or business needs. Quick property purchases Bridging financing allows buyers to move quickly once they find a property and possibly negotiate a lower price than they would be able to otherwise. Upon completion, a long-term mortgage debt can be secured to pay off the bridging loan. Repossession prevention When a property is due to be repossessed, a bridging loan can be used to pay off the debt and prevent the repossession. A property owner can then retain control of their property so that they can sell it on their own terms and avoid a forced sale situation. Inheritance tax and probate issues When dealing with inheritance and probate matters, funds may be needed. There are many reasons for this, including the need to repay charges on property, pay taxes and other bills, and to pay off other beneficiaries before the transaction can conclude. Un-mortgageable properties Bridging loans can also be used by people who are renovating dilapidated homes, where traditional mortgages would not be accepted or have previously been declined. For example, a surveyor might point out an issue that needs to be rectified before a mortgage application can be approved, or a mortgage might not be available because the property currently doesn't have a bathroom, toilet, or kitchen.
Non simultaneous purchases Looking to upsize, downsize, relocate, or make home improvements on a recently purchased property before moving in. You might want to consider a bridging loan. In most cases, lenders secure a charge on your existing property and on the property you plan to purchase before you sell your current home, with the loan being repaid once your current home is sold. HMO & student let conversions Houses of multiple occupation (HMO's) and student lets have gained popularity in recent years, with many properties being converted to meet the current demand. Bridging loans can be obtained to finance the purchase of property in the first instance, and lenders may provide additional funds to renovate/convert the property into a student rental or HMO unit before a longer-term mortgage facility is secured once the works are finalised to repay the bridging loan.
What types of bridging loans are available?
Bridging loans can be divided into four key types.
Open bridging loan Borrowers who have no confirmed plan to exit their bridging loan, i.e., they intend to sell their house, but it's not yet on the market, or under offer.
Closed bridging loan Borrowers with a confirmed exit strategy, i.e., your house is under offer, contracts have been exchanged and a completion date established, or your fixed rate bond lock in period ends on a specific date.
Regulated bridging loan A bridging loan secured against a property that you either have or intend to live in. This type of loan is regulated by The Financial Conduct Authority (FCA), giving the borrower additional protection from mis-selling and bad advice. Unregulated bridging loan A property that you don't intend to live in, such as a commercial unit or a property that you intend to rent. Second & third charge bridging loans for business purposes secured against a borrower's main residence also fall into this category.
Each bridging loan is either an open bridging loan or a closed bridging loan and is either regulated or unregulated. For example, a bridging loan secured on your primary residence that is for sale, but not yet sold, is a regulated open bridging loan. How to get a bridging loan?
Currently, bridging loans cannot be obtained from high street banks, so a specialist lender must be approached. As a large number of bridging loan providers only accept business through brokers, it is usually best to seek out a whole of market broker, like Curzon Financial, to source the funds on your behalf. Although some lenders accept business directly, with bridging loan rates and fees varying widely between lenders, it is best to obtain expert advice, as bad decisions can prove very costly.
In a nutshell
In spite of the higher fees and rates associated with bridging loans, they can prove invaluable in the right situations for a short period of time. In addition, a bridging loan could mean the difference between securing your dream home, preventing temporary cash flow problems that could have more serious consequences, or making a profit on a project. In recent years, bridging loans have rapidly gained in popularity and become more mainstream as borrowers increasingly acknowledge the benefits of bridging loans instead of the higher costs and interest rates. For more information about Curzon Financial or any of the services we offer, please give a call on 01932 686601, email us at firstname.lastname@example.org, or complete the enquiry form on our website www.curzonfinancial.com.