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How Bridging Loans Work

Bridging loans are a type of short-term secured loan that can help you buy a property or complete a project while you wait for other funds to become available.

Posted: 3rd January 2024 by Finance Monthly
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They are often used by property developers, investors, and home movers who need to act quickly or face a gap in their cash flow.

Bridging loans are not meant to be a long-term solution, but rather a temporary bridge to cover a specific need. They usually have higher interest rates and fees than other types of loans, and they require a clear exit strategy to repay them.

In this article, we will explain what bridging loans are, how they work, what they are used for, and what you need to consider before taking one out.

Why are Bridging Loans Popular with Property Developers, Landlords and Investors?

 Bridging loans are favoured by property developers, landlords and investors as they are fast, flexible, have many uses and can be arranged in a matter of days as opposed to a traditional mortgage or property development finance which is more complex, has a higher minimum loan and can take longer to arrange.

Bridging loans are commonly used for projects requiring borrowing from £50,000 to around £2,000,000.

The primary focus of Bridging Lenders is on the value of the property being purchased and the viability of your exit route rather than your credit history. This means that having a poor credit history or income that is difficult to prove won’t necessarily mean an automatic decline of your application.

Borrowing can be up to 75% of the value of the property or the purchase price, whichever is lower, this can be increased to 85% if you are planning to refurbish the property.

However, in certain circumstances Below market value bridging loans are available which allow borrowing up to 100% of the purchase price if the purchase price is below the actual open market value of the property or if you are offering an additional property as security.

What is a bridging loan?

A bridging loan is a loan that is secured against an asset, usually a property, that you own or are buying. The loan gives you access to a large amount of money for a short period, typically between 3 and 24 months.

The loan is designed to be repaid as soon as you receive the funds from another source, such as selling your existing property, getting a mortgage, or completing a project. The loan is then ‘bridged’ or closed, and the lender releases the charge over your asset.

What are bridging loans used for?

Bridging loans are typically used for property-related purposes, such as:

  • Buying a property before selling your current one.
  • Property Development.
  • Fixing a broken property chain after a sale falls through.
  • Buying a property at auction when you need quick access to cash.
  • Investing in a buy-to-let property.
  • Renovating or developing a property.
  • Buying a property that is not mortgageable.
  • Paying for unexpected expenses or emergencies.

Bridging loans can also be used for other reasons, such as:

  • Business expansion or cash flow
  • Tax liabilities or inheritance tax
  • Divorce settlements or legal fees
  • Debt consolidation or refinancing
  • Personal or professional projects

What do you need to consider before taking out a bridging loan?

Bridging loans can be a useful and convenient way of accessing funds quickly, but they also come with some drawbacks and challenges. Here are some of the things you need to consider before taking out a bridging loan:

  • Loan-to-value (LTV) ratio: The LTV ratio is the percentage of the value of the property or asset that you are borrowing against. The higher the LTV ratio, the more you can borrow, but also the more you will pay in interest and fees. The LTV ratio may vary depending on the type of bridging loan, the type of property and the lender. The average LTV ratio for bridging loans is around 70%, but it can go as high as 80% or as low as 50%.
  • Exit strategy: The exit strategy is the way you plan to repay the bridging loan, such as selling your property, getting a mortgage, or completing a project. The exit strategy is crucial for both you and the lender, as it determines the viability and affordability of the loan. You should always have a realistic and reliable exit strategy, as well as a backup plan, before taking out a bridging loan. You should also keep the lender informed of any changes or delays in your exit strategy, as they may affect the terms and conditions of the loan.
  • Risks and consequences: Like any form of mortgage borrowing, a bridging loan depends on several factors and assumptions that may not materialise as expected. If you fail to repay the bridging loan on time, you may face penalties, higher interest rates, legal action, or repossession of your property or asset. You should always assess the risks and consequences of taking out a bridging loan, and seek professional advice if you are unsure.

How to Apply for a Bridging Loan?

Most bridging lenders generally require applicants to submit their applications through an experienced commercial finance broker, with over 30 years of experience, being based in Scotland and covering the whole of the UK we are ideally positioned to guide you through the application process.

Conclusion

Bridging loans are a type of short-term secured loan that can help you buy a property, develop a property or complete a project while you wait for other funds to become available. They are often used by property developers, investors, and home movers who need to act quickly or face a gap in their cash flow.

Bridging loans can be a useful and convenient way of accessing funds quickly.

 

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Finance Monthly is a comprehensive website tailored for individuals seeking insights into the world of consumer finance and money management. It offers news, commentary, and in-depth analysis on topics crucial to personal financial management and decision-making. Whether you're interested in budgeting, investing, or understanding market trends, Finance Monthly provides valuable information to help you navigate the financial aspects of everyday life.
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