A bridging loan is a short-term financial tool. It helps you ‘bridge’ a financial gap until you can arrange a more permanent funding solution. These loans are secured against an asset, such as a property or land. People value them for their speed and flexibility, which makes them ideal for time-sensitive transactions. When you know how to use bridging loans correctly, you can seize opportunities you might otherwise miss. This guide will show you how to use these loans to your best advantage so you can make informed decisions that align with your goals.
How to Use Bridging Loans?
You can use bridging finance for many different needs. A clear understanding of these uses helps you decide if a bridging loan is the right choice for you.
Secure a New Property Before You Sell
A bridging loan allows you to buy a new home before your current one sells. This is a very popular use. It provides the funds you need for the purchase and gives you peace of mind while you wait for a buyer. This also helps you avoid property chain breaks, which happen when a buyer for your existing property falls through. A bridging loan can serve as a lifeline to keep your plans on track.
Succeed at Property Auctions
Auctions are all about speed. You often need to complete a purchase within 28 days. Bridging finance provides the funds quickly so you can buy the property while you sort out a long term mortgage. Some lenders even offer pre-approved funds for auction purchases.
Fund Property Renovations
If you want to refurbish or develop a property to increase its value, a bridging loan can provide the capital. This is also useful for properties that are in a poor condition and considered un-mortgageable by traditional lenders. You can use the loan to complete the works and then remortgage or sell the property once it’s habitable.
Support Your Business
Business owners can use bridging loans to manage short term cash flow gaps or fund business growth. These loans provide quick capital to cover interim expenses like payroll, rent or stock. You can also use them to pay urgent bills like tax demands or to fulfill a large order while you wait for other funding to come through.
Other uses include getting funds to get planning permission which can increase a property’s value or to manage probate issues by accessing funds from an estate’s property to settle inheritance tax bills.
Understand the Loan’s Features
Before you apply you need to know the bridging loan’s features. These loans have many benefits but also drawbacks you need to consider carefully.
Key features include:
- Short Repayment Terms: Bridging loans are intended for short-term use, with terms that usually range from one to 24 months. This short repayment window means you must have a clear and reliable plan to repay the loan swiftly.
- Higher Interest Rates and Fees: Because of their short-term nature and the increased risk to lenders, these loans have higher interest rates than traditional mortgages. It is important to calculate the total cost, which includes other potential costs like arrangement, valuation, legal, and exit fees.
- Flexible Interest Payments: To help with your cash flow during the loan term, many lenders offer flexible interest payment options. You can often ‘roll up’ the interest and pay it all at the end of the term, or have it ‘retained’ from the initial loan amount. This means you may not need to make monthly payments.
- Loan to Value (LTV): Lenders will typically lend up to a certain percentage of the property’s value, known as the Loan-to-Value (LTV) ratio. This is often around 70-75% of the asset’s value, though some plans may go up to 80%. The LTV can vary depending on the lender and the asset used as security.
- Flexible Criteria: Bridging loans are often more accessible than traditional finance. Lenders tend to focus more on the value of the security and your exit strategy rather than just your income or credit history. This makes them an option for borrowers with complex financial situations or a less-than-perfect credit history, who may be declined by traditional lenders.
How to Prepare Your Application?
A well-prepared application can increase your chance of approval and help you get favorable terms. Lenders look for specific things when they assess an application.
Define a Clear Exit Strategy
A solid exit strategy is the most important part of your application. This is your plan to repay the loan. Lenders need to see a clear and viable plan to mitigate their risk. Common exit routes include the sale of a property, refinancing to a long-term mortgage, or using another funding source.
Know Your Financials
Conduct a full assessment of your financial situation. You need to understand your income, assets, and liabilities to be sure you can manage the repayment. While proof of income is not always a primary factor, it can be important if your exit strategy is to refinance.
Work with a Specialist
The bridging market is busy with hundreds of lenders. To navigate this jungle it’s best to work with a financial advisor or a specialist broker. An independent specialist finance broker like KIS Finance can be a great asset. KIS Finance is an independent specialist finance broker based in the UK, providing bridging loans, development finance and commercial mortgages for property transactions and business needs. We’ve been in the bridging sector for nearly 14 years and have arranged over £1 billion in bridging loans. We’re known for fast, competitive funding and work with a wide panel of lenders to offer flexible terms. A specialist broker will understand your needs and get you the best deal for your situation.
A Quick Guide to Loan Types
You will encounter different types of bridging loans. It helps to know the basics so you can choose the right one for your situation.
Regulated and Unregulated Loans
A regulated bridging loan is secured against a property that you or a close family member lives in or intends to live in. These loans are subject to FCA regulations. An unregulated loan is for investment or commercial properties and is not subject to the same regulatory oversight.
First and Second Charge Loans
A first charge loan is the main mortgage on a property. A second charge loan is secured as a secondary charge, behind an existing mortgage, for borrowers who already have debt on a property.
Open and Closed Loans
A closed bridging loan has a fixed repayment date as the exit is already confirmed, e.g. an exchanged property sale contract. An open bridging loan has no fixed repayment date, more flexibility if your exit plan is not yet confirmed but can be more expensive.
Conclusion
Bridging loans are a versatile financial tool for short-term needs. If you want to use bridging loans effectively, you must understand their purpose, prepare your application with care, and have a solid plan for repayment. A clear exit strategy is the most important part of a successful loan experience. With proper research and expert advice, you can use bridging finance to achieve your property and business goals.
Frequently Asked Questions
1. What is a bridging loan?
A bridging loan is a short term loan that provides immediate cash flow by ‘bridging’ a financial gap until a more permanent funding solution is found. It’s a type of interim finance secured against an asset, like property, and is known for its speed and flexibility.
2. How do I qualify for a bridging loan?
Qualification is more about the value of the property used as security and the strength of your exit strategy rather than your income or credit score. Lenders will assess your ability to repay the loan within the agreed term. While a good credit score and low debt to income ratio is preferred especially for property transactions, criteria can be flexible.
3. What are the main advantages of a bridging loan?
The main benefits are speed, flexibility and accessibility. Funds can be arranged very quickly, often within days, so you can snap up time sensitive opportunities like auction purchases. Lenders offer bespoke terms to individual situations and are more accessible to borrowers with complex financial profiles or poor credit history.
4. What are the main drawbacks of a bridging loan?
The main drawbacks are higher interest rates and shorter repayment term compared to traditional loans. There can also be additional costs like arrangement, valuation and legal fees that add to the overall cost. If you’re buying a new home before selling your old one you may have to pay two loans at once.
5. What is an ‘exit strategy’ and why is it important?
An exit strategy is your plan for how you will repay the bridging loan at the end of its term. It is the most important element of your application because it shows the lender you have a clear and viable way to repay the debt. Common exit strategies include selling the property, refinancing with a long-term mortgage, or using funds from another source.
