How to Utilise Bridging Loans for a Property Purchase
What is a Bridging Loan?
A bridging loan is a short term finance option, usually used to aid the property buying process. It is usually used if you have time constraints and need to find a large amount of cash quickly, either to take advantage of an opportunity or bridge the gap between property purchase and sale.
When would you use a Bridging Loan?
If you need to move fast
If time is of the essence, then a bridging loan can be helpful. Perhaps you’re a landlord looking to snap up a great buy to let property before competition gets to it or you might need to move into a new home quickly, before you’re able to sell your current property. Another common reason is when you find a property at auction, which will require full payment within 28 days, so a mortgage application is impossible.
When you need flexibility
Bridging loan lenders are often more open to buyers with a poor credit history or an irregular income, as they secure the loan on the actual property, so are taking far less risk. It’s important to remember, however, that ordinary bridging loans will need to be paid over a short period of time, so you must have the funds available to do so.
For commercial purchases
Bridging loans can be used for commercial purchases of either new business property or in some cases, other business expenses, when there are cash flow issues.
Whereas conventional mortgages are generally used for either business or residential needs, bridging loans can be used to acquire other types of property, such as those used for mixed purposes.
For example, if you plan to purchase a property as your home, but there is also space you intend to use for business within the building, or on adjacent land, a bridging loan could be an option. It should be noted, however, that not all bridging finance lenders will offer this.
You will also find that high street lenders are unwilling to offer financing for properties that are not immediately liveable. For example, those without kitchen or bathroom facilities or with structural issues. If you plan to buy an unlivable property for renovation purposes, whether this is for yourself or as an investment, a bridging loan can ordinarily be used.
What are the features of a Bridging Loan?
They are short term
Unlike mortgages, bridging loans are designed to be short term loans.
Quick to arrange
One of the major benefits of a bridging loan is that it can be arranged quite quickly. Whilst a mortgage can take a few months to arrange, a bridging loan can be set up much more quickly.
The Interest can be deferred
There are monthly interest payments to make throughout the duration of a bridging loan and the lump sum payment will be made at the end of the term to clear the balance.
You are also often offered the option to ‘roll-up’ the monthly interest until the end of the term and add it to the final loan amount. In this case, you pay the full balance and interest when you repay the loan in full.
High Loan to Value lending is available
As lenders see bridging loans as a secure option, they are sometimes happy to offer higher LTV (loan to value of the property cost) amounts.
You must have an exit strategy in place (confirmation of how you will pay back the loan). This might be achieved through the sale of your home or with a mortgage.
How much would a bridging loan cost?
As bridging loans are taken over a short period, the interest rates are calculated monthly, rather than annually.
There are also legal fees and arrangement fees to consider, which will usually total around 2% of the loan amount.
How can a Mortgage Broker help?
As bridging loans are not used as commonly as mortgages, they are sometimes harder to source and they can also be fairly complex, so having advice and guidance throughout your finance journey can save a lot of stress.
Although The Mortgage Store doesn’t offer bridging loans, we can direct you to a third party, recommended by us, who will be able to help you.