Following a significant rise in the number of bridging lenders willing to lend again and the world now normalising back to levels pre covid, rates and loan to values (LTVs) are in a constant state of change in the current market, it has never been more important to enlist the services of an broker to help you navigate the complexities of taking out a bridge.
But in what instances should you consider using bridging finance?
Eight reasons why you should use a bridging loan
1. Funding the purchase of a new property
As previously mentioned, you may find yourself in a situation where you are purchasing a new property with the funds generated from the sale of another property, but this sale has not yet completed.
A bridging loan is a brilliant facility for this scenario as it quite literally ‘bridges the gap’, providing you with the funds you need to complete the purchase of the new property.
Once the sale of the other property has been finalised, you can then use the proceeds of the sale to repay the bridge.
2. Buying a property at auction
Congratulations! You secured the winning bid on an auction property. But what now?
Typically, you can expect to pay a 10% deposit on the day, with the rest of the purchase bid required for payment soon after.
This can cause a problem for many as a standard investment mortgage can take more than 28 days to take effect.
A bridging loan eradicates any worry of not being able to complete the property purchase within the tight auction timeframe as they can be secured very quickly, being repaid once the mortgage is ready.
3. Funding a refurbishment or renovation
It can seem impossible to secure refurbishment finance from a traditional lender as they may deem the property in its current state as unsuitable for mortgage purposes.
As light refurbishment and renovation works tend to take a short amount of time, a bridging loan can provide the perfect solution.
Bridging finance for refurbishment is particularly useful for property developers or buy to let property investors who need to better the condition of an existing property, add a new bathroom or kitchen, or make improvements prior to renting it out to new tenants.
The bridging loan can be arranged quickly to fill the short-term funding gap, before being repaid once a traditional mortgage has been secured after the project has been completed.
4. Purchasing a commercial property
In order to be a successful property investor in a highly competitive market, it’s no secret that you need to be able to act quickly on a new opportunity when it presents itself.
As such, investors looking to purchase a new commercial property need access to funds quickly. This can often be difficult as capital may be tied up in another property or asset.
As commercial mortgages can involve a much higher level of complexity compared to residential mortgages when it comes to long-term loans, traditional lenders typically require large deposits or impose rigorous income stress tests, meaning that accessing funds via this route can be a long and arduous process.
Plus, if the process takes too long, investors are at risk of losing their deposits if the sale falls through.
Bridging finance is a much more viable option when purchasing a commercial property, as the short-term funding can be drawn down in as little as five days depending on the borrower’s circumstances, allowing property investors to remain competitive.
5. Navigating long-term mortgage delays
As we’ve already mentioned, traditional long-term mortgages can take time. In fact, even simple mortgage applications can take over a month to process and release the required funds.
This leaves many at risk of their deal falling through if they fail to have the money needed in place before a particular deadline.
A bridging loan is again ideal in this scenario as it can cover the time period between the purchase of a property and the completion of the long-term mortgage. Once the traditional mortgage has been finalised, this can be used to repay the bridge.
6. Business Capital
Many bridging lenders will lend to Limited Companies, as well as individuals. This means that bridging finance can be utilised by a company to:
Expand and grow their current enterprise
Start a new business venture
Purchase a new commercial building such as a warehouse or office buildings
Much like residential bridging loans, semi-commercial and commercial loans are often sought after due to their impressive speed. Long-term commercial lending can take a long time due to the nature of these assets, due to their complexity and company structures. It can also be deemed riskier for the lender.
A bridge loan allows you to invest quickly, should a unique opportunity arise. Whilst we provide the funds in the short-term, you can then organise traditional finance as a long-term solution without the worry of missing out on a great investment opportunity or potential regulation and lender delays.
7. Capital gains through property portfolios
This is a common usage for unregulated bridging loans by landlords, property investors, or offshore investors looking to invest in UK assets. The property market is constantly changing.
The announcement of the stamp duty holiday in July 2020 re-ignited the property market following the first lockdown. Property prices have increased dramatically, making bricks and mortar a popular investment option for many investors in a time of instability and confusion.
The latest government house price index shows that over the past 12 months the UK average property price has risen by 10% to £255,000. Source: Office of National Statistics
Refinancing is when you take out a new loan to repay your current lender, either alternative or traditional finance.
A general example of refinancing is: If you were to come to the end of three-year mortgage fixed term, you would then need to remortgage through finding a new mortgage offer; usually on a 2, 3 or 5-year term. This is so you can continue to pay off the remainder of your investment's purchase price.
How can you use bridging loans to refinance?
A refinance bridge loan can help cover a payment gap, should you be facing delays or waiting for your exit strategy – the sale of a property for example.
By applying for a bridging loan, you could pay off your current lender to avoid extension charges or home repossession, depending on your lender’s flexibility and criteria.
This then provides enough breathing space for you to arrange a new exit strategy or arrange a long-term financial solution.
Additional uses for bridging finance
There are many ways you can utilise bridging loans, so we’ve listed additional uses below:
Avoid gazumping / broken property chains
How Accelerated Finance can help
No matter the complexity of your case, our expert knowledge of the bridging market will ensure we secure you the best solution to suit your circumstances.
Our panel of mainstream bridging funders, peer-to-peer lenders, niche funders, family offices, and private lenders gives us the flexibility to secure bespoke bridging finance that befits the needs of our clients.
The articles are intended to provide a general understanding of the topic. The contents should not be treated as advice. Please note Accelerated Finance only considers applications for commercial or investment properties.
Your property may be repossessed if you do not keep up repayments on the finance secured against it.