A bridging loan is a form of financial support, offering short-term and flexible conditions for either personal or commercial use. Most commonly, bridging loans are utilised in the property market, aiding buyers and developers with quick access to legitimate funds.
Yet, through their flexible terms, bridging loans can in fact be used to aid a range of financial needs, offering either respite or efficient support.
As bridging loans are rapidly accessible, especially when compared to conventional mortgage loans, they are now becoming a popular option for many. Through flexible terms and exit plan arrangements, bridging loans can be catered around and secured to meet personal needs.
To grasp the ins and outs of bridging loans, what they are mostly used for, their benefits and the application process, keep reading.
What is a bridging loan?
As outlined above, a bridging loan is exactly what the name suggests. It predominantly supports individuals or companies with funds while bridging from one project or stage, to the next. Offering reassurance and reliability, using a bridging loan provides the opportunity to make or progress additional investments, up until further funds are available or assets are sold.
Bridging loans will generally last between 3-18 months. They are categorised as a short-term loan product, with a variety of different repayment options. For some, a bridging loan can be seen as a lifeline, offering a chance to meet current liabilities by providing fair and repayable capital.
In most cases, bridging loans are advanced to clients who are exchanging large investments, such as a new home, buy-to-let property or warehouse equipment. Within those large investments, financial delays or problems may occur. This is exactly where a bridging loan can support clients, promoting the ability to progress.
Ideal for a number of different investments, bridging loans are available and beneficial for residential and commercial clients.
What are the most popular ways of using a bridging loan?
Using a bridging loan provides flexibility. The financial product can be adapted to cater to any situation where immediate, short-term loans may be required. Yet, below are 6 of the most popular ways of using a bridging loan in today’s market.
- When purchasing a property
Purchasing a new property is a big investment. In some unfortunate cases, delays may be experienced in the property chain. For example, purchasing a property while waiting to sell another will require excess capital. A bridging loan for house purchase purposes can be offered and used to make the initial purchase, soon paid back once the sale has completed.
- Buying a new property at auction
Auction property purchases are now very common. However, it can take a significant amount of time for the mortgage process to complete. As auction payments must be paid in full, 28 days after the initial purchase, the conventional mortgage process can influence much strain. Conventional mortgages are in fact often unsuitable for this type of purchase.
Sometimes mortgage applications and processes may not complete in time, resulting in financial problems for the buyer. Here is where a mortgage bridging loan can support the buyer, allowing for the purchase to go ahead. A reliable exit strategy will be required in this case, future-proofing the ability to repay the bridging loan.
- When looking to complete a property refurbishment
Property development is a costly project. Commonly, the project will be short-term, with the aim to refurbish and sell efficiently. Alternatively, refurbishments may be required to meet buy-to-let mortgage standards. Refurbishment loans are commonly used, yet, again can take some time to process, delaying vital development stages and resources. This will be down to a lack of funds to pay contractors or purchase materials.
A bridging loan for property development purposes can be secured through a lender, providing rapid access to crucial funds. An exit strategy will again likely involve either the sale or rental of the refurbished property, paying off the loan by transferring to a buy-to-let mortgage in the latter exit.
When looking to refurbish a property through demolition and rebuild, a self-build bridging loan will also be available, following the same process
- When looking to refinance for the short-term
In most cases, clients who are looking for short-term refinancing will opt for immediate relief. This will provide greater time to make careful decisions on further finance options. A property bridging loan is a heavily used product by landlords in this scenario.
For example, imagine that the terms of a repayment mortgage agreement are nearly up. Current tenants are also coming to an end of their tenancy agreement. In a short space of time, decisions will be required to continue repayments. To avoid a hasty decision, a bridging loan can be utilised, with the aim to map out and source a new tenancy agreement. Once utilised, an exit agreement will take place by repaying the loan, soon returning to a commercial mortgage.
- When using business working capital
Alongside property purchases, bridging loans can be used to assist businesses. In the case where a company is looking to raise equity from selling shares, a bridging loan can be utilised to cover the day to day running of the business. This is a realistic way to continue business activity and employment contracts, while considering further financial investment.
- Buying new commercial assets, such as machinery and IT equipment
When running a business, large investments are probable. Resources, machinery, IT equipment and tools are necessary assets to run the day to day for some companies. If cash flow is low, causing purchase delays for those assets, a bridging loan can be secured and repaid within the fixed timeframe.
Bridging loans are great support for some companies. Where invoices haven’t been paid, or a large sale has fallen through bridging loans can offer respite, up until funds have been received.
What are the key benefits of using a bridging loan?
Through the above examples, it is clear to see how beneficial bridging loans can be for both personal and business purposes. Yet, here is a concise breakdown of why bridging loans are a good option when compared to other financial products.
- They offer short-term relief, lasting between 3 and 18 months.
- They can be sourced and secured quickly, much quicker than other mortgages or streams of capital.
- They can be utilised for a diverse range of needs.
- They can be secured on both residential and commercial properties.
- They offer great flexibility on exit strategy agreements.
- They offer fair interest rates.
- They also offer great flexibility when considering terms.
Why must a realistic exit strategy be in place?
If you’re hoping to benefit from a bridging loan, it is important that you have a realistic exit strategy in place. Without this strategy, it is very unlikely that capital will be offered to you.
An exit strategy will accurately define how you’ll intend to repay the bridging loan. For example, if you require the loan to bridge your investment while waiting for a house sale, the bridging loan for house purchase purposes will be repaid once the sale has completed.
Without clearly defining your ability to repay the loan through either manageable repayments or a one-off repayment, financial support may be denied.
How are bridging loan terms calculated?
Bridging loan terms are commonly calculated on a personal basis. However, it is important to note that this approach may differ depending on your selected lender.
The vast majority of lenders will consider factors such as what the bridging loan is being used for and the associated risks, the market value of the engaged asset and whether it is a first or second charge loan.
First charge loans: A first charge bridging loan is classified as the priority debt to be paid off. With this in mind, if you do not have existing debt, your bridging loan will be the first in line. A first-time mortgage is an example of a first charge loan.
Second charge loans: A second charge bridging loan is where further debt will be first in line, where repayments of the bridging loan will be delayed. In this case, a bridging loan will usually be secured to pay off the first charge loan. This is likely where a loan or mortgage is already placed against a property.
To understand which option may be best suited for you personally, speaking to a lender will be advised. Here you’ll have the opportunity to understand your eligibility for a bridging loan, along with calculating loan terms and rates.