Top 5 reasons to use a bridging loan
By Paresh Raja -
Bridging finance allows fast access to loans for residential, commercial, or semi-commercial purposes, and can be used by individuals, partnerships, and UK limited companies, amongst others.
As rates and LTVs even at mainstream lending institutions are in a constant state of change in the current climate, brokers need to be fully aware of all the loans currently on the market and how they can be used to support the needs of their clients.
Specialist finance in general, and more specifically bridging loans, became a popular option for those seeking fast finance during the global financial crisis of 2008 and in the years following, when loans were difficult to obtain from the high street banks.
The COVID-19 pandemic has once again proved the demand for these types of loans.
Bridging loans are deployed on a case-by-case basis and tailored to meet the demands of each client, no matter how complex their circumstances are.
So, when should brokers be looking to bridging loans for their clients?
To answer this question, the team at Market Financial Solutions has compiled a list detailing the top five reasons that their clients use a bridging loan.
1. Overcoming delays encountered by a long-term lender
Mortgage providers and big banks historically can take a long time to process mortgage applications and deploy funds – on average this can take 30-45 days, even for a simple application.
This means that buyers are at risk of a deal collapsing if they are not able to access the finance that they need in time.
If delays are being encountered, a bridging loan can be used to ‘bridge’ the gap between the purchase of a property, and the completion of the traditional funding solution.
Then, once the traditional mortgage has been issued, this can be used to pay off the bridging loan.
2. Funding the purchase of one property before the sale of another
Many property buyers find themselves in a ‘chain’ when selling a property and purchasing a new one.
A smooth transition relies on all of the individuals up and down the chain having their finance in hand, their solicitors up to date and all of the rest of their paperwork in order.
This can put pressure for everyone to move in tandem through the selling process, which is at best difficult, and at worst just not possible.
A bridging loan can ease this pressure, by allowing someone to purchase their new property with the bridging loan, and then repaying it when the sale has gone through of the other property.
3. Funding a refurbishment
Light refurbishment projects are commonly undertaken by buy-to-let investors when they are getting the property ready for new tenants, or targeting a new sector of the rental market.
However, it can be difficult to find traditional long-term lenders willing to fund refurbishment and renovations.
These projects typically last three to six months, so a bridging loan is a good solution to this.
As bridging is short term, it can fill the funding gap, then a traditional mortgage can be acquired on the property once all works have been completed.
4. Purchasing a new build
New-build properties are often popular amongst non-UK residents seeking a buy-to-let investment.
When buying a new build, the developer will set a deadline date by which the purchase has to be completed.
If this is not met, the buyer risks losing the deposit that they will have placed on the property.
Often, the time between the property being finished and the deadline for completion is as little as two weeks.
Putting pressure on the buyer to have their finances in hand quickly and hoping for no hiccups.
However, a bridging loan can be used to meet that deadline, with time to spare, and ensure the borrower does not lose their deposit.
5. Buying a commercial property
Finally, bridging loans are commonly used by investors who are purchasing a commercial property, particularly when expanding their real estate portfolio.
Much like residential cases, investors look to bridging loans when they need access to finance quickly.
As commercial and semi-commercial assets can be slightly more complex to arrange long term finance on, bridging loans once again make sure that investors do not lose their deposits by the sale falling through.
Bridging finance also essentially allows property investors to be competitive in the market. It does this by allowing them to move quickly on any opportunities that may arise.