In this quick guide to bridging loans we explain what they are, how bridging finance works and how you can make bridging finance work for you.
Bridging finance can be relatively expensive but when understood and used properly is can be a very powerful way of allowing you to do property deals that you wouldn’t otherwise be able to do.
What is Bridging Finance?
A Bridging Loan is very similar to a short-term mortgage.
The amount the lender will give you is determined by the value of the property and you will pay interest during the loan term, then pay the loan back at the end.
Lenders will also take a charge on the property as security meaning they can repossess it if you fail to repay the loan.
The big difference between a mortgage is that you will take a bridging loan over a period of around 12 months or less rather than 25 years.
The other big difference is the cost with bridging loan rates ranging from 8% to 15% compared to below 5% for mortgages.
Pros of Bridging Loans
Despite this extra cost there are advantages to bridging finance which mean it is often easier to secure than a mortgage.
- Lenders aren’t often concerned about your income
- Lenders are bothered about the rental income of a property
- Lenders aren’t too concerned about the condition of the property
- Lenders can arrange bridging finance much quicker than a mortgage (often in days)
Lenders are concerned about the value of the property and they will do their own independent valuation to determine how much they will lend you.
Some lenders will also want to see you have an exit strategy and some will want to see you have experience in property development.
Every lender is different and those with less stipulations tend to cost more than those with more rigorous qualification criteria.
Some lenders will lend based on lowest of the price you paid and the market value, however some bridging lenders will lend based on just the current market value – and ignore what you paid for it.
In addition some lenders will lend based not he gross development value of the property when you have finished your work.
This means you can sometimes borrow quite a bit more by using bridging finance with these lenders (of course remember this comes with higher interest rates).
When to use bridging finance
There are few times when using bridging finance is a good idea. These are
When you don’t want to hold the property for long: For example, when flipping a property you don’t want a long term mortgage so a bridging loan makes perfect sense to buy the property before selling it quickly for a profit.
When you want to remortgage soon: Sometimes you might be doing some work on a house which will increase it’s value. It can often make sense to use a bridging loan to increase the value then take out a long-term mortgage against the new value.
When you need to do a deal quickly: If you have seen a good deal and need to move quickly to beat cash buyers or buy at auction, then the speed that you can get a bridging loan can mean the difference between securing the deal or not.
When the property is a wreck: Mortgage lenders need a property top be habitable. If you have bought a house that needs a lot of work then bridging finance can allow you to get the work done before mortgaging when the work is finished. The mortgage you take out can repay the bridging loan.
How to get a bridging loan
We hope you found this introduction to bridging loans useful. Look out for part two soon where we will go into more detail about how to get a bridging loan. In the meantime drop us a line if you would like to find out more or would like to discuss getting a bridging loan.
If you are looking for a bridging loan or would like to understand more about how bridging finance works just drop us a line for an informal chat on 0161 913 2780 or email us here