Bridging loans have risen to prominence largely due to their use in the property development industry. This form of finance offers unparalleled levels of speed and flexibility, making it perfect for such a competitive industry as the property development industry. Property developers can rely on bridging finance to raise a large amount of capital at short notice, allowing them to seize upon opportunities as they appear in the market. However, as they are exceedingly useful for purchasing property for commercial reasons, many are wondering if bridging loans are as good for house purchases.
In this article, we will discuss what bridging loans are, how they work, and whether it is possible to use a bridging loan for house purchases. Let’s get started.
What is a bridging loan?
Bridging loans are a form of secured finance that serve to “bridge” the gap between a purchase and a long-term financial solution. Given this aim, bridging loans are exceedingly quick, both in how they raise finance, and how long a loan term lasts. Typically, bridging loans will last around 12 months, though it is not exactly uncommon for a bridging loan to fall on either side of this time frame.
Bridging loans derive their key advantages from requiring assets to be used as collateral. This collateral allows large sums of money to be raised, as the value of the loan is dependent on the value of the collateral. If you have high-value assets to use as collateral, you can raise large sums of money through bridging finance.
In addition to this, the use of collateral allows for a greatly expedited application process. Lenders are much less concerned about traditional loan application factors, such as income or credit rating, and are much more interested in the value of assets to be used as collateral. These assets will be used to guarantee the loan, and present an exit strategy to lenders. As such, assuming they can verify the value of said assets, lenders can approve loans and release money in as little as a couple of days. This makes bridging loans an exceptional form of finance for the property market, where swift action often means the difference between seizing a profitable opportunity and losing it.
Also Read: What Is an Unregulated Bridging Loan?
How do bridging loans work?
A borrower can apply for a bridging loan usually either from a private lender directly, or from a bridging loan hub. As part of the application, the borrower must request a specific “Loan-to-Value” percentage. Typically, this percentage sits at around 70-75%, and essentially refers to shortfall. The lender will provide roughly 70% of the asset’s value, and the borrower will have the rest as a deposit.
Once a sum has been requested, the borrower will then submit information regarding collateral assets. In the majority of instances involving the purchase of property, other property is used as collateral. For example, if a property developer intends to purchase a property, they will either use one of their existing properties as collateral, or in some cases, the property they intend to purchase will serve as its own collateral. If all is as it should be, the application will be approved and funds released quickly, often in as little as 48 hours.
After the borrower receives the funds, they will purchase their desired property in cash, which is often well-received by the seller. Cash purchases are gold dust in the property market, and most sellers will put you at the top of their list if you can make such an offer. At this point, all that’s left is to repay the bridging loan.
Repayment
For the majority of bridging loans, repayment will be quick to avoid the comparatively high-interest rates that come with this form of finance. To do this, borrowers tend to sell off an asset, such as an existing property, or attempt to refinance the bridging loan. This strategy usually involves obtaining a traditional mortgage shortly after the purchase, then using the funds to pay off the bridging loan. The mortgage would then be repaid as normal. In other cases within the property development industry, bridging loans are used to make a purchase, then are repaid after the development opportunity is completed and sold. The lender gets their money with interest, and the developer makes a profit they otherwise would miss out on.
Also Read: Where Can I Get a Bridging Loan?
Can I use a bridging loan for a house purchase?
Although bridging loans are most commonly used within the property development industry, they are a perfectly viable option for purchasing a personal dwelling. Using bridging loans for a house purchase works exactly the same way as it does for a commercial purchase. The borrower will fill in an application, offer assets of sufficient value as collateral, and make the purchase once the funds are released. Bridging loans are most commonly used for a house purchase when a traditional form of finance cannot be obtained immediately, but can be obtained later. Sometime after obtaining the bridging loan, borrowers will refinance the loan with a mortgage, for example.
Although bridging loans have the same advantages and disadvantages when used for a house purchase, the risk a borrower assumes is arguably greater in some cases. This risk comes from the same place that bridging loans get their benefits – collateral. Once assets are used as collateral, the lender will place a lien on them. This lien entitles the lender to seize these assets if the borrower fails to keep up with repayments. While losing assets is never good, there is a world of difference between losing an investment opportunity that went belly-up, and losing your home. Because of this, borrowers in a rocky financial position should take caution when using bridging finance.
Wrapping up
All in all, it is possible to use a bridging loan for a house purchase. In fact, this is one of the ideal uses for bridging finance, as it allows their benefits to be utilised in full. Borrowers can raise a large amount of money quickly, and seize their dream home as soon as it appears on the market. However, there are risks to using bridging finance, namely the fact that borrowers must use existing assets as collateral. If repayments dry up, these assets can be repossessed to cover the remaining value of the loan. As such, it is vital to carefully assess your situation and obtain professional financial advice before taking action.