Purchasing property, whether as a commercial endeavour or as a personal dwelling, is often a good investment. However, the property market is fiercely competitive, and you can expect almost any property, from derelicts to new builds, to be costly. As such, gaining entry to the property development industry, or climbing the first rung of the property ladder, can be quite a challenge.

That said, one approach can be more accessible than others – building your own house. While certainly still expensive, this affords you much more control over your new property in both features and cost. You may even find it cheaper to build a house than it is to purchase a comparable property outright. But, this all still needs capital, and you will likely need to look outward to finance it.

Enter bridging loans. This form of finance has gained prominence in recent years, particularly in the property development industry. It affords borrowers a series of excellent advantages that can make a competitive difference when purchasing property on the market or at auction. However, is obtaining a bridging loan to build a house as useful? In this article, we will answer this question, break down how bridging loans work, and give you the information you need to make a good decision. Let’s get started.

What is a bridging loan?

Bridging loans are a fairly niche form of secured finance. It excels at raising large amounts of capital in an incredibly short space of time, ensuring borrowers can seize upon ideal opportunities as they appear in the market. This speed of releasing capital is due to bridging loans being a form of secured finance. This means that they require physical assets to be used as collateral, rather than placing a heavy emphasis on the credit history of a prospective borrower. This allows lenders to quickly sort between viable lending prospects and non-viable ones, without having to conduct a lengthy application process.

This speed carries through to the short life of a bridging loan; most bridging loan terms last less than 12 months, with some being even shorter. This may seem like a significant obstacle, but it is there by design. Bridging loans aim to “bridge” the gap between a purchase and a more long-term form of finance, rather than be a long-term solution itself. This is typically achieved through the sale of an asset, either previously owned or purchased with the bridging loan itself, or through a more traditional form of finance such as a mortgage.

While certainly advantageous in many instances, this speed, coupled with the need for collateral, can make bridging loans a risky prospect for certain borrowers. Upon a successful loan application, the lender will place a lien on collateral assets, entitling the lender to repossess them should the borrower default. Naturally, this makes bridging loans considerably risky for borrowers in an unstable financial position.

Also Read: Where Can I Get a Bridging Loan?

How do bridging loans work?

Bridging loans are quite simple in their function, and work much the same as other forms of finance, such as a mortgage. A prospective borrower will submit an application, including various details specified by the lender. Although credit history is not as important as personal income and the value of assets for bridging loans, it will still play a part. Additionally, you must be able to pay a deposit, as specified in your lender’s Loan to Value (LTV). Essentially, this is the percentage of a property’s value your lender will be willing to loan you. For example, a lender offering a bridging loan with an LTV of 70% will expect you to pay 30% of the property’s value, either through equity in an existing property, or through other means. Assuming you can, and your other details are up to par, you stand a good chance of a successful application.

In addition to the above, you must have a viable “exit strategy”. In short, this refers to the method by which you will repay your bridging loan. Your exit strategy will depend on your situation. If you use your bridging loan to build a house, you have two main options available. First, you could wait to sell it if you built it for profit, using the proceeds to repay your bridging loan in full. Second, you could instead obtain a long-term form of finance, such as a mortgage, and use it to refinance your bridging loan. In either case, you will be able to repay the bridging loan in full, and enjoy your newly-built property.

Also Read: Is It Possible To Get a Bridging Loan With No Deposit?

Can bridging loans be used to construct a house?

It is well known that bridging loans are an excellent way to raise capital for the purchase of property. What is perhaps less well known is whether bridging loans can be used to build a house from scratch, and be applied to property development more generally.

Bridging loans can be used in both cases; they are perfectly viable both in the construction of a new house, and the development or refurbishment of an existing one. However, their effectiveness may be limited depending on the situation. For example, bridging loans are a good form of finance to raise capital for a plot of land. A bridging loan can also be effective at covering other fixed costs, such as certain fees or specific materials.

However, bridging loans are not as effective at funding the purchase of materials or covering labour costs, given how these costs often exceed what is planned. This is because bridging loans are best at covering a large, on-time cost while you secure a long-term solution, rather than provide a line of credit to draw from as needed. In cases where you might need a bit more flexibility if things don’t go according to plan, you might be better off using a construction loan.

Wrapping up

All in all, using bridging loans to build a house can be effective, though they do have some shortcomings. As in any case, bridging loans constitute a risk to the lender, as default will likely lead to the seizure of assets used as collateral. Additionally, bridging loans may not be capable of keeping up with the quickly-changing nature of construction. If unforeseen costs occur, it may be difficult to cover them with a bridging loan. In such cases, other forms of finance, such as a construction loan or a revolving line of credit, may be more suitable.