Bridging loans have seen a significant uptick in use to finance property purchases. It provides prospective buyers with a large sum of money in a short space of time, making it the perfect solution for property developers at auction. Although bridging finance has gained popularity through its commercial utility, it is equally useful when looking to purchase residential property.
In this article, we will discuss what bridging loans are, how they can be used to fund the purchase of residential properties, and the benefits of doing so. Let’s get started.
What is a bridging loan?
Bridging loans are a particular type of secured loan that prizes speed and flexibility over anything else. It is a short-term form of finance, with most bridging loans lasting no more than 12 months. As it is a secured loan, you will need to use an existing property as collateral. When purchasing a property, you can secure the loan against your current property, use the funds to purchase a new one, then sell the previous property to repay the bridging loan.
This framework makes bridging loans ideal for buying commercial and residential properties. For residential property owners looking to move up on the property ladder, they can leverage the equity they have in their homes to raise funds required for a new one. This can prove to be a useful alternative form of finance when, for reasons of credit or otherwise, a prospective homebuyer cannot obtain a mortgage or other traditional form of finance.
How do bridging loans work when buying a residential property?
To illustrate how bridging loans work when buying residential property clearly, let’s consider a practical example. Suppose a family wants to purchase a new home for more space, but lacks the available cash on hand to make the deposit required for a suitable mortgage. They cannot find another adequate traditional method of financing a house purchase, but have a large amount of equity in their current home. In this case, bridging finance becomes a possibility.
If the family decides to use bridging finance to purchase their new home, they will naturally have to go through the application process with their chosen lender first. While somewhat different from the process for a mortgage, placing more on the value of the existing property as opposed to credit rating, the application process is much quicker and easier than other forms of finance. If accepted, the family will leverage the equity they have in their home to obtain the bridging loan.
The loan will be secured against their home, with funds being made available within mere weeks. The funds can then be used to purchase the property through a cash offer, making it an incredibly appealing offer from the seller’s perspective. The offer is accepted, money changes hands, and the family can begin to move into their new home. Their old home can then be sold without worry of the onward chain being broken, and the funds raised from the sale of the old property can be used to repay the bridging loan, marking the end of the process.
Also Read: The Pros & Cons of Bridging Loans
Benefits of using bridging loans to purchase residential property
As you can see, bridging loans have notable benefits and utility when purchasing a residential property. However, there are more benefits that aren’t quite so obvious, but are considerably useful for not only residential home buyers, but anyone looking to purchase a property. Below are some of the key benefits of using bridging loans to purchase residential property.
Fast access to finance
The main draw to using bridging finance is its speed. The application process for most bridging loan lenders is short and straightforward, with fewer restrictive factors than a traditional form of finance. Credit isn’t as much of an obstacle, as the main point of interest is the value of the collateral property. In many cases, the application can be approved within a day, with funding entering your account in as little as a few days afterwards.
Also Read: How Long Does It Take To get a Bridging Loan?
Flexibility
Similar to the above advantage, bridging finance is an extremely flexible form of finance. This is partially due to the quick application procedure, allowing applicants to act swiftly and seize upon opportunity without delay. However, this isn’t where the flexibility of bridging loans ends. With this form of finance, you will be able to raise as much or as little as you please, provided you own assets of sufficient value. If you have the means, you can raise well in excess of £1 million, though you may need to look a little harder for a suitable lender.
Poor credit is not a dealbreaker
Having poor credit is not an issue when using a bridging loan to purchase residential property. As we mentioned, this is because the main point of interest is the value of assets being used to secure the loan. With poor credit, and even a record of bankruptcy or other financial issues, you won’t have a problem provided you have assets of sufficient value and a stable financial position.
Simplifies the moving process
Bridging finance makes moving house much more straightforward. Without enough cash on-hand to make a substantial deposit or an all-cash offer, prospective homebuyers will need to line up a buyer for their existing property first. This creates a chain; if your potential buyer decides to withdraw for any reason, you’re left in a difficult situation. Equally, if the seller of your ideal home suffers delays, this can have a knock-on effect on the entire process. You may even have to sell your existing property and rent temporarily.
With bridging finance, all these what-if scenarios and the associated stress simply won’t come to pass. You’ll be able to purchase your new home without worry that a chain will break or an unforeseen delay will scupper the process.
Wrapping up
All in all, bridging loans are just as useful for purchasing residential properties as they are for commercial properties. By using bridging finance, you will enjoy a series of significant benefits that make the oft-stressful task of buying a property much more straightforward, allowing you to enjoy your new home without such a high amount of difficulty.