Purchasing a property is an expensive endeavour. Almost every property, from a plot of land to a pristine dwelling, comes at a high price, making development projects difficult to undertake. Rarely can a buyer make a cash offer, making financial assistance a necessity. While these loans can make a property purchase possible, they do come at their own cost, and often require the borrower to put forward a deposit based on the value of the property. With bridging loans rising to such a high level of popularity amongst property developers, many new developers seeking to utilise the loan are wondering whether you need a deposit for a bridging loan.

In this article, we will cover whether developers will need to put forward a deposit when using a bridging loan. The costs of using this form of finance, and whether you should consider using it for your next project. Let’s get started.

What is a bridging loan?

Bridging loans are a part of the secured finance umbrella. One that specialises in raising large amounts of capital in a short space of time. As a short-term service, bridging loans rarely last longer than 12 months, with most being much shorter than this timeframe. This short duration allows bridging loans to “bridge the gap” between a purchase and a long-term form of finance.

As a secured loan, bridging loans require physical assets to be used as security. This requirement for security is where bridging loans derive many of their benefits, though it does pose a level of risk for borrowers. When putting forward assets as security, lenders will place a lien on them for the duration of the loan term. This lien entitles lenders to seize collateral assets equal in value to the outstanding loan, should borrowers fail to keep up with repayments. This risk can be the deciding factor of whether or not to use bridging loans for some prospective borrowers.

How do bridging loans work?

Bridging loans work around speed; applying for and obtaining a bridging loan is fast, and repaying the loan should be almost as fast once the borrower has made their desired purchase. When applying for a bridging loan, borrowers will need to disclose certain pieces of information. Much of this information is par for the course, but an emphasis is placed on the borrower’s collateral assets. In fact, this is such an important part of the process that lenders will often make a decision almost solely on the value of a borrower’s assets. This makes the application process quick, ensuring the borrower receives their money swiftly and can capitalise on opportunities in the property market.

Once the borrower has obtained their loan and purchased a property, repayment must come next. Repayment will come in the form of an exit strategy, which essentially refers to how a borrower will raise the amount payable, including interest. For the majority of bridging loans, an exit strategy will either be the refinancing of the bridging loan or the sale of an asset. If borrowers wish to refinance their loan, they will typically do so with a mortgage or another loan that can raise large amounts of finance for a long period.

The new loan will be used to repay the bridging loan, and will essentially extend the term for as long as the borrower requires. Alternatively, the borrower can sell off an asset, often the asset used as security, and use the proceeds to repay the bridging loan. A common example of this is in property development, when developers secure a bridging loan against a property in their portfolio. Once the new property is purchased, the collateral asset will be sold off, ridding them of the debt. Both strategies are perfectly viable, with the best depending on your particular situation.

The costs of using a bridging loan

Bridging loans can be a costly form of finance to use. While they may save you money in the long run, especially when interest rates are considered, they will impact your finances in the short term. Compared to other forms of finance, bridging loans have a rather large interest rate, which can quickly add up unless the loan is repaid promptly. Additionally, bridging loans can have a range of additional fees, though the specifics vary from lender to lender. Some will charge higher rates for borrowers that pose a higher risk, while others will charge exit fees. It is vital you read the fine print of your loan agreement to avoid any nasty surprises.

Do I need a deposit when using a bridging loan?

When applying for a bridging loan, you must declare the LTV, or loan-to-value. In essence, this is the ratio of credit to your own money in relation to the property’s value. While not named as such, this functions identically to a deposit in a mortgage. The more you put forward, the more beneficial it is for you. However, unlike other forms of finance, it is possible to obtain 100% LTV bridging loans. Doing so is incredibly rare, and will lean heavily on an airtight exit strategy and solid business acumen. However, there are lenders willing to provide this service.

Benefits of using a bridging loan

Bridging loans offer several key benefits that make them well suited to the purchase of property. These core benefits include the following:

  • Speed – Bridging loans have a unique level of speed, owing to their requirement of collateral. Applications are straightforward, and money is released swiftly, often within only a few days.
  • Large loan amounts – Due to the requirement of collateral, bridging loans can be used to raise large amounts of capital. Broadly speaking, the higher the value of the collateral asset, the higher the value of the loan.
  • Flexibility – Bridging loans are an extremely flexible form of finance. They can be obtained quickly, used for a great many purposes, and even repaid in a range of ways.

Should I use a bridging loan?

Bridging loans are an outstanding tool for property developers and home buyers alike. They can be used to quickly raise vast sums of money. This allows borrowers to snap up profitable development opportunities or their dream homes without much issue. However, a deposit is still required, though there is more flexibility in this regard compared to mortgages. This might make bridging loans seem like the obvious option, but there are some downsides.

Bridging loans are generally quite expensive in the short term, which can be a dealbreaker for some borrowers. Furthermore, the level of risk posed by the requirement of collateral can be too much to bear. Especially for borrowers in a difficult financial position. As such, it is vital you carefully consider your situation and obtain professional advice before taking action.