Bridging loans are a fairly niche form of finance, though one that has more than proven itself in recent years. Its strengths make bridging finance perfect for purchasing property, both for homebuyers and property developers seeking success in the competitive industry. However, although bridging finance has increased in use as of late, it is a considerably different form of finance than many are used to. For some borrowers new to bridging finance, this can cause issues.
One example of an unpredicted obstacle is who offers bridging loans. Naturally, most people looking to take out a loan would turn to a bank or a credit union as their first port of call. With bridging loans, it might not be so simple. In this article, we will discuss bridging finance, how it works, and answer the all-important question – do banks offer bridging loans?
What is a bridging loan?
Bridging loans are a type of short-term secured finance, capable of supplying large amounts of capital in a short space of time. Bridging loans are most often used to bridge the gap between a purchase and a more long-term form of finance, hence the name. This is done by leveraging the equity in an existing property to raise the capital required to purchase a new property. This does constitute a risk for the borrower; the lender will place a lien on the property being used as collateral, entitling them to repossess it if the borrower defaults. As such, bridging loans are best used by borrowers in a secure financial position.
Let’s consider a practical example. Suppose a family is looking to take a step up on the property ladder, but lacks the funds to purchase a new home or take out a mortgage quickly. However, they do have equity in their current home. Rather than wait until they are eligible for a mortgage, risking their ideal home being bought before they can act, they turn to bridging finance. They use the equity in their current home to take out the loan, then make a cash offer on their chosen property. As it’s a cash offer, the seller accepts in short order, and the family moves in. Once the old home is sold, they use the money to repay the loan, and take out whatever remains in a mortgage.
Do banks offer bridging loans?
Although banks might be your first place to look, it isn’t likely that you’ll find many offering bridging loans, and those that do won’t offer a great selection. However, this wasn’t always the case; before the 2008 financial crash, bridging loans were commonplace, with banks and private lenders offering the service. Now, many banks have chosen to pool their resources in more well-known and trusted options, such as mortgages, personal loans, and so on. As bridging loans are a bit more niche and not as commonly sought after, they were amongst the first services to be discontinued. That said, some banks do still offer bridging loans, though they might not advertise it as much as they do their other services. It’s always worth checking with your bank to see if they offer bridging loans before looking elsewhere.
Which banks offer bridging loans?
If you would prefer to obtain a bridging loan from a bank, rather than from a private lender, you still have some choices available. The following are some of the high street banks that still offer bridging loans:
- HSBC – HSBC offers residential bridging loans for homeowners that have an existing mortgage with them.
- Natwest – Natwest offers residential and commercial bridging loans to its existing customers. With one, you will be able to purchase a new residential dwelling, or purchase a property from auction with a view to selling it on the market.
- Royal Bank of Scotland – The Royal Bank of Scotland offers bridging loans as a form of specialist finance. While this loan can be used to purchase property for several different reasons, it will be difficult to obtain. You will need to prove a strong income of at least £100,000 per annum.
- Lloyds Bank – Lloyds Bank offers residential bridging loans to its existing customers, but they are few and far between. You’ll need to be a member with them, with a Lloyds TSB balance of at least £750,000, and have a savings or investments account with Lloyds of at least £250,000.
- Barclays – Barclays offers bridging loans for both personal and commercial uses, though their service is mostly used for commercial applications. If Barclays cannot offer you a bridging loan that is appropriate, you can use their comparison service to find one instead.
Alternative bridging loan lenders
If your bank doesn’t offer bridging loans, or you don’t meet the requirements to obtain one, then you will have to look elsewhere. Thankfully, the increasing popularity of bridging loans has caused an increase in alternative lenders looking to fill the gap left by banks and other traditional lenders. If you’re willing to look, you’ll find no shortage of specialist lenders that will meet your needs.
These alternative lenders are typically much more flexible than banks and other traditional lenders. With a private lender, such as a hard-money lender or a bridging loan hub, you’ll find it much easier to obtain a bridging loan that meets the needs of your situation. However, this convenience usually comes at a cost. Interest rates and fees are often more expensive using such lenders, meaning the overall cost of your loan will be comparatively higher. Moreover, there is the additional risk of borrowing from the wrong lender. With banks, you have the assurance that they are well-regulated and can be held to account if they renege on the agreement. However, if you borrow from an unscrupulous lender, you likely won’t have much room for recourse. As such, you should exercise caution, only borrowing from reputable lenders with a good history of conduct.
Wrapping up
Bridging loans are an effective method of financing property purchases, but the lack of traditional lenders may be off-putting to some borrowers. While some banks offer bridging loans, the bar to entry can be high, making one difficult to obtain. However, there are a variety of private lenders willing and able to provide you with a bridging loan, though it’s strongly advised that you do your research before signing along any dotted lines.