When it comes to property, bridging loans are typically considered to be most useful for property development or refurbishment. Although bridging loans are certainly useful to purchase property for commercial reasons, they can also help prospective borrowers looking to purchase a residential home. To find out how a bridging mortgage could help you finance a home purchase, read on.
What is a bridging mortgage?
A bridging mortgage is essentially a bridging loan that is used to purchase property. There is no real difference between the terms bridging mortgage and bridging home loan, with the two being used interchangeably to refer to the same concept depending on who you speak to. Although it can be used to purchase property for commercial purposes, for example renovating and reselling a house, it can also be used to help finance the purchase of a house to live in.
Unlike other types of loans, a bridging mortgage is not its own product, but rather a description of what a loan will be used for. In this case, the purpose is to finance the purchase of property. Once you have been granted a bridging mortgage, you will have a short period of time, typically around twelve months, in which to pay it back. As such, a bridging mortgage can be viewed as a mini-mortgage, helping you “bridge” the gap between what you have in your savings and the total cost of a deposit, as an example.
When you apply for a bridging mortgage, you will have to put up assets as security. Generally, this will be that property you intend to buy, or another property you own. The value of this asset will then determine the amount of money you can take out as a loan. There are a few options to repay a bridging loan, though the most common way is to pay interest throughout the duration of the loan, with the full amount expected at the end.
How are bridging mortgages different from other loans?
Compared to other loans, bridging mortgages can be acquired very quickly, assuming your application has been accepted. If you decide to take out a bridging mortgage, you can expect the application process to be completed and to receive the money in a matter of weeks, rather than months. However, the tradeoff for this speed is a fairly high interest rate, one unlikely to be matched by other loans.
Secondly, whereas credit scores and incomes are some of the main deciders in successfully getting a loan, bridging mortgages are more concerned about the value of the security. For any bridging loan, this is considered the “exit strategy”, and is arguably the most important factor. Provided the exit strategy is viable, you should have no trouble successfully getting a bridging mortgage. Even for properties you would not typically be able to mortgage otherwise.
Types of bridging loan
To ensure you choose the best bridging loan for you, it is a good idea to know the two categories of bridging loans – regulated and unregulated.
Regulated bridging loans
As the name suggests, regulated bridging loans are regulated by an authority, namely the Financial Conduct Authority (FCA). Due to this, borrowers that choose this kind of bridging loan will have an additional layer of protection against bad recommendations, false advertising, and so on. As regulated bridging loans are more secure, they can be ideal for homeowners that would like to work on their current home, or for prospective homeowners looking to make a purchase.
Unregulated bridging loans
Unregulated bridging loans offer increased flexibility at the cost of a bit more risk. This flexibility can be quite advantageous to borrowers that intend to purchase property as an investment, for example for rental purposes or resale. If you want to take out a loan to purchase a property to rent, you may find some lenders willing to lend to you based on the rental potential of the property, rather than income. As with regulated bridging loans, unregulated loans are available at short notice. Allowing you to secure the property you need right when you need it.
Is bridging finance viable for auctions?
Auctions are an important tool in the property developer’s belt, as well as a good place to find residential homes for a cheaper price, provided you are willing to fix them up.
Though auctions can be an excellent opportunity to find that perfect property to add to your portfolio, funds for the purchase are expected shortly after the successful bid, generally within 28 days. Because of this, it can be difficult for many property hunters to have the necessary at the ready, leading to missed opportunities. In situations like this, bridging loans could be a good solution; you can secure one against the property you are looking to purchase, and more importantly, you can get one quickly.
As bridging loan lenders are more concerned with the value of the exit strategy rather than your annual income, you will likely be able to purchase any property that fits your development plans, be it a flat or a commercial unit. This versatility, combined with the speed they can be arranged, makes bridging loans a perfect option to use at auctions.
Bridging mortgages can be an important lifeline
A common nightmare for anyone purchasing property is a break in the chain. Imagine spotting the perfect property, coming close to finalising the sale of your current home in order to afford it, only for the buyer to change their mind at the last moment. It happens more often than we would like, and often means the end of the line for snatching up that dream home. However, a bridging mortgage could be just what you need.
Purchasing the ideal home in this scenario does seem to be impossible. But, a bridging mortgage can help “bridge” the gap between the purchase of this new home and the sale of the old one. By applying for bridging finance, you will be able to put down a mortgage on the new home. Repaying the loan once your old home sells. Better yet, many lenders will be willing to lend you the money until the sale of the old house. Allowing you to settle down in your new home without the thought of imminent debt repayment looming over you.
How to get a bridging mortgage?
In short, successfully applying for a bridging mortgage depends on three factors. Your exit strategy, credit rating, and the asset the loan is secured against.
The exit strategy
Your exit strategy refers to how you will settle the debt in the event you cannot repay the loan, and represents the most important factor. Oftentimes, this is the same as the security property. That asset will be sold if you cannot pay, however, there are many more exit strategies. Depending on your lender, you may be able to put up investments, inheritances, properties other than what you want to purchase, and more. You should check with your lender what they would be willing to accept before you make any concrete plans.
Credit score
As with any loan application, your credit score is of note to lenders. While not the most important factor to bridging loan lenders, a bad credit score can put off the more cautious ones. Particularly if you intend to use exit strategies such as a remortgage. The better your rating, the lower your risk, which will open up more options for you.
Security asset
Lastly, there is the asset you intend to use as security. For this, there are two main factors to consider. The value of the asset itself, and the speed with which it can be sold. Lenders will consider other attributes, such as the location of a property, as this can affect the value. As with your credit score, the better the value the better your options.
Should you get a bridging mortgage?
Quite like most things related to finance, the best answer to this is to consider your situation. A bridging mortgage certainly can help a prospective homeowner secure that perfect property. They can help property developers source the funding they need for a purchase when they need it. However, there are other factors to consider. Bridging mortgages, though they certainly have their advantages, carry with them disadvantages too, such as the comparatively high interest rates. As such, it is a good idea to have a chat with an expert broker to get professional advice, and help make the best choice for you.