Purchasing property is always a challenge. It’s an expensive endeavour that takes a great deal of planning, patience, and most often, an effective form of finance to meet the cost. However, a great many finance options aren’t suitable. Property purchases need large sums of money at a moment’s notice, something unachievable for a lot of loan types.
Bridging finance, otherwise known as bridging loans, can meet these strenuous criteria. It is a short-term form of finance, one intended to “bridge the gap” between purchasing a property and either securing a longer-term loan, or selling a previous property. Because of this, bridging finance is swift and flexible by nature. Making it an ideal option for property purchases and development projects.
In this article, we will break down the details of what bridging finance is. How it works, and whether it might prove useful to your projects or ventures.
What is bridging finance?
Bridging finance is a short-term loan intended to bridge the gap between a purchase and a long-term financial solution. This solution is often the sale of property or assets, but also includes long-term finance options. Because of this, securing bridging finance is quick. Often only requiring a brief application and a valuation of the property in question. This makes bridging finance an ideal solution for those working in property development commercially. Though it is just as useful for individuals looking to purchase residential property.
Bridging finance requires the valuation of a property or assets because it is a type of secured loan. This means that the lender is entitled to the property or assets the loan is secured against in the event of default. This is often the property the loan finances. This can make bridging finance a riskier option for those with unstable finances.
How does bridging finance work?
Though bridging loans are predominantly used commercially, they can also be used by private individuals to facilitate the purchase of property. Upon taking out a bridging loan, it will be treated as a first or second charge loan. Meaning the loan takes priority over any other debt you may have. This means you must make repayments to the bridging lender first, then to any other lenders.
The first step to securing bridging finance is, of course, finding a lender. As part of your application, you will almost certainly be required to submit a business plan. Detailing the intended purpose of the property in question. Bridging finance is flexible and can fund a wide array of projects. But, lenders like to know what they might be getting into. As such, you will likely be accepted as long as you have a cohesive, feasible plan in mind. Collateral will also be agreed upon, and the lender may ask to examine your credit history before accepting the application. Note that unlike other forms of finance, credit history is not as important for bridging finance, as planning and collateral are of more use.
Short term loan
Although bridging finance is usually utilised as a short-term loan, it can also prove a feasible tool in the long term. For a longer-term bridging loan, you should take out an open bridging loan, one of two categories. Open bridging loans, as the name suggests, are open-ended. This means that they don’t have a fixed date of repayment, though most don’t exceed 12 months. This is contrary to the second type, closed bridging loans, which have a fixed date of repayment.
Bridging loans are fast and flexible, but they come at a cost. Namely, this cost is a high-interest rate and a short time until repayment. This is on top of what is offered as collateral. Though that is only a risk if you are financially insecure. As such, you should carefully plan your projects and ensure bridging finance is both suitable and low risk for your situation.
Purchasing property using bridging finance
As we’ve mentioned throughout this article, bridging finance is most often used to fund the purchase of property. This is most commonly for commercial purposes, but also extends to residential property too. As such, they have quite the reputation amongst buyers, developers, and investors within the property industry, with many making use of or providing bridging finance.
When purchasing property, bridging finance is typically used to fund the purchase before a previous property is sold. As such, the value of the old property is usually the bottleneck for how much can be borrowed. After all, a sensible lender won’t lend what is obviously beyond your means. You will be expected to put forward the deposit, and the rest will be covered by the lender. Once the old property is sold, you will pay off the bridging loan and enjoy your new property.
Credit rating
Because of how bridging finance is structured, it is a viable option for those with a poor credit rating. While it does factor in somewhat, if you can prove you have equity and can offer valuable property or assets as collateral, you will likely be accepted. If this is the case, your lender knows that even if you can’t pay, you have assets that can be repossessed to cover the loan. This makes you a lower-risk case from the perspective of a lender.
However, bridging finance isn’t only beneficial when purchasing property; it also is an ideal finance solution for property development. A bridging loan can allow the purchase and renovation of a derelict building, or the construction of a building on an empty plot. Once the project is complete and the property sold, the loan can be repaid in full.
Bridging loans are also perfect for property auctions, as cash is typically made available within 24-48 hours of a successful application. Where the window of opportunity is brief, as in an auction house, this is invaluable.
Conclusion
Bridging finance is the perfect form of finance for anything in the property industry. Its speed and flexibility make it perfect for seizing upon opportunity. While also being suitable for a wide range of projects. Although it is mostly used in commercial projects, it can be used to facilitate the purchase of residential houses, and many other purchases, such as equipment or vehicles.
However, bridging finance isn’t without its downsides. It is typically more expensive than most other forms of finance, with comparatively high-interest rates. Additionally, property or assets must be offered as security. Making it a risky option for individuals in a poor state financially. This is especially so given the short time between repayment. As such, it is advisable to plan and research diligently, ensuring bridging finance is the right option for you, one that can be repaid without risk.