When Should You Use Bridging Finance?
BY: RYAN KH ON WEDNESDAY, MAY 16, 2018
Bridging loans can help in a variety of different situations, but it is most frequently used for those buying property or a short-term investment of any sort. Whilst mortgages can typically last 10, 25 or 40 years, a bridging loan is a type of short-term funding that can be used for 12 months (regulated) or up to 24 months (unregulated), and it is usually used to cover a transaction with a tight deadline, hence its popularity when it comes to those buying property.
Bridging finance is always secured against something, and this is typically a residential or commercial property. With funds available in 2 to 3 weeks, it is a popular way to break traditional property chains and get finance from a specialist lender compared to a mortgage from a bank.
In the following article, we will look at the perspectives of a homeowner, property developer and those trying to raise finance, to explain how bridging loan funding can be helpful in each of these situations.
For purchasing a new home
If you are a homeowner trying to complete on a new property but have not sold your own property but need the equity, this is where a bridging loan can help. This type of finance allows you to ‘bridge the gap’ so you can raise the amount you need and purchase the desired property, even though your original home has not sold yet. Eventually, once your initial house has indeed sold, you can simply use the money to repay your bridging loan.
For example, if you are looking to move into a property worth the equivalent of $400,000 but have an outstanding mortgage of $100,000 on a property, you would be able to receive finance that can bridge this gap and allow you to purchase the property. Therefore, this kind of loan allows you to move at a far quicker rate than otherwise possible, as well as having the chance to clear the debts once the house is sold.
Bridging finance for property developers
Bridging finance can also help property developers who are looking to purchase and then refurbish a block of flats or an individual property to then rent out or sell on at a profit. In the US, this companies that facilitate this type of finance could be a bank or credit union, or in the UK could be specialist lenders such as Masthaven, Precise Mortgages and MT Finance. Bridging loan providers allow you to gain access to finance in just a matter of days or weeks in comparison to the alternative of a long-winded mortgage process that may take months to sort out.
Raising finance for investments
If you have an attractive investment opportunity or need some capital to grow your business, bridging finance is seen as a viable way to do this, provided that you have some form of security e.g your home or business premises. You may use the injection of income for just a few months and then repay the loan and debt when you have generated the healthy return.
There are some lenders that will not lend against your residential property, in which case it would be treated as a second charge loan – which slightly limits the amount you can borrow because it is the second priority for repayment after your mortgage.
What do you need to be approved?
To be eligible for a bridging loan, you need to have some form of security and this is typically the property that you have under a mortgage or the property in question that you are looking to invest it or purchase. This is used as your collateral and the potential value of this property will influence how much you can essentially borrow, with properties with financial potential allowing to maximize your borrowing facility compared to properties likely to decrease in value. Your property in question will always be subject to a valuation during the application process. Most banks or lenders will assign a specific surveyor that they work with to ensure that it meets their criteria. The initial loan offer that they give you and how much you can borrow is based on your property valuation – so it is an important part of the application and seeing if your property is really worth what you think. You will also need to have a solicitor to help you with some final paperwork, especially since you are using security, and there is a risk of repossession if you do not meet your repayments on time.
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